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November 05, 2013



Is it accurate to describe higher taxes resulting from higher wages (ie via automatic stabilisers) as fiscal tightening?

They may lead to a fall in the absolute size of the deficit but they wouldn't represent a change in the fiscal stance. In other words, the 'deficit propensity', or the level of deficit at each level of aggregate demand, would remain unchanged.

I think fiscal tightening is more properly used to refer to a change in the fiscal stance, ie the govt running a smaller deficit at each level of aggregate demand.

You may as well say that one's exporters growing their share of export markets is contactionary, since the exporters will pay more corporation tax.


Would it be a net fiscal tightening? If assumption 1 is right, implying that the profits the lw would eat into are saved (perhaps a leap, but huge corporate cash stockpiles and all that...) then would a government net saving matched by a corporate net dissave (or, reduction in rate of dissaving/ reduction in rate of saving) net to null in macro-fiscal terms?


"For one thing, many low-wage employers aren't giant corporations but smaller firms whose owners rely upon their profits. Secondly, expectations matter. If employers expect further rises in the living wage, and further cuts in profits, they might cut their consumer and investment spending in anticipation."

Marx dealt with this objection in Capital I, Chapter 22, looking at international comparisons of wages. He demonstrates that "wherever wages are low the price of labour is dear". That is because, high wages encourage capital to introduce mechanisation, and more efficient methods. In other words, it is low wages that are a deterrent to investment.

British wages were 50% higher than in Europe, but Britain was more competitive because British workers were backed by more capital. We see the same thing today with high wages and better social conditions in Germany, which continues to be the second largest global exporter behind China.

Previously, Marx demonstrated that when the earthenware manufacturers had complained about the 10 Hour Act being impossible for them to implement, when they had to, they invested in new capital and techniques that reduced costs, improved productivity, increased profits, and also through the expansion of capital led to more workers being employed.

You are right that it is small capitalists who pay low wages and provide the worst conditions. As Marx again described in Capital III, capitals with higher organic compositions are least affected by rises in wages. But, the current situation is rather like that which Marx criticised in Capital of the position of the hand-loom weavers.

For many years they subsisted in abject misery trying to scrape a living because they could not compete with power looms. They subsisted on the basis of welfarism provided via Poor Relief, which was funded by other workers in their Parish rates. It would have been much kinder had the hand-loom workers simply transferred to some other occupation.

Today the small capitalists survive by paying low wages which are subsidised by other workers via welfarism out of their taxes. Better that the small capitalists have to either invest in order to be more efficient and thereby pay decent wages, or else that they disappear and the capital they misuse be put to work in some other function where it can employ workers on decent wages.

Luis Enrique

I'm not sure about this:

"Howard is entirely correct to see that this isn't a virtue of the plan, but a defect. On its own, a living wage is a fiscal tightening, which is a net destroyer of jobs."

suppose the economy recovers, worker bargaining power strengthens, and both employment and wages rise. This would reduce payments of tax credits and unemployment benefits, and increase tax receipts. A fiscal tightening. But we wouldn't call that a "defect" of employment and wage growth, and clearly it would be nonsensical to call it a "net destroyer of jobs"

so what changes when the same thing is brought about by legislation (or voluntary adoption by firms) as opposed to happening of its own accord?

[yes higher wage costs might reduce employment, but fiscal tightening doesn't come in to that]

Chris Purnell

Would a 'living wage' correlate with the 'dignity of labour?'


@ Luis, Anders - you're right that I'm only talking of automatic stabilisers. But I'm not sure this much matters. If the govt takes 50p of my £1 pay rise, that's 50p I can't spend. This mightn't be so bad if my pay rise is due to an expanding economy. But if it's due to a shift from profits to wages which mightn't increase the size of the economic pie, then the stabilizers could leave us worse off than we were before.
@ Mat - I see your point, but it's surely a heroic assumption that the fall in profits would mean a 1-for-1 fall in cashpiles, with no adverse effects.
@ Chris P - I think the "dignity of labour is a wider term, encapsulating work conditions and the cultural respect we give to unskilled work. I favour raising these - but I think boosting union power would be a better way to do so.


It wouldn't have to be a 1:1 fall though Chris, as it would only need to be the part taken and saved by government (which, god one hopes, is less than 1; or marginal tax rates are more borked than I thought)- on the assumption all that retained by employees is spent.TBH I suspect you're right that it wouldn't net to 0, but it could reduce the net fiscal tightening to something approaching negligible...

The timing would also be an interesting factor; if firms were able to plan for the lw in advance they could counter act the gain to wages. If it was unexpected, and to the extent firms financial records and hence plans are delayed, the net effect to profits (via increased consumer demand) could, perhaps?, be positive from the get go. Or is my logic failing me?


and not a fall in cashpiles, but a reduction in the rateof increase of them.

If it would take a fall I think it is an assumption too far, as I can't envision many companies maintaining ongoing expenditures out of retained earnings.


The living wage is calculated sans Taxes and Rents is therefore inadequate when these factors are considered.

Unlike Mr Miliband I would use the Treasury windfall from the Living Wage to increase personal allowance (rather than a rebate to employers) increasing the impact on the individual, coupled with a genuine Job Guarantee along with fiscal dominance, would produce an expansionary environment, well beyond Mr Balls wildest imagination.

Of course Labour don't listen to me on economic policy and dilute my policies (when they do regularly appear) to the level of ineffectiveness.


"A living wage is not much of an anti-poverty policy. One of the best things governments could do to reduce poverty is to get more people into work. And that's a task for macro policy."

But what if people are all employed but at such low wages that they can barely stay afloat? In what way more jobs would reduce poverty?

Or is the poverty you mean a precise academic term more to do with numbers and not with lack of wellfare?

Denis Drew

We can usefully imagine boosting lower 50 percentile American wages by half – on the average. Today’s minimum wage ($7.25 an hour) being half today’s median wage ($15 an hour) we can just raise the minimum to the median. Above 50 percentile wages would then feel upward pressure but not necessarily that much – LBJ’s 1968 median wage was only 20% higher than his minimum wage.

Adding half again to lower 50 percentile wages would raise prices only a little compared to hefty income increases for lower 50 workers/consumers -- because only 12 percent of overall income goes to bottom half earners. As incomes make up only 2/3 of the cost of GDP output, figure that half again of 8 percent (2/3 of 12%) = 4% added to prices.

Reality check: an average $8,000 yearly raise for 70 million American employees = $560 billion. Divide that by $15.8 trillion GDP and we get 3.6% direct inflation.

Businesses catering more to lower 50s tend to hire more lower 50s – lower prices generally reflecting lower wages. Shifting a small slice of overall income to lower 50s (from upper 50s – via inflation) means shifting extra demand to lower 50 catering to/hiring firms – which could actually lead to upward pressure on wages in some cases!

Since upper 50s represent 88% of overall income, businesses catering more to upper 50s would suffer only in proportion to their customers very moderate shave, but even that marginal downturn might be partially filled in by newly affluent lower 50 consumers. Upper 50 consumers would feel a small pinch (as my doctor says, needle in hand). Upper 50 earners could face a similarly proportioned pinch in employment.

Reality check: if LBJ's federal minimum wage of $10.75 an hour had kept pace with both inflation and per capita income growth it would have reached $14.11 an hour by 1978 – when per capita income was only 2/3 of what it is in 2013!

[See minimum wage worksheet]

yr..per capita.real.nominal.dbl-index %-of





staggeringly sloppy post

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