Wage
drift
The
difference between basic pay and total earnings. Wage drift consists of things
such as overtime payments, bonuses, profit share and performance-related pay.
It usually increases during periods of strong growth and declines during an
economic downturn.
Wages
The
price of labour. In theory, wages ought to change so that the supply and demand
in the labour market are always in equilibrium. In practice, wages are often
sticky, especially in a downward direction: when demand for labour falls, wages
does not fall. In this situation, the fall in demand results in higher
involuntary unemployment. Trade unions may use collective bargaining to keep
wages above the market-clearing rate. Furthermore, many governments impose a
minimum wage that employers must pay.
Firms
may choose to pay above the equilibrium wage to increase the productivity of
workers. Such so-called efficiency wages may make workers less likely to join
another firm, so cutting the employer's hiring and training costs. They may
encourage workers to do a better job. They may also attract a higher quality of
worker than wages at the market-clearing rate; better workers may have a higher
reservation wage (the lowest wage for which they are willing to work) than the
market-clearing equilibrium.
In
recent years, employers have tried to reduce wage stickiness by increasing the
proportion of pay that is linked to the performance of their firm. Thus if
falling demand reduces the employer's profit the pay of its employees falls
automatically, so it does not have to lay off as many workers as it otherwise
would. Performance-related wages can also reduce agency costs by giving hired
hands a stronger incentive to do a good job.
Wealth
effect
As
people get wealthier, they consume more. This wealth effect has important
consequences for monetary policy. When there is an interest rate increase,
future income from assets such as equities must be discounted at a higher rate
than before. As a result their owners feel poorer and spend less. A cut in
interest rates has the opposite effect. Economists disagree on the wealth
elasticity of consumption: how much consumer spending would rise if wealth
increased by, say, 1%. Different consumers may have different wealth
elasticity. If most of the increase in wealth goes to poorer people this may
have a different wealth effect than if most of it went to people who are
already wealthy. The source of the wealth increase may also matter. If share
prices rise or interest rates fall, consumers may be slow to spend out of their
increased wealth if they think the increase may be temporary. However, if they
think a sharp rise in share prices is permanent and the stock market then
tumbles, the result may be that consumption falls by enough to cause a
recession. The wealth effect of rising house prices is particularly uncertain.
Wealth
tax
In
most countries, the majority of wealth is concentrated in a fairly small number
of hands. This makes a wealth tax appealing to politicians, as it should allow substantial
amounts of revenue to be raised from comparatively few people, allowing the tax
burden on the majority of the population to be kept down. It also appeals
because it promotes meritocracy by making it harder to be born with a silver
spoon in your mouth. A wealth tax reduces the disparities in wealth rather than
income that are the biggest determinant of how the scales are weighted for
succeeding generations. What could be better than a tax that produces lots of
money for the government and strikes most voters as being extremely fair?
Alas,
as critics point out, wealth taxes may cause inefficiency by discouraging
wealth-creating economic activities. Moreover, the revenue collected may prove
disappointing. The wealthiest people are often the most skilled at tax
avoidance, not least because they can afford good tax accountants. Despite the
enormous concentration of wealth in a small part of the population, on average
across the OECD wealth taxes account for less than 2% of total tax revenue.
A
wealth tax can achieve horizontal equity and vertical equity (so that people of
similar means pay the same and those with more pay more) in ways that income
tax cannot. For instance, neither a poor person nor a rich person with no
income would pay income tax, and only the rich person would pay the wealth tax.
Wealth
taxes come in two main forms. Capital transfer taxes are levied when wealth
changes hands, either at death (inheritance tax) or through donation (gift
tax). Annual wealth taxes are levied each year as a fraction of the taxpayer's
net worth. Some people regard capital gains tax as a wealth tax, but, strictly
speaking, it is a tax on the income earned on capital, rather than a wealth tax
on the capital itself.
Weightless
economy
At
the start of the 21st century, the total output of the American economy weighed
roughly the same as it did 100 years earlier. Yet the value of that output, in
real terms, was 20 times greater. Output is increasingly weightless, produced
from intellectual capital rather than physical materials. Production has
shifted from steel, heavy copper wire and vacuum tubes to microprocessors, fine
fiber-optic cables and transistors. Services have increased their share of GDP.
This weightless or dematerialized economy, most economists agree, is not just
lighter but also more efficient.
Welfare
Americans
use welfare as shorthand for government handouts to the poor. Economists use it
to describe the well being of an individual or society, as in 'are tax cuts
welfare-enhancing?'. This is economist-speak for 'will tax cuts improve the
overall well being of the country?'
