Wages & profits

Accountants EY say that the number of firms issuing profit warnings has risen. This reminds us of an awkward fact - that real wages haven't fallen because capitalists have increased their exploitation of workers. Instead, they've fallen because productivity has fallen. And lower productivity means lower incomes for both capital and labour.

My chart shows the point. It shows that the share of non-financial profits in GDP hasn't changed much since 2010, and is lower than it was before the crisis.

This doesn't necessarily undermine Labour's interest in predistribution and the Left's interest (pdf)  in wage-led growth. Solutions to problems need not resemble their causes. Even if a fall in labour's share of GDP isn't the main cause of falling real wages, a higher wage share might boost growth - though I have my doubts.

Not least of such doubts is whether such a shift is achievable. A new paper by David Bell and Danny Blanchflower argues that "the UK labor market is much further from full employment than the MPC calculates". If they're right, there'll be continued downard pressure on wages. Which means predistribution will be fighting against the tide of market forces.

What can be done? There are two (non-exclusive) possibilities.

One is to raise productivity growth; if the pie grows, everyone could, in principle, get a better slice. This, though, runs into two problems: we don't know why productivity has stalled - the Bank of England calls it a puzzle (pdf); and history shows that national policies can't do much to raise trend growth.

The second possibility is simply to increase aggregate demand through looser fiscal policy; this would help reduce labour market slack and downward pressure on wages whilst also boosting profits, so both capital and labour win. This, though, is excluded by Labour's commitment to austerity.

I fear, therefore, that there's not much that economic policy will do to raise real wages.

Complaining about this fact is, however, as futile as complaining about the poor quality of modern pop music. Given the twin constraints of poor public taste and the interests of capital, we should not expect anything better.

Comments

[Ken Clark]

But you claim that both labour and capital will benefit from increased productivity and increased aggregate demand. How are the "interests of capital" a constraint then? Capitalists should be lobbying for an end to austerity, no?

[chris]

@ Ken - I was thinking of wage-led growth as being excluded by the (perceived?) interests of capital.
The link between fiscal policy and their interests is awkward. It could be that whilst fiscal expansion benefits capital in the short-run, it it not in its long-run interests, as Kalecki pointed out:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/02/why-not-fiscal-policy.html

[Luis Enrique]

If labour market slack implies falling wagws that itself doesn't strike me as a reason not to predistribute, although as of yet I have no idea what the prpposed policies and mechanisms to do that are. But you could say it makes it even more important.

[Ben]

And if wages go up so will rents/mortgages because prices are set on the ability to pay in a market engineered to have artificial scarcity.

"One is to raise productivity growth; if the pie grows, everyone could, in principle, get a better slice."

So I disagree with the above. It always goes to the banks. They have captured all productivity gains by inhibiting the supply of shelter.

[aragon]

Why invest elsewhere given the extraordinary returns from finance?

Given the two Ed's in charge of economic policies, many potential polices will not be pursued, and the ones I got through:
Job Guarantee, living wage as a minimum wage, re-nationalisation of rail, energy, water are already eviscerated.

Banking reforms don't even make the agenda, except challenger retail banks, and a possibly an investment bank?

The Ed's commitment to austerity does preclude any fiscal expansion beyond house building already announced.

To be blamed for two credit crunches in row could be seen as careless. And this is my fear for the next parliament.

http://www.spectator.co.uk/features/9271191/back-to-the-brink/

For once I can agree with Liam Halligan.

"Yet alarming evidence is amassing that the global recovery is shaky, stock markets are over-hyped and the large western banks, for all the talk of reform, remain a serious liability. The reality, and it gives me no pleasure to write this, is that we could see a re-run of the ghastly credit crunch of 2007/08."

[rogerh]

So why low productivity? Is it that the workers don't work hard enough. Is it that their tools are old fashioned. Is it possible that our middle and upper range workers are forcing up the living wage of lower level workers to the point where lower level work is uncompetitive here. If that were the case we might ask why do the middle and upper workers earn so much - is it because they are so brilliant compared with the rest of the world or is it an historical hangover from a time when they were a small part of the workforce and a world comparison did not apply. Why does a middle and upper level worker need so much - houses. Therein lies the key perhaps. Real wages are set globally but house prices and therefore apparent productivity locally.

[gastro george]

Because in many sectors the cost of labour is now so low as to be marginal, so why bother to invest in machinery when you can just employ a larger, more "flexible", workforce.

The exemplar-of-the-moment is hand car washing, which is taking over from mechanised car washes.

[Kevin Meyer]

"This reminds us of an awkward fact - that real wages haven't fallen because capitalists have increased their exploitation of workers. Instead, they've fallen because productivity has fallen."

It may be true - for the UK, and in the very recent term - but your proposed "awkward fact" doesn't hold water over the long term, nor internationally.

Look at US productivity growth since the early 70s... now look at US real (infl.-adj'd) median wage growth over the same time period. There's a major disconnect since the early-mid 70s.

It didn't used to be that way... Post WWII, real median wages used to march in lock-step to productivity gains (a fact enshrined in the so-called Treaty of Detroit that once ruled sector-wide management-labor relations in the US for nearly 30 years), but something happened in the 70s - I'm still waiting for a convincing & comprehensive analysis - and since then US wages have diverged from productivity trends.

To me, it seems entirely plausible that capitalists - encouraged by the Reagan & Thatcher policies that tilted the playing field demonstrably in favor of capital & moneyed-interests - have indeed been increasingly exploiting their workers for the last 40 years, and that accounts for much of the divergence in real wages from productivity trends.

[Kaleberg]

Why should labor increase its productivity? It has three decades of experience showing that it isn't going to see a thin dime or farthing of that. It's like the old Soviet Union: they pretend to pay us, and we pretend to work.