Social Europe Journal
by George Tyler on 10 August 2015

Corporations are at the center of market fundamentalist capitalism practiced in the UK and US. Yet, in contrast to northern Europe, they are only weakly embedded in their communities, insufficiently attuned to the aspirations and needs of the wider stakeholder community. Rather than government diktats, the solution is cultural changes whereby inspired societal norms produce pressure for more communitarian corporations.

In his recent interview with Social Europe, economist John Kay of the Financial Times argues that the market fundamentalist capitalism in the UK and US would benefit from a set of cultural changes. “Good Corporations” need to become inspired by the broader interests of customers, employees and the like rather than just maximizing shareholder value. “What we need is to change the rhetoric and that’s a job for people like me who write. It’s even more for politicians to frame the terms of public debate.”

Northern European capitalism has succeeded in rehabilitating corporate governance, investment and raising real wages broadly. The cultural changes necessary for the UK and US to emulate those successes are best framed by political campaigns. Yet, the emerging US presidential campaign holds little promise in that regard. Indeed, one major party even disputes that higher hourly pay should be a goal at all. Republican Party faithful reject stronger unions, higher minimum wages, labor law reform, overtime pay, paid family leave and the like. Unwilling to touch the third rail of raising hourly pay, party aspirants such as former Florida governor Jeb Bush have proposed instead that Americans raise incomes by working more hours. That is an awkward remedy since Americans already average 300 more hours of work annually than peers in northern Europe. Indeed, the Bush vision for America eerily resembles Soviet-era Eastern European economies characterized by meager investment and productivity growth, with men and women employed for long hours at wages that stagnate year after year.

That gives an edge to the Democrats should they prove willing to draw lessons from northern Europe. They offer agendas featuring more education, daycare support to increase female participation, a corralled financial sector, incentives to invest for the long term, higher minimum wages and the like – good ideas all. The most adventurous proposal comes from former Secretary of State Hillary Clinton, who urges greater profit sharing by U.S. firms on the model of Southwest Airlines or Google. Evidence from northern Europe and Asia show that firms following that model have higher productivity and less turnover than competitors. That is why the Financial Times editorial board embraced it, even while concluding that her broader agenda was quite insufficient to fulfill her vision: “To achieve anything like the income boost Mrs. Clinton desires would require nothing less than a cultural revolution in American capitalism.”

Not So Revolutionary After AllIt should not surprise that the London-based FT has lauded Clinton for “casting around for new ideas” to raise wages. Intimate with northern Europe capitalism, however, the “new ideas” they have in mind are in fact quite mundane. Indeed, cultural changes leading to policies to raise incomes that American voters may view as revolutionary scarcely appear that way to peers in many other rich democracies. That is because voters in these nations since World War II have repeatedly and consistently endorsed a version of capitalism explicitly designed to raise incomes, one where the interests of employers and employees are harnessed to broad-based prosperity. What strikes Americans as revolutionary is standard operating procedure in Australia or Germany. Across many rich democracies, annual wage gains are linked de facto to productivity growth, typically through union negotiations. Wage settlements in organized industries such as metallurgy in Germany or groceries in Australia routinely become the template for nationwide wage increases year after year.

Ironically, the model for this success was postwar America itself where wages negotiated by General Motors and the United Auto Workers were national templates. It produced widely broadcast wage gains for decades, until derailed by Reaganomics. Since then, experience in Germany documents that wage growth has not been hobbled by the hobgoblins of technology or globalization, but by structural changes at the US workplace. These changes include weaker labor laws and unions, Presidents and lawmakers bedazzled by market fundamentalism that disproportionately rewards elite earners, and weak corporate board oversight allowing the ascendency of short-termism and rent-seeking in management ranks.

These post-1980 American practices have not spread abroad thanks to the higher quality of democracy in Australia and northern Europe. Pay-to-play is eschewed, while high voter turnout and responsive governance architectures more effectively translate majoritarian preferences into economic policies.