Welfare
economics
Economics
with a heart. The study of how different forms of economic activity and
different methods of allocating scarce resources affect the well being of
different individuals or countries. Welfare economics focuses on questions about
equity as well as efficiency.
Welfare
to work
Active
labour market policies, in which government handouts to the unemployed come
with strings attached, designed to get the recipient off welfare and back to
work as quickly as possible.
Windfall
gains
Income
you do not expect, such as winning a lottery prize. Economists have long argued
about whether people are likely to save such windfalls or spend them. According
to the permanent income hypothesis, favoured by most economists, people save
the lion's share of windfall gains. But real life often contradicts this; ask
any lottery winner.
Windfall
profit
A
controversial concept, often used by politicians to justify imposing a tax on
profit that in theory is earned unexpectedly, through circumstances beyond the
control of the company concerned, and is thus deemed undeserved and ripe for
the taking by the tax authorities. As the profits were neither expected nor a
result of the efforts of the firm, taxing them should not harm the firm's
incentives to maximise future profits. The problem comes when greedy
politicians start claiming that profits are windfalls when in fact they are
deserved and expected. Then taxing them sends a signal to firms that they
should not try too hard to make profits, as if they do too well they will not
get to keep the profits anyway. If this became widely believed, effort would
probably decline and economic growth would be slower.
Winner-takes-all
markets
No
time for losers. In certain jobs, the market pays individuals not according to
their absolute performance but according to their performance relative to
others. The income of window cleaners depends upon how many windows they clean,
but investment bankers' pay may depend upon their performance ranking. Slightly
more talented window cleaners will make only a small difference to the
transparency of their customers' windows, but in the markets for selling bonds
that slight edge can mean everything. Rewards at the top are therefore
disproportionately high, and rewards below the top are disproportionately low.
People in these professions are often willing to work for very little just to
have the chance to compete for the top job and the jackpot that comes with it.
This
sort of economics has long been prevalent in celebrity-dominated businesses
such as entertainment and sport. But this reward structure is spreading to more
and more occupations, including journalism, the law, medicine and corporate
management. Globalization has expanded the market for skills, increasing the
opportunities for the rich to become even richer.
In
a normal market, sumptuous superstar incomes would attract competition from
more applicants to do the jobs that pay them. This would then bring salaries
down to less exotic levels. In a winner-takes-all market, this does not happen.
An investment bank wants the best analysts and dealers; second best will not
do. It can also afford to pay. Some economists believe that because of more
liberalised markets there will be growing inequality in most professions and
the emergence of a winner-takes-all society.
Withholding
tax
A
tax that is collected at source, before the taxpayer has seen the income or
capital to which the tax applies. In other words, that part of the income or
capital due in tax is withheld from the taxpayer, who therefore cannot easily
avoid paying the tax. Withholding taxes are frequently imposed on interest and
dividends.
World
Bank
An
institution created with the IMF at Bretton woods in 1944 and opened in 1946.
The world bank has three main branches: the international bank for reconstruction
and development (IBRD), the international development agency (IDA) and the
international finance corporation (IFC). Collectively, it aims to promote
economic development in the world's poorer countries through advice and
long-term lending, averaging $30 billion a year, spread around 100 countries.
Critics
of the World Bank say that it often worsens the problems facing developing
countries. Its advice has often been guided by economic fashion, which led it
to support a centrally planned brand of development economics in the 1960s and
1970s, before switching to privatisation and structural adjustment in the 1980s
and then to promoting democracy and economic transparency, and attacking crony
capitalism, in the late 1990s. Until recently, it has generally supported big,
high-profile projects rather than more economically useful smaller schemes. It
has often failed to ensure that its loans have been spent on the intended
project. Its willingness to pump money into struggling countries creates a
potential moral hazard, in which politicians may have little incentive to
govern well because they believe that, if they do a bad job, the world bank
will come to the rescue. The increase in private-sector lending to and
investment in emerging markets has led to growing discussion of whether the
world bank is any longer needed.
World
Trade Organisation
Bête
noire of anti-globalization protesters. The World Trade Organisation is the
governing body of international trade, setting and enforcing the rules of trade
and punishing offenders. Established during the Uruguay round of talks under
the general agreement on tariffs and trade (GATT), it opened for business in
1995 with a membership of 132 countries (rising to 146 by 2003). Countries used
to break GATT rules with impunity. They seem to be finding it harder to do so
under the WTO. Even so, protestors complain that it does not promote fair trade
but does promote the interest of rich countries over poorer one. Supporters of
free trade, including the economist, reckon that all countries are better off
as part of a well-regulated international trading system, and that the WTO is
the most likely source of the good regulation that is needed.
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