Wage rises are required – real wages must grow in line with productivity

There was an interesting article in the UK Guardian last weekend (March 29, 2015) – Why falling inflation is a false pretext for keeping wages low – which examined wage trends in the UK and the validity of the argument that “Falling inflation now provides employers with a pretext for keeping wage settlements low". Employer groups never support wage increases and are continually trying to suppress real wages growth below productivity growth so that they can enjoy a greater share of national income. As part of my research to discover the nature of the ideological shift accompanying the emergence of Monetarism as the dominant policy paradigm I have been examining wage distributions. This is part of a book I will complete next year (fingers crossed) on the demise of the political left. In this blog we examine the shifting relationship between labour productivity growth and real wages growth since 1960. The results are illuminating and open up a broad research front about which I will write more as time passes.

As usual, Bill puts his finger on the fundamental issue. The chief issue in a surplus economy is distribution of the surplus. The major parties vying for a share are "capital" (owners and those who control the firm) and "labor" (workers aka "the help"). So the tussle is between capital share and labor share with respect to distributing the surplus resulting from productivity.

Owners argue that productivity increase no longer comes chiefly from laborin a highly technological economy , e.g., through growing experience and improved skill, but from technology and organizational and management capability. So capital and top management that controls and directs the firm naturally deserve the greater share based on both proportionate contribution to the resultant profit and incentive to increase profit through capital formation, which benefits the whole society by creating jobs and trickle down.

As Henry Ford realize, the problem with this approach is effective demand for consuming production potential if workers are not paid enough to afford to purchase the entire potential (and they cannot borrow to do so indefinitely). So the result is an output gap and involuntary unemployment.

Bill's analysis shows that the problem is not at root economic but political, that is, ideological. It is the result of imposing a neoliberal political theory on society based on a false economic rationale in that the basis of neoliberalism as a political theory is that a market state is superior to a welfare state in delivering a high standard of living. Politics is essentially about the distribution and use of power in a society, and the ruling elite who hold power get to impose their ideology on society. The recourse therefore is to change the ruling elite and shirt the power. That is an economic issue to the degree that wealth confers power.

Basically, the thinking behind a market state being superior is Say's law and the belief that the purpose of capitalism is increased capital formation because trickle down. The thinking behind a welfare state is that production is for consumption and shared prosperity and a high standard of living are based on broadly based distribution that encourages circular flow.

However, as Bill points out, the hidden agenda behind a "market" state is rent extraction rather than simply allocation of the surplus to the top tier through market forces. This is neoliberalism's dirty secret. Power provides the ability to design institutions for rent extraction.

Bill Mitchell – billy blog
Wage rises are required – real wages must grow in line with productivityBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia