Why not wage-led growth?

Britain's big supermarkets are in trouble. Tesco's share price has halved in the last year, Morrisons has begun a price war with Aldi and Lidl, and Sainsbury's CEO Mike Coupe says: "The supermarket industry has changed more rapidly in the last three to six months than any time in my thirty years in the industry."

There's an obvious cause of these troubles. Six years of falling real wages - with maybe more to come - have forced shoppers to become more bargain-conscious and to shift to low-cost stores. This shift is quite consistent with Mr Coupe's claims that things are changing rapidly now, because consumer spending is a matter of habit, peer effects and social norms (such as the erstwhile stigma against Lidl), and these can change slowly at first but them quickly.

This, though, implies that the wage squeeze isn't just bad for workers but also for at least part of capitalism. Which in turn supports the idea that wage-led growth (pdf) would benefit not just workers but bosses too. Perhaps, therefore, the interests of capital and labour coincide. All would benefit from higher wages.

Which brings me to a puzzle. Very few commentators on the supermarkets' woes are drawing the inference that the TUC might be right: Britain needs a pay rise because falling wages hit businesses as well as households.

Why are they not doing this? It could be, of course, that it's mistaken. Just because some capitalists would benefit from higher wages it does not follow that all would. However, whilst there has been a debate about wage-led growth in economics blogs, this debate, AFAIK, has barely entered media or business circles.

I fear there's a reason for this, pointed out by Selina Todd in The People: The Rise and Fall of the Working Class. Workers' interests, she says, have always been regarded by those in power as a sectional interest opposed to the national interest. Even the 1964-70 Labour government, she writes, "regarded workers' rights as being distinct from the 'rights of the community'."

From this perspective, the failure of "business leaders" to even consider the possibility that wage-led growth is in most people's interests might be an example of a path-dependent belief - an idea that lingers on even if it has outlived its usefulness.

Or is it? Perhaps instead what we are seeing here is what Kalecki called the "class instinct" of capitalists. This tells them that even if higher wages do benefit capitalists in the short-term, they are to be resisted because of their longer-term dangers. After all, if we start empowering workers, where will it lead?

Comments

[Boffy]

Having workers bargain for higher wages does not empower them. As Marx points out, it simply traps them even more within the bourgeois ideology of reformism, of bargaining within the system, of seeing their goal as being simply a rise in wages rather than abolition of the wage system.

[Luis Enrique]

This is an externality, right? Any individual firm that raises wages bears 100 per cent of the cost but only a fraction of the benefit. Perhaps, rather than or maybe as well as the reasons you suggest, the main problem is simply coordination. If we could coordinate wage rises across the economy, great. But can we? Can we legislate our way to higher real wages?

[pablopatito]

"There's an obvious cause of these troubles."

It's not obvious to me. Internet shopping and greater competition from Lidl and Aldi seem as much the cause. That and the fact that Tesco is just a horrible, crap, expensive retailer that got too big. It amazes me that so many people still push shopping trolleys around massive supermarkets on a Saturday afternoon when they could get them delivered instead. And if you're going to get them delivered, why use Tesco when Asda will delivery exactly the same products for significantly less money.

[dilberto]

The idea that it is enough for the government to increase demand in order to produce growth is a fallacy. Extra demand created by government borrowing or other means is the indiscriminate extension of credit which at best creates only a mild incentive to increase output and economic growth but which is likely to produce more inflation than growth.

When banks make loans to commercial enterprises they do so on a commercial basis and in a very discriminating manner because otherwise most of the loans they make would produce no return for the bank and it is by returning a profit on credit which proves that that lending is commercially viable and it is by such commercial viability that economic growth is effected. The same principle applies to government demand stimulus, it is just that the government does not discriminate in the same way as banks, is less skilled in such judgements and has far broader responsibilities.

[Roy Lonergan]

@Luis You could put a tax-credit through PAYE and put an equivalent charge through Employer's NI. Effect would be a statutory pay rise.

[Luis Enrique]

Good point Roy,

yes - what is the difference between wage-led growth, and tax cuts for workers funded by tax increases on bosses?

[not tax cuts for workers and tax cuts for bosses funded by public spending cuts and VAT increases, which is our current policy mix]

[Jimweibo]

Decades ago at a conference, I asked a speaker whether it was feasible to expect rapid economic growth in the midst of extreme income inequality. He was scornful.

That conference was about Egypt! It's distressing to find that we now find ourselves asking the same question about the UK and other developed economies.

[Steve]

According to BIS, it's not just real, but nominal wages that are falling. They've recently announced that 40-somethings who have not paid off their pre-1998 student loans will need to earn less next year to reach the 85% of average earnings threshold:

http://www.moneysavingexpert.com/news/loans/2014/08/student-loan-deferment-threshold-to-fall-qa-on-why-its-happening

Funnily enough, Cameron did not announce falling nominal average wages in his speech this week.

