Labour's cost of living problem

Hopi Sen says he's a "cost of living sceptic". He'll not thank me for saying so, but I agree.

First,let's be clear way real wages have fallen. Duncan's right to say that inflation is not to blame, simply because we've seen many periods of inflation around current levels without falling real wages. Blaming inflation for falling real wages is like blaming plane crashes upon gravity.

Nor is it because workers' incomes are being squeezed by more powerful capitalists. In recent years, the share of wages has been more or less flat; this week's figures show that the wage share of GDP is actually slightly higher than it was before the recession.

Instead, real wages have fallen simply because there's a massive excess supply of labour. If we add part-timers who'd like a full-time job and the inactive who'd like to work to the measured unemployed, there are 6.2 million waiting to work more - equivalent to 15.4% of the working age population. And there's an unknown number who are under-employed on the job.

Policies to increase real wages must, therefore, include measures to reduce this excess supply. And herein Labour faces two constraints. One is its commitment to some form of fiscal restraint. The other is that it faces demands (sadly from working class voters too) for "welfare reform", the effect of which would be to strengthen people's incentives to look for work, thus raising the labour supply.

Granted, there is an alternative here* - to raise workers' share of GDP, in ways suggested (pdf) by Howard Reed and Stewart Lansley. But here too, there are big constraints. Policies to increase minimum wages and strenthen collective bargaining would be resisted by capital, and it's possible that even if such measures were enacted, capital would respond by cutting investment and demand for labour; we cannot be confident that wage-led growth is feasible.

All of which brings me to endorse Hopi's point - that Labour's proposals to raise real wages are "small-scale.". He's right to say: "we’re setting up a general ‘crisis’ of living costs, against which our solutions then seem somewhat insignificant."

Herein, I think, lies a reason for Ed Miliband's much-criticized failure to push his economic message; he's aware of this big gulf between the size of the problem and the smallness of his answers.
However, to believe this is due to Miliband's personal, idiosyncratic weaknesses is to commit the fundamental attribution error. Labour's problem isn't a lack of "leadership" but rather that there are serious constraints upon what any social democratic government can achieve.

* You might object that there is one alternative that is very politically feasible - to have tougher immigration controls. However, there's no evidence that these would raise real wages, except slightly at the bottom end of the labour market, and even then only temporarily.

Comments

[Ralph Musgrave]

Chris, Your argument doesn’t hold.

It’s quite plausible that an excess supply of labour might reduce wages relative to GDP, but it hasn’t. So the “excess supply” reason for a fall in real wages doesn’t add up. I.e. the explanation for the fall must be a reduction in GDP, and one big contributor to that fall I suggest was the 2008 devaluation of Sterling. The latter will have increased the number of hours that UK citizens have to work to buy a given bundle of imported stuff.

Re “fiscal restraint”, Labour (like the Tories) are 100% clueless on this issue. If both parties got to grips with Modern Monetary Theory (or, much the same thing, Keynes), they’d discover that the deficit and debt are no restraint whatsoever on giving the economy a fiscal boost. As MMTers are forever pointing out, there is only one restraint: inflation.

[Dave B]

If there's an excess supply of Labour, then surely Mr Miliband should be calling for zero immigration?

[e]

The answer is employment of last resort, hours of work consistent with earning good rate of ‘benefit’ at minimum wage. Shut those arguing from a position of ignorance that they’re all skivers up, and undermine dysfunctional wage markets built on spurious notions of skills shortages and unwilling participants. Bring MMT to the masses or continue the handwringing.

[FromArseToElbow]

The braver response (and a more sensible one given the secular trend in labour demand) would be a more equitable sharing of work time (the working week has been struck at 30-35 hours for a century now) and/or a more equitable sharing of pay, through a basic income scheme.

Given the long-term decline in the demand for labour due to technological advance, the guaranteed income ("employment of last resort") beloved of MMTers would merely condemn an increasing proportion of the population to a modern form of bonded servitude: coercion and a permanent minimum wage.

Full employment isn't coming back, short of the intervention of the four horsemen. The real bind for Labour is that it is the party of work.

