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Tuesday, March 20, 2012

Better Wages are Better

Thirty years of pro-business, ‘neo-liberal’ economic policies have not created the gains in wealth and prosperity that were promised. Instead a financial meltdown of the scale not seen since the 1930s Great Depression has crippled the world (and New Zealand’s) economy for the last five years.
Even the institutions that led the free-market, deregulation crusade have had to admit that things are not what they were cracked up to be. The IMF, for example, now says that sluggish productivity growth and increasing income inequality is a result of multi-national companies taking advantage of deregulated trade and globalisation in a race-to-the bottom; chasing lower wage rates.
The loss of higher value-added production since the opening of the economy in the 1980s has been documented in New Zealand. So has the growing income inequality. The real average wage fell from a high point of $29.97 an hour (in June 2011 dollar terms) in March 1982, to $26.27 an hour in June 2011 – a drop of 14%. Wage and salary earners’ share of the economic income cake was slashed by a quarter between the early 1980s and 2002, from 60% down to 46%. In 2010 this share was still 15% down on the early 80s despite some improvement over the 2000s. Of the OECD countries, only Turkey and Mexico track lower.
The CTU Economic Bulletin (Oct.2011, from which these figures are taken, concludes that there would be “wider benefits across the whole economy as well as better social outcomes from a commitment to a high wage, high skill, high value society. The integration of innovation, higher wages and more investment in skills and technology are a sound underpinning for development that is sustainable both economically and socially. This is a stark contrast to the low wage pathway that competes on the basis of cost alone.”
This is not just trade union rhetoric. Increasingly, academic research is bearing out these conclusions. The International Labour Organisation, which is part of the United Nations, has recently published research showing that wage-led growth is the way to a sustainable recovery from the current economic depression. 

ILO says wage rises are compatible with better profits
The ILO research calls into question the prevailing wisdom derived from Milton Friedman’s theory that there is a natural rate of unemployment, below which inflation will rise. The Friedman theory justifies monetarist interest rate manipulation to keep the economy from growing fast enough to create full employment. When there is full employment, wages naturally tend to rise and profits supposedly fall.
Two Dutch economists, writing in the ILO International Journal of Labour Research, show that rising inequality due to the global wage squeeze in the 1980s and 1990s is at the root of the current economic crisis. Credit inflation replaced wage inflation and led to the huge increases in household and corporate debt that crashed the financial system in 2007-8.
When alternative policies are adopted to strengthen the bargaining position of wage earners, wages rise and society becomes more egalitarian. In the simplistic, zero-sum world of the Philips curve that has dominated economic thinking since the 1980s, profit rates automatically go down as wages go up. This is the direct effect. More than offsetting this, though, are indirect results that will increase profits as wages go up.
First there are the gains in labour productivity that come from higher wages and more contented workers. In a co-operative industrial relations system, workers will share their tacit knowledge about how best to do things to make production and services run smoothly. They will more readily contribute their learned-on-the-job knowledge in an atmosphere where they feel secure and unthreatened by possible job losses as a result of helping to raise productivity.  Workers and firms will invest more in training and up-skilling when employment protection is stricter and average job tenure is long. The resulting higher labour productivity increases the profit rate.
Secondly, as wages increase, demand for goods increases. Firms are able to run at fuller capacity to meet the demand, utilising more (or all) of their productive capital investment to generate profits. New investment spurred on by greater demand and higher profits will lead to improved technologies and even greater labour productivity, and again, higher profits.
The authors conclude that profitability need not fall, and indeed can rise (counter-intuitive though this may seem), as the wage share rises and distribution becomes more egalitarian. The resulting society is better for everyone.