{"id":31981,"date":"2015-10-02T14:15:10","date_gmt":"2015-10-02T04:15:10","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=31981"},"modified":"2015-10-02T14:15:10","modified_gmt":"2015-10-02T04:15:10","slug":"friday-lay-day-the-neo-liberal-real-wage-scandal","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=31981","title":{"rendered":"Friday lay day – the neo-liberal real wage scandal"},"content":{"rendered":"

\t\t\t\tIts my Friday lay day and I am trying to finish one paper that is due and also prepare the presentations that I will be giving in Finland next week. But I was reading a Briefing Paper (No 406) from the US Economic Policy Institute (published September 2, 2015) – Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay<\/a> – that resonated with me today. One of the defining characteristics of the neo-liberal era has been the divergence between real wages growth and productivity growth. It has been a deliberately engineered divergence as policy makers have shifted from mediating the distributional struggle between labour and capital to being ‘pro-business’ and introducing a range of initiatives that have allowed capital to gain greater shares of national income and build a booty that has then been pumped into the increasingly deregulated financial markets. Oh, and to allow the bosses and their managers to take out obscenely high salaries and swan around in private jets. The dynamics unleashed by these distributional shifts helped cause the Global Financial Crisis. A sustainable recovery with progressive outcomes (reductions in income inequality etc) will only be possible if Governments abandon the ‘pro-business’ bias and instead introduce policies that ensure real wages grow in line with productivity (along with other changes).
\n<\/p>\n

I have considered the shift in national income distribution in previous blogs:<\/p>\n

1. There is a class warfare and the workers are not winning<\/a>.<\/p>\n

2. Massive real wage cuts will not improve growth prospects<\/a>.<\/p>\n

3. The origins of the economic crisis<\/a>.<\/p>\n

4. Redistribution of national income to wages is essential<\/a>.<\/p>\n

5. Declining wage shares undermine growth<\/a>.<\/p>\n

6. Wage rises are required – real wages must grow in line with productivity<\/a><\/p>\n

Distributional shifts towards profits of the magnitude we have seen since the 1980s are damaging to economic growth and financial stability.<\/p>\n

The EPI report provides a detailed account of the same sort of trends in the American labour market. The divergence has occurred in many advanced economies over the same period.<\/p>\n

This graph is reproduced from Figure A in the EPI Report. It is a stunning indictment of the neo-liberal era and we will look back on this at some point in the future and wonder what the hell the workers were doing electing governments that allowed this divergence to occur.<\/p>\n

\"US_RW_LP_divergence_EPI_Figure_A\"<\/a><\/p>\n

<\/div>\n

In most nations, the wage share of national income was constant for several decades following the Second World and this constancy was so marked that Kaldor (the Cambridge economist) termed it one of the great “stylised” facts.<\/p>\n

So real wages grew in line with productivity growth which was the source of increasing living standards for workers.<\/p>\n

The productivity growth provided the ‘room’ in the distribution system for workers to enjoy a greater command over real production and thus higher living standards without threatening inflation.<\/p>\n

If real wages grow in line with productivity, then Real Unit Labour Costs (RULC) are constant and there is thus no inflationary pressures emerging from the labour market (given constant mark-ups on costs).<\/p>\n

Since the mid-1980s, the neo-liberal assault on workers’ rights (trade union attacks; deregulation; privatisation; persistently high unemployment) has seen this nexus between real wages and labour productivity growth broken. So while real wages have been stagnant or growing modestly, this growth has been dwarfed by labour productivity growth.<\/p>\n

As a result, the wage shares in most nations have been falling. Where has the real income gone? To the profit share!<\/p>\n

Here is the same graph for Australia, showing movements in real wages and GDP per hour worked since 1971. The data does not allow me to go back as far as the US graph above. But other data (not compatible here) show that hourly real wages grew more or less in line with productivity per hour worked for almost all the Post War period up until the early 1980s.<\/p>\n

Between the September-quarter 1971 and the March-quarter 1982, GDP per hour worked grew by 22 per cent while Real Wages per worker grew by 21 per cent.<\/p>\n