[Boffy]

The answer within Capitalism is a significant rise in the Minimum Wage. I'm not convinced Big Capital would resist that - small capital certainly would, which is why the Tories won't propose it. Even Moneyweek recently argued there should be a big rise in the Minimum Wage, as an alternative to taxpayers subsidising low paying small businesses.

Big capital will not oppose it because in general they already pay above Minimum Wage. As Engels pointed out, they tend to support this kind of thing, as they came round to supporting Factory legislation and shorter hours, because they can cope with it, whereas small capitalists can't, so it facilitates big capitals swallowing up small ones.

Marx pointed out that where the Factor Acts and Ten Hours Act had a similar effect, it forced firms to introduce new more efficient methods. In fact, the consequence was improved efficiency, lower prices, increased output, and higher profits.

A higher Minimum Wage might mean higher unemployment in the short term - but not necessarily, its really a shift from one group of workers subsidising bad employers through the tax and benefit system, to those workers "theoretically" then having more income left over to spend buying commodities, thereby raising aggregate demand. But, by getting rid of the zombie companies, and making more rational use of their capital, it would provide a more stable basis for rising employment.

[Ralph Musgrave]

ArseToElbow,

Work sharing is just one example of a category of ideas which have always been popular with economic illiterates, and which are regarded as a joke by most economists. That category is sometimes referred to as “labour supply reduction”. The big idea is: reduce labour supply (e.g. by early retirement, or delaying entry into the labour force by requiring youngsters to stay at school longer) and assuming demand for labour stays the same, the unemployment will allegedly decline.

And don’t tell me that work sharing has worked well in Germany recently: I’m well aware of that, and can answer that point.

Re the idea that machinery puts people out of work, that’s the old Luddite argument. That argument was demolished a century ago.

Re the idea that employer of last resort would “condemn an increasing proportion of the population to a modern form of bonded servitude” that is nonsense. Advocates of ELR (whether they are MMTers or not) have always seen ELR as employing a SMALL proportion of the workforce.

Re “bonded servitude”, no doubt you get an emotional thrill from the phrase, but advocates of ELR for the most part advocate that pay should be equal to the minimum legal hourly rate. If that’s “bonded servitude” then presumably everyone on min wages is in “bonded servitude”.

[Forlornehope]

Increasing the cost of labour would encourage capitalists to increase, not decrease, investment to replace labour with capital. France is a really good example of this with a very high hourly cost of labour and the highest per hour productivity in the OECD driven by high levels of investment.

[chris]

@ Ralph - I'm not sure excess supply of labour would necessarily reduce wages relative to GDP. If the downward pressure on wages depresses consumer spending, wak demand for labour would reduce both wages and GDP, leaving the wage share more or less unchanged.

[Yet another Chris]

Chris, I think the UK's position is far more complex than whether labour deserves a bigger share of GDP. And, Boffy, just raising the minimum wage solves nothing other than to create more unemployed.

The fact is that government, the Labour Party, nor Milliband can legislate for high wages and high employment. But what legislators, the EU and bureaucrats have done is to legislate for low wages and high unemployment.

For my sins I've been employed in SMEs for the last 20 years. Legislation and taxation have become extremely onerous for us little guys. It's hardly worth the effort after the tax man takes his slice. And the companies I've worked for provided good, well paid jobs. But no more. These days where I work now outsources a lot to India for one-tenth of the cost with none of the health & safety, maternity leave, EU regs, planning committees ... and general red tape.

I don't like any of this. But it's happening and the UK is becoming a country with no middle class - just the elite and the unemployed underclass. It'll end up like Detroit - hollowed out - unless we wake up to the fact that the UK needs to be business-friendly, especially for SMEs. The government has to stop taking 50% of GDP and leave some for us little guys to produce real, productive, well-paid jobs.

[SK]

I think your assumption for inflation not being the main reason is wrong.