[Steve]

The below figures represent 85% of average FT earnings:

Here's a list of the deferment thresholds for the last ten years, given to us by BIS:

2005/06: £24,137
2006/07: £24,412
2007/08: £25,287
2008/09: £25,936
2009/10: £27,050
2010/11: £26,449
2011/12: £27,734
2012/13: £27,813
2013/14: £28,775
2014/15: £26,727
Some economic recovery!

[andrew]

funny how we spend less on food but more on housing

[Ralph Musgrave]

Dilberto,

I would guess you've never worked your way thru an introductory economics text book. Certainly you manage to cram more nonsense into a few short sentences than I could if I tried. I'll take just one point: your claim that extra demand "is likely to produce more inflation than growth."

More demand will CERTAINLY produce more inflation if the economy is at capacity. But if it's nowhere near capacity, the effect would be primarily to produce more growth".

[Peter K.]

Dilberto:

"When banks make loans to commercial enterprises they do so on a commercial basis and in a very discriminating manner because otherwise most of the loans they make would produce no return for the bank..."

lolwut? Did you completely miss the epic housing bubble and financial crisis on both sides of the North Atlantic?!?!?

They were short-term ponzi schemes reminiscent of the criminal fraud of Enron. The captured regulators were MIA or complicit like the ratings agencies bestowing AAA ratings on toxic sludge.

I seemed to remember a similar discussion with Waldman, DeLong, Krugman etc. In the U.S. also the chain Dominicks is closing stores.

[Deviation From The Mean]

"Having workers bargain for higher wages does not empower them."

Everything is so black and white on planet Boffy - who holds on every word uttered by the scriptures! Obviously when workers join trade unions, act collectively in their interests, this empowers workers. No matter what shit Boffy spews.

And more to the point when workers are atomised and divided they are certainly weaker.

Of course, in Boffy world the trade unions have contributed nothing that the civilising mission of capitalism wouldn't have had achieved anyway.

[Blissex]

«More demand will CERTAINLY produce more inflation if the economy is at capacity. But if it's nowhere near capacity,»

Usually talking about "the economy" as if it were a single concept is weasel words...

What if it is some some critical subset of "the economy" that is at capacity even if other critical subsets are far from capacity?

For example, what if capacity has been reached for:

* the international oil supply;

* the ability of the UK to import raw materials and consumer goods without a collapse of the exchange rate.

http://www.ianwelsh.net/living-in-a-rich-society/

Because people who are not wholly ignorant of economics know that "stagflation" is a "thing", and not a purely theoretical "thing", as the UK had quite long periods of stagflation in the 20th century, where it happened that there was at the same time oversupply in some important markets (like labor) and insufficient supply in other important markets (like imports of energy).

The usual graph tells a big story:

http://mazamascience.com/OilExport/output_en/Exports_BP_2014_oil_bbl_GB_MZM_NONE_auto_M.png

No discussion of UK "economy" (and politics) in the past 50 years makes much sense without looking at that graph...

[Blissex]

«The usual graph tells a big story:»

It tells half of the story though, the quantity story and this is important, because the other half of the story is price, and combined with quantity it may mean that a massive redistribution between private and government sectors has occurred, and therefore from poorer, lower income people in the North to richer, higher income people in the South,

Because changing oil prices and quantities have very different impacts on production and import/exports, and the government sector primarily benefits from the *production* side.

The peaks for UK oil production *and* exports happened roughly in 1985 and several years around 2000, at times of low oil prices.

This means that there was an abundant supply of cheap oil for the UK without having to import it, and therefore cheap easy energy.

But now while UK oil production is still positive, it only covers a half of consumption, but oil price is now 4 times higher than it was.

This means that despite the huge fall in UK oil production UK oil royalties going into the Exchequer have not collapsed, even if the rest of the economy have had to contend with both higher oil imports and at much higher prices.

In other words the UK government is far more "long" oil than the rest of the UK, and since the UK government is controlled by high income and property interests, this has meant a massive redistribution upwards, as constant or increasing oil royalties have been used to fund tax cuts on high income taxpayers and huge handouts to property interests (the bailout of banks).

Note: the UK government is also simultaneously "short" oil because government expenditure increases with increasing oil prices. But probably the UK government is *net* "long" oil, as increasing oil prices increase government oil royalties by more than they increase government oil costs. It would be fascinating to see a graph showing the various trend lines, and I am quite sure that is a graph that George Osborne keeps well in mind at all times.

[George Carty]

If oil consumption (much of which is surely for commuting to work by car) is the problem, then it makes sense to go after the NIMBYs and the Campaign to Protect Residential Equity, as these are the groups preventing us from densifying our built environments where necessary to make people less dependent on their cars.

[Blissex]

«it makes sense to go after the NIMBYs and the Campaign to Protect Residential Equity»

Sure, it makes sense to go after the swing voters in marginal seats who can elect or fire governments, just like Labour did in four elections between 1979 and 1997 :-)

Unfortunately it is extremely unlikely that any party willing to win elections will do that until the bitter end comes.

http://en.wikipedia.org/wiki/Southern_Discomfort_%28Fabian_Society_pamphlets%29
http://en.wikipedia.org/wiki/Essex_Man