The globalisation of labour and the rise of automation has led, according to the former chief economist of the World Bank, “a crisis in the global labour market”. But Professor Kaushik Basu, in Australia to give a lecture at the Monash Business School, argues that the push by Donald Trump and political parties in Australia towards greater protectionism is precisely the wrong path to take.

Instead, governments need to focus more on distributing profits to workers.

For Basu, professor of economics and the C. Marks Professor of International Studies at Cornell University and former chief economic advisor to the Indian government, the time since the GFC has seen “one crisis after another” leading to a long period of economic stagnation. But among the biggest challenges economists and politicians have to face is that the increase of technology has spurred the globalisation of labour in a way never before encountered.

According to Basu, the big change from previous technology increases has been the “sharp rise in technology that links workers in different places”. This means that wealthy nations are now able to access “cheap labour that was earlier tucked away in faraway places”.

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Basu notes that there is no doubt that the ability to outsource workers has improved world GDP and the standard of living for people in developing countries and thus should be celebrated.

But the problem is the “bottom end of labour” in rich countries like Australia, USA and the UK is now in direct competition with “workers in poorer countries who for the reason of being in poorer countries command a much lower wage”.

Basu says that while poverty is improving in developing countries, this competition for labour “is causing inequality to get exacerbated” in wealthy countries.

He argues the crisis in the global labour market is “a slow crisis” as there is “never an event which makes news”, but that it is “feeding into a lot of economic and political problems and manifesting in different ways”.

And for Basu, one of the most stark ways it is manifested is the declining share of national income going to workers.

This decline is something that has occurred across most developed nations since the mid-1970s, but the drop in Australia is among the most marked.

In 1975 two thirds of our GDP was in the form of wages; in 2014 it was just 53%:

Not surprisingly such a shift has also seen real wages flatten, even while labour productivity improves:

For Basu, this highlights that the winners from globalised labour are not just the worker in the poor nations, but the “profit makers” in the wealthy ones.

He argues the solution to the dilemma of outsourcing and the replacement of work by automated processes is to not think of it as a “labour versus labour problem – workers in rich countries and workers in poor countries.” Instead he argues, “we have to face up to the fact that this is also a wage versus profit problem – with an increase in the share of profits, and a decrease in the share of wages.”

One of the problems with thinking of it as a labour versus labour problem is the solution quickly becomes one of protectionism. But for Basu, this would just be a case rich nations economically cutting off their nose to spite their face.

The problem is that outsourcing has actually been very good for economic growth in wealthy nations. The open economy in the USA of the 1980s and 1990s, he argues, allowed its economy to be much more flexible and thus able to best use its resources and could “surge ahead” while Japan which was largely protectionist, “slowed down”.

He argues that were the USA under Trump, or Australia under a protectionist trade policy, to block the outsourcing of labour it would look very good “at first sight” because it would seem like “you’re protecting jobs among your own workers in your own country”.

But he argues what would happen is that other nations would continue to use the cheap labour and would “out compete” the protectionist nation – hurting economic growth and hitting profit makers in that nation, and even more so, the workers.

Basu is not an economist who only thinks in terms of GDP growth.

Earlier this month, along with Nobel laureate Joseph Stiglitz and three other former chief economists of the World Bank, he signed “the Stockholm Statement” which seeks to guide policymaking.

The first principle of the statement is that “GDP growth is not an end in itself”.

Basu notes that too often those who argue in favour of reducing inequality and poverty do so by arguing that it “is actually good for GDP growth”. He argues however that while this is often the case, reducing inequality or poverty is “worthwhile as an end in itself even if it slices off a little of the GDP growth”.

Thus he argues the way to respond to the declining share of wages due to globalisation and automation is for both an open economy (which is good for GDP growth), but also that governments must “think of some form of redistribution so that workers get their income shored up.”

To this end, while not discounting the idea of a universal basic income, he argues “the time has come to allow workers to get a share of profits”.

He also argues that this redistribution of income should also “take the form of better services likes health and education.”

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Basu argues this “doesn’t mean a need for a large government” but rather it means a need for “a redistributed government which takes away a slice from the rich and provides it to the workers in the form of health benefits education and also some form of profit share”.

Globalisation is not about to stop, and neither are the concerns of workers – especially as we are seeing in Australia a time of flat real wage growth and declining share of income going to workers.

This does not mean we need to cower and put up trade barriers which will only exacerbate the problems. But neither does this mean we can carry on still thinking only of GDP growth. To both improve our economy and also dampen the nationalistic xenophobia that quickly turns to racism, governments must adopt policy more targeted to inclusive growth. They must realise that with the greater flexibility of labour comes the need for greater emphasis on redistribution of income.

Failure to do so will only see inequality increase and the fires of nationalism – and all the dangerous sparks associated with it – burn hotter.