However, there is a very
important downside to this development. Over the last decade, wage increases rapidly
outpaced productivity gains, meaning that labor costs rose despite the fact
that businesses were not increasing their output per worker. Wage growth is the
key to reducing inequality, but without productivity gains such growth is
unsustainable. Now that the commodity boom is over and Brazil’s economy is coming
back down to Earth, the reality has become readily apparent. Growing wages
in Brazil without massive investment in education, infrastructure and capital goods
(such as machinery) have eroded the country’s competitiveness, and there is legitimate fear that
recent gains in reducing inequality may be reversed in subsequent years.
Brazil’s situation stands in
stark contrast to the U.S. and Germany, two manufacturing powerhouses that have
seen wages stagnate over the last decade as productivity skyrocketed. Innovation,
mechanization and globalization enabled businesses to reduce labor costs and
increase their output per worker, while the purchasing power of the middle
classes eroded and inequality crept upward. The result was therefore the
opposite of what happened in Brazil: growing inequality helped businesses to
maintain competitiveness in the global economy, and these countries now have
some of the most dynamic manufacturing sectors in the world. But this led to
other serious structural imbalances. In the U.S., the middle class turned
increasingly to credit, which ended catastrophically in the collapse of the
mortgage market in 2008. In Germany, growing export competitiveness combined
with limited domestic demand led to unbalanced trade relations with Southern
Europe, culminating in the ongoing Eurozone crisis.
The interplay between wages,
productivity and inequality is therefore a fundamental challenge facing the
world economy, and Brazil and the U.S. represent two opposite approaches that
both have major shortcomings. In theory, wage increases should increase in
tandem with productivity growth, but in practice this can be hard to achieve.
In a society like Brazil with historically entrenched class divisions, reducing
inequality is a top priority for policymakers and citizens alike and it is hard
to argue from a moral perspective that the country should abandon this approach
in order to maintain the international competitiveness of its businesses.
Furthermore, the difficulty of unlocking
productivity gains from within the middle-income trap means that Brazil
would have few opportunities to build its middle class. In the U.S., unions
have been the traditional guarantors of wage increases, but globalization has
undermined their negotiating power as companies can simply choose to relocate
to keep labor costs low. Policymakers have struggled to find an adequate
alternative to guarantee that productivity gains “trickle down” to the rest of
society.
What then, is the most
appropriate approach to take on this issue? Are there moments when business
competitiveness should be prioritized over inequality to create more wealth and
innovation? And are there other moments where combating inequality should be
the more central focus, especially in developing countries? It is difficult to
come up with straightforward answers to this question, especially as the nature
of the world economy rapidly changes due to globalization, digitization and
automation. The growing role of additive manufacturing and
internet services is causing such a paradigm shift that many now argue we are
on the verge of a third
industrial revolution that could completely transform society and upend our
traditional models of economic development based on mass manufacturing systems.
I have written
before about how technological changes will force us to radically rethink
our understanding of wages and productivity in the future. Looking at the
difficulties currently faced by Brazil, the U.S., and Germany, a revolution in
the nature of work may be the best chance these countries have of escaping
their current paradoxes.
