Last week, I provided a graph in this blog post – The Left/Right distinction is as relevant as ever as corporations gouge profits out of pushing inflation (May 2, 2022) – which showed negotiated wages growth in Europe was declining and real negotiated wages had fallen sharply over the last several months. I am continually on the lookout for evidence that the current inflationary episode, no matter how alarming, is not being driven by structural forces in the labour market even though unemployment rates have fallen somewhat. A music segment follows.The basic equation is the relationship of capital (ownership) share and labor (individual employee) share of profit. This depends on labor bargaining power, since capital is largely in control of setting the wage owing to its generally superior market power. owing to ownership being in a position to set the wage. This can be seen as a type of monopsony.
There are two major factors that influence labor power — availability of workers relative to business need for them based on demand and institutional arrangements that affect labor power, e.g., laws and regulations that support the interests of labor. The first factor comes into play at full employment, when labor becomes scarce. Bill argues that the advanced economies are not at full employment at present.
The second depends on the political power of capital and labor relative to each others. The latter is most decisive. This may have been a factor in the Seventies stagflation when union power was strong, for instance, even though the economy was not. Since then, institutional arrangements have been changed to favor capital, so labor power is not coming from this direction. This is where the left-right divide is most visible relative to labor to capital share.
Stagflation fears are rising again with various explanations and remedies being put forward. Bill and others argue that this is not a period of full employment with labor power increasing owing to scarcity for this reason. If labor is scarce, it is owing to the conditions around the pandemic that make workers reticent to accept the risk of contracting illness relative to the wage offered. Wages need to rise to attract more workers into accepting this risk.
The other reason for increasing inflation is reduced available real resources owing to lagging production and distribution, again due to the pandemic.
The pandemic is an exogenous shock so that the currently rising inflation needs to be analyzed on the merits of existing conditions, not textbook theory based on normal times. While some economists are proceeding on this many, many are not and are just using the conventional narratives about "inflation." and proposing conventional remedies for it.
Bill Mitchell – billy blog
With corporate profits booming, business can afford to pay higher wages
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
Bill Mitchell – billy blog
With corporate profits booming, business can afford to pay higher wages
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
15 comments:
There is no left/right divide. That is referred to as political theater.
Without full employment and perfect competition, capital has more power relative to labour than it otherwise would. A JG would address the employment issue.
What would address the lack of competition?
In the real world, we have a mixed economy. 'Socialist' economy and 'free market' economy are the equivalent of sports fantasy leagues.
What is amazing to me is how "MMT" is taking the blame for inflation due to supply side issues.
Fiscal spending is way up so MMT should take some blame along with their Democrat political partners…
No offsets for spending approved by the ruling class.
The basic equation is the relationship of capital (ownership) share and labor (individual employee) share of profit.
Profit is not like a pie that is split up between capital and labor. Labor is simply another cost item, and the profit is added on after that, i.e., cost plus pricing. Strong labor power does not increase real wages, in fact, it may actually reduce them. To wit, this post by Lawrence Summers:
My new study w @asdomash shows that nominal wage growth and real wage growth are historically not correlated. Indeed, faster nominal wage growth above 4 percent is associated with slower real wage growth.
source with graph: Lawrence Summers tweet
There is more here (bold mine):
While it is tempting to think that higher average wages categorically make workers’ richer, we believe there is reason for uncertainty. It is useful to consider the following football analogy made by Arthur Okun to differentiate between individual and aggregate outcomes: When an individual football fan stands up in the crowd, he can see the football game better. But if everyone in the crowd stands up, then nobody sees any better, and everyone is made less comfortable and worse off. Similar to this logic, we believe there is reason to question whether aggregate wage increases are always better for workers.
We first highlight that in general, the correlation between economy-wide wage increases and worker purchasing power is close to zero or negative. Table 1 shows the historical relationship between nominal wage growth and real wage growth going back to 1965. We show the correlation coefficient using alternating wage measures and inflation measures, and include both the contemporaneous correlation and the correlation between lagged nominal wages and real wages. Across all our series, the correlation between nominal wage growth and real wage growth is very low, and usually becomes negative with a lag.
source with graphs and data: The relation between nominal and real wage growth by Alex Domash and Lawrence H. Summers
In the conventional view, that is the case. But why should profit be limited to capitalist ownership and labor be reduced to a commodity? That is the basic Marxian viewpoint that is shared widely beyond Marxian economics. The reason as Marx explained, is that's is how capitalism works (defines itself institutionally) to extract surplus value from production, giving capital a greater real share of production.
