Class matters

Today’s figures confirm that real wages are falling. They show that average earnings rose by 1.7% in the year to March, a period during which consumer prices rose 4%.
It’s easy to ascribe this to weak productivity growth, the sclerotic post-crisis economy and to rising commodity prices.
Such an explanation, however, misses something. It raises the question: why are these factors hitting wages more than profits? In the 1970s, for example, very similar forces caused a severe profit squeeze more than a wage squeeze.
The answer to this question, of course, lies in one word - class, understood in its proper,  Marxian, sense. Capitalists today have the power to pass on economic pain to workers in a way they did not have in the mid-70s.
In this context, we should welcome a new paper (pdf) by Juan Carlos Cuestas and Bruce Philp. They show that the rate of surplus value in the UK - defined as the ratio of profits to wages, excluding the public sector and self-employed -  is a reasonable empirical function of three factors: the unemployment rate, which shifts the balance of power in favour of capitalists; working class militancy; and  - perhaps surprisingly - whether we have a Labour or Tory government.
Now, we can quibble with this. I’m not sure whether the phrase “surplus value” has any analytical force distinct from talk of the balance of class power or the profit-wage ratio. And it’s quite possible that this analysis omits some other variables, such as the way in which technological change in recent years has been biased in favour of capital.
Nevertheless, the important fact remains. This shows that a central feature of the economy - the growth of wages relative to profits - can, and should, be analyzed in Marxian terms. To omit this is to ignore some key elements of the economy.
It is rather unsatisfactory for Ed Miliband to talk about the “squeezed middle” without a Marxist perspective.

Comments

[Luis Enrique]

"average earnings rose by 1.7% in the year to March" - how much did average profits rise in the year to March? Perhaps the real value of profits is being eroded by inflation too?

[I'm not asserting that, merely pointing out that you implicitly assert profits have risen faster than wages without citing any data]

n.b. I wonder what in the data distinuishes power or capital biased technological change from skills biased technological change:

http://cep.lse.ac.uk/pubs/download/occasional/op028.pdf

[Luis Enrique]

on second thoughts, if inflation is 4%, nominal GDP must have risen at least 4% or we'd be in a real recession, and if nominal GDP has risen 4% and nominal wages only 1.2% then nominal profits must have risn faster.

(I think)

[Playhouses Man]

Nearly true Luis. You assume that a business only has wages as a cost, but if raw material costs are rising higher than 4% then profits can be squeezed.

Inflation is based on end prices, companies could be absorbing the higher input prices and reducing margins.

I dont know if this true, but it is possible. I would like to see some data.

[chris]

In the year to Q1 real GDP grew 1.8%. I suspect employment growth did not quite offset the drop in real wages, so labour's share of this can't have risen much. It's unlikely that other incomes (eg rent) rise much, so I suspect profits did rise; we'll get prelim figures next week.
@Playhouse Man - you're right in theory, but high PPI inflation suggests manufacturers at least are passing on materials costs, as are many other firms (eg airlines according to yesterday's CPI data)

[BT]

It's true that the weakening of unions means that wages have ceased to rise as they once did, which creates inequality but also macroeconomic problems.

But imagine there were no emerging-market driven commodity price surge and inflation was 2%. Wages would be falling (if they were not sticky) in response to the current recession/stagnation (until they reach a low enough level that employment picks up).

Now, falling wages makes debt-servicing more difficult and therefore worsens the recession. However, inflation allows falling real wages and reduces the debt burden simultaneously.

So 5% inflation is actually something to be encouraged for our current lost decade.

[Doug]

Several years of wages falling behind prices were a key factor in the large scale militancy before the First World War. Are modern workers going to remain passive forever? One interesting aspect of the Great Unrest was previously unorganised workplaces combining fights for higher wages and union recognition.