As per a post in FT Alphaville, essentials inflation in 2011 was 8% and in 2012 close to 4% which is much higher than the RPI.

http://ftalphaville.ft.com/2013/02/20/1393672/the-real-rate-of-british-inflation/

You really cannot solve the cost of living issue without examining:
-Housing costs (Rents/ House Prices)
-Energy costs
-Transport costs
-Food costs.

Wages is not the answer here. The 4 above need to be reduced but the government/Labour are too weak to offer any solutions like LVT.

[aragon]

I have to agree with SK, the Rich (0.1%) as represented by the banks have dismantled all the constraints on the banks and other monopolies, including through privatisation of public monopolies.

The Rich (0.1%) are taking the whole cake and leaving the rest of the population with the crumbs.

The constraints on the Labour leadership are self imposed, they will not consider alternative solutions that have acted as constraints in the past. They just wish to manage the status quo.

e.g.

* Nationalisation of natural monopolies e.g. Water, Energy, Transport etc.
* Increased taxes on limited resources.
* Control of the banks, both in terms of money creation and participation in non-banking markets.
* Greater Taxation of 0.1%

How you choose to redistribute the revenue (and reverse the collapse of Government revenue) through lower bills (Water, Energy, Transport) and extra employment (Job Guarantee) or other mechanisms e.g. reduced hours but not reduced income.

Increased wages are needed to reduce private debt and increase private leisure, but represents a different distribution of national wealth.

We need to worry about the balance of payments, and a more equal distribution of wealth. What matters is the size of the cake and how it is distributed.

The Labour leadership problem is myopia and poverty of ambition - not been willing to contemplate the solutions which involve structural change and undoing the changes made by bankers to make themselves 'Masters of the Universe' over the past thirty years.

We know what works and it is not neoliberalism.

And the two Ed's won't even start the process, Ed Balls wants for continue the austerity.

Of course the Labour party have side-lined me for the last decade and won't take my advice on economic issues.

Remember: you read it here first and who wrote it. Comments welcome :)

[Luke]

Ralph, you take the orthodox view that work sharing won't happen. I do't take issue generally, but consider the fund management industry. Thousands of funds all doing much the same, providing well paid work to lots if people.

[Boffy]

ArseToElbow is right about worksharing. The Trotskyist demand for a sliding scale of hours can only be implemented as Trotsky himself recognised, as with any other form of Transitional Demand in a revolutionary situation where workers are strong enough to impose it. We certainly are not in any such position.

He is also partly right about the idea of machines replacing labour. Marx showed that machines do replace labour-power, because Capital will only introduce machines where they raise the rate of profit, which means where they are cheaper than the paid labour they replace. However, Marx also demonstrates that this does not necessarily lead to unemployment because, the higher rate of profit that results, the greater volume of use values produced, etc. means that capital formation can be increased, and this additional capital formation means more labour is employed absolutely, even whilst less labour is employed relatively.

That is why the other Chris is wrong about higher wages creating more unemployment. In fact as Marx showed, wages were 50% higher in Britain than other European countries, yet it still out competed them, sold more commodities and thereby provided more employment. It did so, because higher wages encouraged capital to use more, better machines that reduced unit costs.

The same was true in respect of the Factory Acts. he gives the example of the earthenware producers who said they could not survive the introduction of the ten hour day for technical reasons. But they did, by introducing new methods etc. which meant they became much more efficient, produced more at lower costs, sold more, employed more people, and made higher profits.

Today, Germany pays generally higher wages than most European countries, and provides better conditions etc. Yet, it has higher levels of employment and lower levels of unemployment, because its industry is more efficient and competitive, and focussed on higher value commodities.

By contrast, Thatcher focussed on building a low wage-high debt economy that has continued since. In a global economy where to be successful such an economy has to compete with the low wages of China, India, and Vietnam, Angola, Kenya etc. you would need to have much lower wages than is ever likely to be achieved in Britain!

[FromArseToElbow]

@Ralph,

Assuming the rewards are not monopolised by capital, productivity gains can be realised by labour either through increased pay or decreased working time. Over the last 100 years, we have largely opted for the former (which made sense during an era of full employment), but there is no reason why we could not opt (in part) for the latter. This was the fundamental premise of Keynes's "Grandchildren" essay (I don't believe he was an "economic illiterate").

