Doubts about wage-led growth

In his Ralph Miliband lecture, Len McCluskey said unions "first job is to organise workers and secure a better deal for them at work." However, I'm not sure this is anything like sufficient to provide the alternative to our current crisis-ridden capitalism.

Let's assume - heroically - that unions do find the strength to push for higher wages. Would this boost the economy?

History suggests it could. In the 50s and 60s, a degree of wage militancy was compatible with full employment and decent economic growth. But I doubt that those circumstances apply today, for two big reasons.

First, high wages are quite consistent with full employment and high investment as long as those wages are returned to capitalists in the form of higher consumer spending. If this happens, capitalists will tolerate a squeeze on profit margins because they will anticipate that low margins will be accompanied by high sales volumes, and thus a decent return on capital.

But I'm not sure that higher wages would be returned in this way. For one thing, they might leach overseas in the form of spending on imports. And for another, if households use their extra incomes to pay off debt or student loans, then consumer spending won't rise as much as wages rise. That'll be a net loss to capital, and hence cause a fall in profit rates.

It's no accident that the post-war settlement was sustainable as long as the household savings ratio stayed low, but eventually fell apart in the 1970s as savings propensities increased.

Secondly, capitalists increased their investment significantly in the 1950s and 60s, thus contributing to high aggregate demand and full employment, even though profit rates were declining; investment rose 5.3% a year between 1948 and 1973. But there were two reasons for this, both of which are obviously absent now:

- The 1930s slump and the war created, in R.C.O Matthews words, "a very substantial arrears of investment opportunities." Today, by contrast, there's a dearth of such opportunities.

- In the 50s and 60s, most people thought governments had the will and know-how to maintain aggregate demand at a high level. They agreed with Tony Crosland's claim in the The Future of Socialism that "Demand has proved to be malleable, and in a broadly predictable manner, by fiscal policy." This reduced the fear of downturns, thus increasing the motive to invest. Again, though, this factor is absent now.

I fear, therefore, that McCluskey's call for greater workers' power will not give us wage-led growth.

This, however, is not to dismiss his lecture. He rightly quotes Ralph Miliband approvingly: "All concepts of politics, of whatever kind, are about conflict──how to contain it, or abolish it.” If class conflict cannot much improve workers 'living standards, the alternative is abolish such conflict. Sadly, however, this form of "one nation" politics is not yet a practical option.

Comments

[Anonymous]

Well low wages haven't worked, have they?

Current UK consumption has been maintained by household borrowing, which of course is not a sustainable way of maintaining consumption in the longer term.

Although increased wages may not produce increased consumption immediately, for the reasons given, reduced household borrowings arising from increased wages should eventually feed into increased consumption even if some of the extra consumption leaks into imports.

From capital's perspective, there may be a short term reduction in profitability due to wage increases being (effectively) saved. However, given the dearth of physical investment opportunities available to capitalists they may well regard the short term reduction in profitability as a sacrifice worth making to get a better return later. So they may be less opposed to wage increases than at first supposed.

In any case, I hope the unions get stuck in big time. Things can't get any worse can they?

[chris]

@ Anonymous - you're dead right; low wages haven't worked. But it doesn't follow that the alternative will. It might just be that there are no feasible policies that reconcile capitalism with full employment and high living standards for all working class folk.
Social democrats seem to assume there are, without even realising they are making this assumption.

[Metatone]

Chris, I hope you realise how managerialist your defeatism is.
It's a bit sad to see you fall into it.
A non-managerial response would be to try some things, see what emerges...

[chris]

@ Metatone - I'm not saying such things shouldn't be tried. I'm just sceptical as to how far they'll work; scepticism is, if anything, the antithesis of managerialism.
I'm in two minds here. On the one hand, I'm instinctively in favour of policy experiments and a non-dogmatic attitude to policy-making. On the other hand, though, the costs of failed experiments have historically tended to be borne by workers. Strange, that.

[aragon]

I agree with Metatone, many of your posts appear to achive balance by FUD (Fear Uncertainty and Doubt). Take your previous too posts:

Propoganda explains the cognative biases, and incebntive scheme are counter productivce and promote cheating.

I have far more radical plans than the minimum wage been the same as the living wage, even though the living wage excludes rents. This is small fry.

Should I be worried that Jeremy Warner appears to be coming around the idea.

[aragon]

http://www.telegraph.co.uk/comment/9808681/A-living-wage-or-a-much-higher-minimum-wage-is-worth-paying.html

"Which is why I have become persuaded of the case for a “living wage”, or at least a much higher minimum wage. The potential negatives from such a policy are almost too numerous to list – surging inflation, higher immigration, rising unemployment, a growing black economy, and so on. These alone might appear to kill the idea stone dead."

[...]

"Set high enough, a living wage would obviate the need for in-work benefits – one of the biggest areas of growth in welfare spending; it would significantly add to demand in the economy; and it would substantially boost tax receipts"

[...]

"For the moment, the concept is too “out there” to be taken seriously"

[...]

"Yet the banking crisis has turned much conventional thinking on its head. This may be an idea whose time will yet come."

Not unqualified support then.

[Anton]

Why would society as a whole want to pay higher wages to human labour IF the same poducts can be produced for virtually free (after fixed cots of acquisition and variable cost for energy) by the machines. The idea of raising wages or hiring more workers just so that aggregate demand can be maintained in light of the advances in technology is not far from the Luddites movement in the past. Surely everyone woud be better off if we let the machines work and pay ourselves a fixed stipend so we can consume. Money is only a social concept, money is not the problem here. And by the way, we already have 4 iphones at home. Who needs more? But that is a separate topic.

[Paolo]

Chris, you are missing the point that consumption (in particular in durables) is also linked to expactations of high wages. Nowadays, the issue is not only low wages by a sense of precariousness towards the future. So, it isn't just high wages but less uncertainty regarding the future that will drive consumption and hopefully trigger the virtuous cycle you described.
If you take into consideration this life-cycle Ricardian effects you could see that higher wages driven by some form of militancy (i.e., not necessarily union-driven) might work notwistanding private households' high indebtedness.

[Luis Enrique]

how serious should we take ideas like multiple equilibria, coordination devices and such like? Perhaps even if higher wages would largely be spent on imports, a positive income shock for half the population might be the sort of thing to coordinate a jump to a better place?

[jOHN]

A short period of wage inflation might be useful in a debt crisis but it would need to be stopped as soon as possible. Public spending is seen as an alternative stimulant but this always results in a depression of private sector growth (See Sydenham's Law of public expenditure and economic growth). It looks like we are stuck with austerity and good management of the balance of industrial balance and terms of trade for a recovery.

[jOHN]

Here is a link to Sydenham's Law: http://pol-check.blogspot.com/2013/01/sydenhams-law-of-public-expenditure-and.html