Workers are actually savvy enough to figure this out and that's why there is always pressure from labor to increase its share in terms of the real wage. Conversely, capitalists are only willing to increase the wage when it doesn't adversely affect capital's share but only affects the nominal wage and not the real wage, which means that labor has more of a claim on production.
Okay, more quotes to buttress my argument that labor bargaining power is useless as regards real wages:
Did Workers’ Wages Skyrocket During the ’70s? Not When You Figure In Inflation.
The story here is that blue-collar wages rose steadily during the 70s, peaking at annual growth of 9 percent in 1980. During the start of the 1981-2 recession, wages grew about 7 percent, and even by the end of the recession wages were rising about 4 percent. After that, wage growth went up and down but always stayed within a healthy range of 2-4 percent. Add it all up, and blue-collar wages increased 226 percent through the end of the Bush administration. The total blue-collar wage increase through today amounts to 600 percent.
Now factor in inflation:
This looks quite a bit different. Wages went up and down in the 70s, but by the end of the decade hourly wages were a dollar lower than they had been at the beginning. In 1979 wages began to plummet, not getting back to positive growth until 1982. The rest of the decade is something of a train wreck for blue-collar workers, with wages mostly declining throughout the entire Reagan/Bush administration and not finally going positive until the middle of Bill Clinton’s administration. In reality, real hourly wages declined from $21.08 at the start of the Reagan era to $19.61 at the end of the Bush administration. That’s a loss of about $3,000 per year, or close to $6,000 per year in today’s money. If you add in the ’70s, it’s even worse: blue-collar wages dropped from $22.42 to $21.94. That’s a loss of $1,000 per year, or a little over $3,000 in today’s money. Put all this together, and blue-collar workers lost the equivalent of $9,000 in modern dollars, which represented a 13 percent decline in blue-collar wages over the course of a couple of decades. The entire period of the ’70s and ’80s was a catastrophe for blue-collar workers.
That's when union membership was high and labor power was strong. Yet, it was worse than useless. So, why do people keep advocating for more unions? Do they think that things will be different this time around?
Unionization is not sufficient to address the capital share if labor's real share doesn't increase relative to capital's real share. Economics is based on nominal values, whereas it is real value that counts with respect to distribution. Basically, unionization can't fix the issues within the capitalist framework in which ownerships is privileged institutionally over work. The conventional argument is that capitalism benefits everyone (trickle down) but that is an excuse rather than an explanation. The only effective way to address this is to redesign of the system to eliminate ownership privilege, which is actually a market imperfection (asymmetry). The basic issue is economic rent which is income that does not correspond to productive contribution. Ownership is a legal fiction.
The only effective way to address this is to redesign of the system to eliminate ownership privilege,
But that doesn't solve the problem either, as this article by Blair Fix shows:
The Allure of Marxism … And Why It’s a Mistake
Marx pinned the ills of capitalism on private property. I think this was a mistake. The real cause of most social ills, I believe, is not private property. It’s hierarchy. Why? Because hierarchy concentrates power. And concentrated power is the despot’s best friend. Concentrated power, I believe, leads to social ills like totalitarianism, inequality, mass violence, and oppression. True, private property is intimately linked with hierarchy and power. But, as communist states demonstrated, we can have hierarchy without private property. This is Marx’s fatal error.
So here’s what goes wrong with communist revolutions. Distracted by private property, Marxist revolutionaries make the problem of hierarchy worse than it was under capitalism. They abolish private property, thinking this will solve the problems of capitalism. But to achieve their goals, Marxists create a vanguard party that eventually becomes a single-party state.
So in the name of creating a more just and equitable society, these revolutionaries concentrate power. They replace capitalist hierarchies with an even larger communist hierarchy. Yes, private property is gone. But the problems of hierarchy are even worse than before. It’s an ironic twist. Marxist revolutionaries aim for a socialist utopia. But what they get is a totalitarian nightmare. And it’s all because they focus on private property and neglect the problem of hierarchy.
That's when union membership was high and labor power was strong. Yet, it was worse than useless. So, why do people keep advocating for more unions? Do they think that things will be different this time around?
In the absence of a job guarantee, unionization is next best strategy. Of course, unionized jobs only benefit unionized workers.
Why do you persist in hand-wringing?
The factors working against labour share are lack of full employment and imperfect competition. Firms which don't risk losing market share, can pass on wage increases to consumers.
A third factor can come into play with businesses operating on a thin margin with market competitors. An increase in wages/benefits due to unionization can push such businesses into bankruptcy.