This shows that work time (e.g. the 35-hour week) is a social construct, not the inescapable product of an economic law, and that the distribution of work time (both productive time and rent-extracting sinecures) is a proxy for the distribution of economic power and wealth.

If full employment is not achievable, then a more equitable division of work time (or, to put it another way, the tokens we exchange for income) becomes a social necessity unless we are prepared to treat a significant chunk of the population as permanently surplus, with all that this entails for democracy and human rights.

The Luddite Fallacy is a strawman - i.e. an easily refutable claim wrongly imputed to anyone who suggests that capital subsitutes for labour (see http://hussonet.free.fr/lumplab.pdf for a history of the fallacy). You do not need to be a machine-wrecker to see that automation is real and that unskilled manual workers aren't all going to become highly-paid creatives. We have had a clear secular trend since the 80s.

The flaw with ELR is that it assumes full cyclicality of labour demand and that we can thus expect to return to full employment (and it requires the minimum wage to encourage workers to move into the private sector when demand for labour returns).

If this is not the case, then it will produce a permanent underclass of workers with no effective route to higher pay or status. So yes, institutionalised government schemes (backed by coercion) + the minimum wage = bonded servitude. (Note the qualification: I did not equate the minimum wage per se with servitude.)

[FromArseToElbow]

@Yet another Chris,

Re "the UK needs to be business-friendly, especially for SMEs ... to produce real, productive, well-paid jobs".

I'm sure you can provide plenty of examples of red-tape and other state-initiated constraints, but the reality is that SMEs are bad for national productivity (compared to large businesses) and their fecund job-creation abilities are largely a myth.

Excluding firms with zero employees, small businesses (i.e. 1-49 staff) account for 37% of employed private sector workers and 30% of turnover in the UK; medium-sized firms account for 14% of workers and 15% of turnover; and large businesses account for 49% of workers and 55% of turnover (see http://www.bis.gov.uk/assets/biscore/statistics/docs/b/12-92-bpe-2012-stats-release.pdf for stats).

As the ratios show, larger companies are more productive than smaller ones, which is what you would expect given economies of scale and market power. This is important to bear in mind, as a growth in small businesses at the expense of large ones (i.e. net employment remains the same) would result in a reduction in GDP.

It should also be borne in mind that many of these firms are business-to-business, i.e. specialist providers in a supply-chain. In other words, many of the smaller firms are dependent on the eco-system created by a larger firms, so independent growth is improbable (and only 1/4 of SMEs have any export component to their revenue). SMEs flourish when the big firms grow. The best (albeit indirect) boost to SMEs would come from the creation of a national investment bank, not from more deregulation.

Even in Germany, the paragon of an economy with a healthy, export-oriented SME sector, the Mittelstand (firms of up to 500 employees) accounts for 70% of jobs but only 50% of GDP. Globalisation has accentuated the ability of businesses to super-size, including large German firms like Volkswagen, Allianz, Daimler, Siemens etc.

It's a bitter pill to swallow in some ways, but we actually need more big companies, not tax and employment law breaks for SMEs.

[Dipper]

Isn't this really straightforward? As a nation we don't earn enough from overseas and aren't efficient enough internally to pay for the superior standard of living we wish to enjoy? Historically we paid for this by exploting foreign workers in the empire, then when that stopped we borrowed the money. The banking crisis was caused by massive levels of borrowing to support an unsustainable standard of living, and when the music stopped with £1 being worth $2 the international community quickly did the sums, worked out that we couldn't pay our way, and that the only way out for the UK was to print pounds. They then promptly sold the pound down by about 30%, making us all about 30% worse off.

The main problem with Labour (and the Conservative) policies is that they think the problem is one of economic policy, so they sit waving their PPE notes at each other shouting "I'm SuperEconomist", "No I'm SuperEconomist"

The problem is as a productive nation we are crap and we need to be better.

so A2E is on the right lines.