Canary in the coalmine

Context:  A recovery led by profits, at the expense of wages, has implications for demand, inequality and policy

Ways in which Gross Domestic Product (GDP) can be reported:

• The sectoral and production side reporting: Agriculture, manufacturing, services

• The functional and expenditure side reporting: Consumption, investment, net exports

• The income side reporting: as the sum of profits, wages and indirect taxes

Issue of skewed economic recovery: 

• Driven disproportionately by capital than labour: 

• Increase in profits despite revenue shrinking: on account of cutting costs including employee compensation.

• E.g. Increase in corporate profits by four times in the US, 25% increase in net profits of listed companies in India.

• Nominal wage growth across 4,000 listed firms has slowed from about 10 % to 3 over the last six quarters.

• Increase in labour market pressure:

• Hiring in the US slowed, and unemployment remains close to 6% and income has contracted in 5 East Asian economies.
• High demand for Mahatma Gandhi National Rural Employment Guarantee Act(MGNREGA) suggests significant labour market slack.

• A recovery favouring large listed companies: putting pressure on profits of unlisted Small and Medium Enterprises, wages and employment

• There was an increase in listed company profits by 25% even when the GDP sees a contraction of 7.5%

The adverse impact of skewed economic recovery:

• Negative impact on future growth: cutting employee compensation cannibalizes future aggregate demand and profitability for all firms.

• Weak demand, in turn, will disincentivize re-hiring, reinforces the risks of settling into a sub-optimal equilibrium.

• Accentuates existing cleavages and inequities: due to technological adoption during the pandemic, and differential productivity impacts on capital, skilled and unskilled labour.

• Will incentivize households to save: If job-market pressures induce households into perceiving this shock as a hit on income, they will be incentivized to save, not spend in the future.

• No imperatives for entrepreneurs to invest: Since labour market pressures will affect private consumption.

Way forward:

• Fiscal policy measures: 

• Public investment:  will be crucial to boost demand, create jobs, crowd-in private investment and improve the economy's external competitiveness.

• Doubling-down public sector asset sales: To finance infrastructure projects

• This helps in reducing headline fiscal deficit 
• This is the only way to undertake fiscal consolidation without incurring a fiscal drag.

Conclusion: The baton for recovery should pass from monetary to fiscal in order to better target the small and medium enterprises and the labour market.