Goodhart, Α.Ε. C. & Erfurth, P. (2014) “Monetary policy and long-term trend“, VoxEU Organisation, 03 November.
There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.
There has been a long-term downward trend in the share and strength of labour in national income, which is depressing both demand and inflation. This has prompted ever more expansionary monetary policies. While understandable, indeed appropriate, within a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance (leverage). We suggest measures, perhaps including government involvement, to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.
Nevertheless, such trends, though they have now lasted for some 35 years, are not immutable and might see a reverse in the course of the next 35 years.
The recent Bank for International Settlements Annual Report (BIS 2014), claimed on page 7 that “Understanding the current global economic challenges requires a long-term perspective”, if we are to find a ‘new compass’ for setting macroeconomic policies. This column aims to provide such a perspective by focusing primarily upon one particular trend in developed countries, which is the trend decline in the adjusted wage share as a percentage of GDP in most developed countries since the end of the 1970s. This is shown for four main economies in Figure 1, and for a wider set of countries in Figure 2.
Figure 1. Adjusted wage share declining across developed markets
Source: European Commission AMECO database, Morgan Stanley Research
- Miles, D. (2014) “‘Mensch tracht, und Gott lacht’ – what’s the best guidance on monetary policy?“, VoxEU Organisation, 22 October.
- Austin, Κ. (2014) “Systemic equilibrium in a Bretton Woods II-type international monetary system: the special roles of reserve issuers and reserve accumulators“, Journal of Post Keynesian Economics, 2014, vol. 36, issue 4, pages 607-634.
- Alvarez, F., Le Bihan, H. & Lippi, F. (2014) “Modelling sticky prices and the effect of monetary shocks“, VoxEU Organisation, 30 September.