In the interim, we observe the current balance. An economy where workers and consumers were more powerful, might have fewer businesses able to survive. Those that do, may see smaller profits. In that case, the incentive to start a business would diminish. Even today, the usual reward for being an entrepreneur is financial failure.
Socialists and libertarians are pursuing a fantasy. A mixed economy is analogous to a tug-of-war, where two sides are pulling against a rope. There can be shifts in position, but there always has to be a countervailing force. Unlike a tug-of-war, everyone loses when one side loses too much power.
Why do you persist in hand-wringing?
It's painful to watch poor people championing the very causes on the left which hurt them. I was raised in poverty, so I feel their pain. As one example:
Finance Minister Chrystia Freeland is imposing a one-time windfall levy on Canada’s major banks and permanently increasing their income tax rate, fulfilling an election promise that has raised the ire of the industry’s top executives.
The measures will force banks and insurance companies to pay an additional C$6.1 billion ($4.8 billion) in tax over five years, according to Freeland’s budget plan released Thursday. The new taxes are virtually certain to be implemented because Prime Minister Justin Trudeau has already secured the support of a left-leaning opposition party to pass the budget law.
This I saw today:
The banking public always pays
The federal government increased the tax on Canadian banks in the April 7 budget. I received a notice from my bank that fees to use their bank will increase by eight to 14 per cent in August. My math says that the service charge increase for the 10-15 million clients will more than offset the “inconvenience” of the government’s tax increase.
I know the government is happy with its “tough actions.” The bank makes a few obligatory media noises, then shrugs and sends me a notice for a fee increase! Just move it on down the line! As usual we, regular Canadians, are at the end of the line! Therefore who pays?
Banking fees are regressive in that they strike hardest at poor people, who just voted another tax on themselves because neither they nor the people they voted for understand the idea of tax incidence.
It's painful to watch poor people championing the very causes on the left which hurt them. I was raised in poverty, so I feel their pain.
Labour standards that are taken for granted today, were fought for by workers a century ago. By organized labour. By politically active organizers. Nowadays large unions are corrupt, and few people know what syndicalism is. Doesn't mean those approaches are intrinsically useless.
A new tax without targeted social spending is useless. This is why anti-poverty organizations are focused on social spending rather than how revenue is raised.
A "left" that doesn't agitate for proven methods is unworthy of the label. This is why I consider left/right divisions as theater. All that remains are ideologues who prefer to talk rather than get things done.
Don't like bank fees? Try no fee banking. There are alternatives out there for discriminating consumers. I chose Simplii Financial many years ago, and am fully satisfied with their service.
@ Ahmed
Well, Marx thought that the basis of asymmetrical power was ownership of the means of the production and I believe he was most correct. However, I have said previously that it appears to me that public control of the means of production is sufficient. Ownership is not needed. China is now proving this point, it seems.
Fix is correct that the issue is really market asymmetry, with which conventional economics also agrees in principle. In practice, however, many if not most conventional economists don't view asymmetry as a significant issue or problem under current conditions and arrangements, that is, markets are "free enough." However, this issue is now coming to a head, although eclipsed by war, owing to rising inequality and social unrest.
It is pretty safe to say that this conversation will broaden and deepen come the next recession when the public gets agitated enough for politicians to notice.
The issue boils down to market asymmetry as both conventional and heterodox economists would agree, if it actually exists. Then the question becomes how to address it. Can it be addressed under economic liberalism conceived as "capitalism," or is that impossible, as Marx held, so that another paradigm is needed, e.g., socialism, under which work is privileged over rent instead of the reverse, as it presently the case.
In the first sentence above, "most" should be "mostly."
I should add that from the spiritual POV, the fundamental problem is the level of consciousness, both individual and collective. There are two extremes on a range between individuality and universality that manifest as selfishness and altruism.
Selfishness manifesting as narrow self-interest is based on the perception of individual existence as separate from the whole and altruism manifesting as universal love is based on the experience of the underlying unity of existence.
Narrow self-interest manifests individually as the pursuit of one's own perceived interests at the expense of others' interests as an individual, and it manifests as class interest at the group level. Altruism manifests individually as serving the interests of others including the whole (group, society, humanity) and collectively as "All for one and one for all." Marx put it as from each according to ability and to each according to need." What Marx missed what that a sufficiently developed level of collective consciousness is a necessary condition for this.
Therefore, it is not the social system as much as the level of consciousness that is determinative. So the "answer" is to raise the level of consciousness, individual and collective. The question is how. Perennial wisdom is about attaining that individually and collectively.
Instead of either tweaking the system over overhauling it, cut to the chase and deal with the fundamental causality.
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