The Increasing Income Gap

Bloomberg.com reports a couple of days ago:

Workers of the world are demanding a bigger share of global prosperity, and this year they may get it.

Political shifts in the U.S., Europe and Asia increase the chances that 2007 will bring labor higher pay and stronger job protection after five years in which its share of economic gains fell. ``The pendulum of economic power might well begin to shift from capital back to labor,'' says Stephen S. Roach, chief global economist with Morgan Stanley in New York.

While that's good news for workers, the result may be a squeeze on corporate profits and stock prices, economists say. Roach, for one, foresees ``a very challenging and difficult environment for global stock markets,'' with heightened risks of protectionism, accelerating inflation and higher interest rates.

While I concur with facts - that the incoming gap is increasing and that countries are taking measures to tackle the problem, I disagree with Roach's conclusions. In my opinion, the trend will continue for some time. Even if workers' wages are increased, say, 10% in 2007, the absolute wealth difference between the rich and the not-so-rich will keep becoming bigger.

Part of the reason lies in the fact that the global economy is doing great. People with extra money to invest are getting very high return on their investment. Most workers don't have much left for investment after bills are paid.

The fundamental reason for the wealth gap however is what is profoundly changing the world right now: the globalization. In today's global market, capital wins over labor. The globalization is increasing the size of the market by a wide margin. For example, Yum Brands, the ower of KFC, is opening new restraunts in countries that were not accessible just several years ago. Most profits go to its stock holders, most of whom are financial institutes and wealthy individuals [Yum Brands' stock increased from 20s to 60 in three years]. Does KFC's workers benefit from this? Absolutely no! They still makes just above the minimum wage. Will the company, hence the stockholders, make more money in 2007 and beyond? Most certainly yes as they are just starting to penetrate the emerging markets. Will the restraunt workers' income grow with the that of the company? Not a chance!

The above is also the reason why it was the Dow Jones Industrial Average, not another index, broke its record in 2006. The Dow 30 companies are big, global companies many of which have higher overseas revenues than domestic revenues. They grow more than purely domestic company.

On a more grand scale, the large MNCs are also winning over smaller local companies in foreign countries. They have more money set aside for advertisement. I noticed that it is the big MNCs who are paying big bucks doing commercials on TV in China. Local companies, most of which are new companies just trying to establish themselves in a very competitive market, cannot compete with them in ad budget. The end result? MNCs are gaining market shares at the expense of locals.

In summary, in today's globalization, people and companies with capitals are by far the biggest winners. The workers? The good news is that they do have a job (US unemployment rate is very low). The bad news is: they are falling way behind in the absolute term. And the gap will become even wider in 2007 and beyond! I don't think it is fair, but I don't know if anybody can change it near term (without a radical movement).

By the way, it is not the first time that Roach has been wrong.