From the March-quarter 1982 to the June-quarter 2015, GDP per hour worked grew by 69.5 per cent while Real Wages per worker grew by only 26.3 per cent.<\/p>\n

The divergence in Australia has not been as great as shown by the EPI for the US. And the resulting increase in income inequality has not been as great as a consequence.<\/p>\n

But neither trend (US or Australia) is sustainable.<\/p>\n

\"Australia_RW_LP_Divergence_1971_2015\"<\/a><\/p>\n

<\/div>\n

The EPI concluded that for the US:<\/p>\n

1. “wages did not stagnate for the vast majority because growth in productivity (or income and wealth creation) collapsed. Yes, the policy shifts that led to rising inequality were also associated with a slowdown in productivity growth, but even with this slowdown, productivity still managed to rise substantially in recent decades. But essentially none of this productivity growth flowed into the paychecks of typical American workers”<\/p>\n

2. “pay failed to track productivity primarily due to two key dynamics representing rising inequality: the rising inequality of compensation (more wage and salary income accumulating at the very top of the pay scale) and the shift in the share of overall national income going to owners of capital and away from the pay of employees.”<\/p>\n

3. “although boosting productivity growth is an important long-run goal, this will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority.” <\/p>\n

When the EPI released the report, the accompanying Press Statement<\/a> said that:<\/p>\n

\nThe fact of the matter is, for decades, a typical worker’s pay rose alongside productivity-but since the 1970s, as a hugely disproportionate share of income generated by rising productivity has gone to extraordinarily highly paid managers and owners of capital … <\/p>\n

The relationship between rising productivity and worker pay has broken down because workers’ bargaining power has been intentionally hamstrung by a series of intentional policy decisions, made on behalf of those with the most income, wealth, and power …<\/p>\n

Our problem is not a lack of growth. For the past 40 years, productivity has gone up substantially, but these gains have not reached working people … The problem is that wages have been suppressed by a restructuring of rules on behalf of those with wealth and power.\n<\/p><\/blockquote>\n

The EPI also noted that “If the hourly pay of typical American workers had kept pace with productivity growth since the 1970s, then there would have been no rise in income inequality during that period”.<\/p>\n

That is a stunning conclusion in itself.<\/p>\n

This has been a deliberately engineered increase in inequality by governments that we vote for. Once again we see the cognitive dissonance of supporting policies that undermine our own welfare.<\/p>\n

The declining wage share and the resulting credit binge in many nations were clearly causal in creating the global financial crisis. The mainstream economists believed that the markets were efficient and that there would be no problems with placing an increasing proportion of real income into the hands of the Casino economy.<\/p>\n

The problem that arises is if the output per unit of labour input (labour productivity) is rising so strongly yet the capacity to purchase (the real wage) is lagging badly behind – how does economic growth which relies on growth in spending sustain itself? This is especially significant in the context of the increasing fiscal drag coming from the public surpluses or stifled deficits which squeezed purchasing power in the private sector since the late 1990s.<\/p>\n

In the past, the dilemma of capitalism was that the firms had to keep real wages growing in line with productivity to ensure that the consumption goods produced were sold. But in the lead up to the crisis, capital found a new way to accomplish this which allowed them to suppress real wages growth and pocket increasing shares of the national income produced as profits. Along the way, this munificence also manifested as the ridiculous executive pay deals and Wall Street gambling that we read about constantly over the last decade or so and ultimately blew up in our faces.<\/p>\n

The trick was found in the rise of “financial engineering” which pushed ever increasing debt onto the household sector. The capitalists found that they could sustain purchasing power and receive a bonus along the way in the form of interest payments. This seemed to be a much better strategy than paying higher real wages.<\/p>\n

The household sector, already squeezed for liquidity by the move to build increasing federal surpluses were enticed by the lower interest rates and the vehement marketing strategies of the financial engineers.<\/p>\n

