Oil & the class war
Workers are bearing the cost of higher commodity prices. Today’s figures (pdf) show that wage inflation is flat, despite rising price inflation, implying that it‘s workers' real incomes that are being squeezed rather than capitalists'.
A neat measure of this is the own product real wage, which is simply wages divided by the product of prices and productivity. If wages rise faster than prices and productivity, workers are (roughly speaking) increasing their share of the pie at the expense of capitalists, and if wages rise more slowly, capitalists’ share is expanding.
It’s easier to illustrate this for manufacturing - though I think this speaks for the economy generally in this instance. Here, wages rose a mere 3% in the year to May, whilst prices, even excluding oil and food, rose 5.9% and productivity grew 1.5%. So, workers’ share is falling.
You can read this in two ways.
1. It shows that workers’ bargaining power is weak, thanks in part to the entry into the global labour market of billions of Chinese and Indian workers. The OPRW has fallen pretty consistently since 2003.
2. There’s risk-pooling going on. Traditionally - and still to a large extent - firms have practiced cost-plus pricing and hoarding of at least more skilled labour. This means workers are partly insured against small economic downturns, as labour hoarding means that productivity slows and the OPRW rises, and against falls in commodity prices, as these lead to lower output price growth and hence rises in the OPRW. In exchange, the OPRW falls as output expands, as this raises productivity, and if commodity prices rise, as cost-plus pricing means this leads to higher output prices and a fall in the OPRW.
I’m not at all sure that this is an optimum pooling of risk. But it is working to the benefit of capitalists now.
Which might - only might - suggest that the stock market is being too pessimistic.
A neat measure of this is the own product real wage, which is simply wages divided by the product of prices and productivity. If wages rise faster than prices and productivity, workers are (roughly speaking) increasing their share of the pie at the expense of capitalists, and if wages rise more slowly, capitalists’ share is expanding.
It’s easier to illustrate this for manufacturing - though I think this speaks for the economy generally in this instance. Here, wages rose a mere 3% in the year to May, whilst prices, even excluding oil and food, rose 5.9% and productivity grew 1.5%. So, workers’ share is falling.
You can read this in two ways.
1. It shows that workers’ bargaining power is weak, thanks in part to the entry into the global labour market of billions of Chinese and Indian workers. The OPRW has fallen pretty consistently since 2003.
2. There’s risk-pooling going on. Traditionally - and still to a large extent - firms have practiced cost-plus pricing and hoarding of at least more skilled labour. This means workers are partly insured against small economic downturns, as labour hoarding means that productivity slows and the OPRW rises, and against falls in commodity prices, as these lead to lower output price growth and hence rises in the OPRW. In exchange, the OPRW falls as output expands, as this raises productivity, and if commodity prices rise, as cost-plus pricing means this leads to higher output prices and a fall in the OPRW.
I’m not at all sure that this is an optimum pooling of risk. But it is working to the benefit of capitalists now.
Which might - only might - suggest that the stock market is being too pessimistic.
Who are these capitalists - mainly pensioners?
Posted by: dearieme | July 16, 2008 at 12:36 PM
Yup - mostly wicked pensioners. And as Harold Wilson used to say in his enlightening moments: One man's wage increase is another man's price increase.
Posted by: Bob B | July 16, 2008 at 01:41 PM
"It shows that workers’ bargaining power is weak, thanks in part to the entry into the global labour market of billions of Chinese and Indian workers. The OPRW has fallen pretty consistently since 2003."
UK workers' bargaining power is weak. But the flip side is that Chinese and Indian workers' bargaining power is increasing (albeit from a low base). Indeed, it has been wage inflation in China that is part of the cause of rising global prices.
Posted by: Bruce | July 16, 2008 at 01:57 PM
Another dark day for the Stock Exchange throughout Europe. Bankers and traders work warily and such trepidation is now typical of every sector. Consumer spending is also showing signs of slowing down; sales in shops are down. Everyday the Bank of England is trying to balance the growing evidence of an economic slowdown against the problem of rising inflation. But the headlines spoke again about dropping house prices...
what can we do?
If you're looking to purchase in London should you wait? Thinking about selling? How difficult is it really?
Posted by: Simone | July 16, 2008 at 05:08 PM