As I have noted previously, one consequence of this recent history is that the U.S. has devolved to a low-wage nation, hourly pay only 14th among the rich democracies. Including all government social program taxes, for instance, hourly factory wages in Holland and France that were 18 percent lower in 2001steadily rose to surpass American wages by 11 percent in 2012. And benefits are far better as well. Importantly, enterprises in other rich democracies have invested considerably more than U.S. firms since the 1980s, as documented by Eurostat economists Denis Leythienne and Tatjana Smokova. Output per hour worked has grown faster since the recession in nations such as Australia and Germany, with productivity levels at the factory floor in some now overtaking America.

Short-Termism: Weak American ManagementContributing to these deficiencies has been the structure of corporate management in the U.S. compared to firms in nations such as Germany. America’s entrepreneurial culture and innovative enterprises are global leaders. But most U.S. firms are hobbled by weak boards and cultures embracing short-termism which features CEO pay without performance. In contrast, exemplified by the German codetermination model, firms in northern Europe focus on investing for the long term thanks to corporate boards comprised equally (at larger German firms) of employee and shareholder representatives. In fact, Berthold Huber, former head of the IG Metall labor union, is the current VW board chairman.

Another factor promoting productivity growth is the higher wages characteristic of Australia and northern Europe. Economists have concluded for some time that relatively strong labor rights do not impose inflation, productivity or growth penalties on societies. Total factor productivity is not weakened by labor market regulations nor does deregulation of such markets improve it, a findingmost recently explored in the IMF’s World Economic Outlook in April 2015.

Moreover, rising wages incentivizes productivity growth, with employers routinely upskilling workforces to justify that pay. Indeed, it turns out that rising wages and productivity growth are complementary, with studies finding “that a one percent change in wages causes a 0.3 – 0.5% change in the growth of GDP per working hour.” Investment, R&D and upskilling are important but so are the synergistic effects on innovation of the high wage model featuring job security. Having invested in upskilling, employers in northern Europe and Australia favor employee retention, and benefit from what labor market economists call creative accumulation or Schumpeter Mark II innovation. Job security translates into a greater accumulation of firm-specific knowledge and problem solving, promoting deeper integration of employees in contemplation of their tasks and in enterprise success.

In contrast, the commoditized labor model characteristic of American short-termism discounts the importance of accumulated knowledge, disrupting this Schumpeterian process of innovation. Insecure employees always look ahead to the next job and thus tend to focus on generalized job knowledge that enhances future employability rather than deeper knowledge of their current particular tasks. Delft University innovation economist Alfred Kleinknecht explains that the American workplace features less firm specific training, more bureaucracy, more turnover, and greater leakage of trade secrets and proprietary technology to competitors. The stagnation of wages also made this U.S. de-emphasis on productivity feasible, because it relieves pressure on firms to upskilled employees to justify higher wages:
The above implies strong complementarities between labour market institutions and innovation models. It also explains why, after the Reagan Revolution, the US had great difficulties in competing against German and Japanese suppliers in mature industries such as automobiles or steel. It explains why Detroit, unlike Wolfsburg, is today a dying city.

The cumulative impact of workplace innovation, higher wages and strong investment has steadily improved the skill level in Australia and northern Europe. And evidence is provided by OECD statistics documenting that labor forces in these nations now have higher skill levels than the low-wage United States. As recently as 1998, it wasn’t that way but skill levels in nations like Austria, Denmark and France have since leapfrogged the U.S.

A Cultural Revolution In American CapitalismVoters, lawmakers and economists in most rich democracies find nothing revolutionary in the practices that have led to their prosperity. Codetermination and wages linked to productivity are effective and nuanced elements of capitalism adoptable by any visionary American politician wishing to restore income growth. Indeed, they are necessary, elemental facets of that vision. Yet, presidential candidates, Democrats included, have shied away. It is a telling commentary on the poor quality of American democracy that seasoned and necessary proposals for rehabilitating low skill, low wage U.S. capitalism remain off the table.