The financial planning industry fell prey to the urgency of capital to push as much debt as possible to as many people as possible to ensure the “profit gap” grew and the output was sold. And greed got the better of the industry as they sought to broaden the debt base. Riskier loans were created and eventually the relationship between capacity to pay and the size of the loan was stretched beyond any reasonable limit. This is the origins of the sub-prime crisis.<\/p>\n

So the dynamic that got us into the crisis is present again and with fiscal austerity emerging as the key policy direction the welfare of our economies is severely threatened. This is a dramatic failure of government oversight.<\/p>\n

Conclusion<\/strong><\/p>\n

This is one of the defining characteristics of the neo-liberal era and is clearly causal in terms of the GFC and its aftermath.<\/p>\n

The IMF, the Troika and all the rest of the right-wing voices that invade the policy debate all call for governments to lift productivity growth to provide the path for increased living standards.<\/p>\n

But as the EPI conclude, raising productivity growth “is an important long-run goal” but that alone “will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority”.<\/p>\n

Otherwise all these so-called structural reforms aimed at increasing GDP per hour will just be siphoned off by the top end of the income distribution and the largesse will continue to swim around the Global Financial Casino – ready to break out and cause the next major crisis.<\/p>\n

Politicians misusing official labour market data<\/h2>\n

One of the radio interviews I did this week was in response to a Conservative federal Member of Parliament claiming that his electorate’s labour market was performing well. When I looked at the official data his claims didn’t appear to be believable.<\/p>\n

The ABC (South East NSW) where the MP is located then decided to analyse the data a bit more after my interview and they wrote this story as a follow up (September 29, 2015) – Unemployment stats: better because they don’t count people who gave up looking for jobs that don’t exist?<\/a>.<\/p>\n

It shows how politicians can misuse of official data to put their ideological spin out and the benefit of having a national public broadcaster that is officially required to present both sides of the story.<\/p>\n

Overseeing a company cheating its workers but don’t let that get in the way of buying your private jet<\/h2>\n

There was an article in the Australian Financial Review (September 30, 2015) reporting that the
\n7-Eleven boss had just bought a new private jet worth about $A10 million.<\/p>\n

His sister had also just splashed out $A20 million om a new mansion in Melbourne.<\/p>\n

The reason I note this is because the company he manages is being investigated for massive underpayment of its low-wage, casual workforce. The company has been exposed exploiting its workers and paying around half the legal minimum wages.<\/p>\n

I note that the legal minimum wage is barely above the poverty line.<\/p>\n

A bit later on September 30, 2015, the ABC carried the news report – 7-Eleven chairman Russ Withers and chief executive Warren Wilmot resign<\/a>.<\/p>\n

The ABC reported that:<\/p>\n

\nAn inquiry into Australia’s temporary work visa program found the underpaying of staff in the convenience store chain was systemic and had been happening for decades.\n<\/p><\/blockquote>\n

The private jetter doesn’t lose that much though. He remains the “chairman of the group holding company that has as its investments 7-Eleven and Starbucks together with real estate and a share portfolio.”<\/p>\n

These bastards have no shame!<\/p>\n

Music – Freedom Sounds<\/h2>\n

This is what I was listening to this morning while I was working.<\/p>\n

Here are the Soul Brothers, who were featured (as a backing band) in last Friday’s blog. This time they are playing in their own right.<\/p>\n

A new series of historical Studio 1 recordings have now been reissued by the Japanese record label – Dub Store Records<\/a>. It is a magnificent venture.<\/p>\n

In some cases, my old vinyl records from Jamaica have become too worn to play and so these reissues are a godsend.<\/p>\n

Here they are with the hit song – Freedom Sounds – originally made popular by the Skatalites in 1964. As I noted last week, the Soul Brothers emerged out of the Skatalites when they finished (for the first time) in August 1965.<\/p>\n

This version marked the transition from Ska to Rock Steady – slower tempos – on the way to Reggae.<\/p>\n

For make up of the band and some history please see my blog – Friday lay day – lightweight garbage from The Economist<\/a><\/p>\n