A German Model?

Published by Anonymous (not verified) on Sun, 24/09/2017 - 12:53am in

Tomorrow Germany votes, and there is little suspense, besides the highly symbolic question of whether the far right will make it into the Bundestag.

Angela Merkel will be Chancellor for the fourth time, marking a long period of political and policy stability. In the past fifteen years Germany emerged as the model to follow for the other large economies. For since its economy has performed better, in terms of growth and unemployment, than France or Italy.

I have at discussed at length, here and elsewhere, the costs of the German success in terms of global imbalances and uncooperative behaviours. Last week I wrote a piece for the newly born magazine LuissOpen (Ad: Follow it on twitter! There is plenty of interesting content well beyond economics! End of Ad).

The piece lists, in a non exhaustive way, a number of weaknesses that can be spotted behind the shining macroeconomic results, and also argues that there is much more than labour market liberalization behind a successful economic model (including in Germany).

The original piece can be found here (and here in Italian). I copy and paste it below

Three months after his commencement, Emmanuel Macron delivered last week one of the most important, and controversial, promises of his agenda. The loi travail that will become operational in the next few weeks mostly deals employment protection, which is weakened especially for small and medium enterprises. The aim is to lift constraints for firms hiring, and thus increase employment. This first set of norms should be followed in the next weeks or months by norms aimed at improving training and employability of unemployed workers. Once completed, the package would be the French version of the flexicurity that Scandinavian countries put in place in the past, with different degrees of success.

Without entering into the details of the law, the set of norms approved by the French government, just as the Italian Jobs Act voted in 2014, is a bold step towards the flexibilization of  labour market relations that Germany has in place since the early years 2000, with the so-called “Hartz Reforms”. The German experience, and to a minor extent the first few years of application of the Job Act, can help understand how the French labour market could evolve in the next few years.

Germany in fact sets itself as an example. The argument goes that the reforms it implemented in 2003-2005, did liberalize labour markets, and since then, with the exception of the first years of the crisis, unemployment has been steadily decreasing. But in fact, this is a misleading example, because the Hartz reforms were embedded in a complex institutional setting, which goes well beyond labour market flexibility.

First, an important segment of the German labour market, the one linked to manufacturing and business services, has always been ruled by long-term agreements between employers, workers, and local work councils. For these insider workers a system of work relations was in place, in which highly paid workers acquired skills through vocational training (within or outside the firm), and were protected by an all-encompassing welfare system. Vocational training created robust bonds between the firms, that had often invested substantial resources in the training, and the workers, whose specific skills could not easily be transferred to other sectors or even to other firms.

At the turn of the century, globalized markets coupled with the aftermath of the reunification, exerted a serious pressure for a restructuring  of labour relations.  This restructuring happened through a consensus process that did not involve the government, and kept untouched the bond between the firm and the worker created by vocational training.

The mutual interest in preserving the long-term relationship between workers and firms in the insider markets, led to agreements aimed at reducing costs or to increase productivity without increasing turnover or reducing average job tenure. These agreements could involve on the workers’ side labour sharing, flexibility in hours and in labour mobility, wage concessions, reductions in absenteeism. In exchange for this, firms would guarantee continued investments in innovation and in the (vocational) training of workers, and job security.

It is crucial to understand that the Hartz reform did not touch the insiders market (manufacturing, finance, insurance and business, etc), that as we just said had already begun restructuring without government intervention. The reform made the welfare system less generous, while  allowing access to benefits even for workers with low earnings, thus de facto introducing incentives to low-paid jobs. Furthermore, it liberalized temporary work contracts, and made more flexible a few sectors subject to competition from posted workers (i.e. construction).

The combined result of reforms and endogenous restructuring yielded a spike in part time jobs, and an increase of employment. But it also widened the gap in earnings and in protection between workers in the export-oriented sectors and the others.

The second feature of the German system that made it resilient during the crisis is the existence of a dense network  of local public savings banks (the Sparkassen). Savings bank were a defining feature of the banking sectors of a number of European countries (e.g. Spain, Italy), but have progressively become marginal. Germany is therefore an exception in that its local savings banks are still a pillar of its economy.

Local savings banks have specific public interest missions, as they are involved in the development of local communities, and in financing households and firms (in particular SMEs). The law only allows operation within the region of competence, which shields them from competition while keeping them close to their stakeholders. Similarly, the ambit of their operations is limited (for example, they face limits in their capacity to engage in securities trading or in excessively risky financing).

To avoid that these limitations hamper their effectiveness and their solidity, the banks work as a network  among them. The network exhibits economies of scale and of scope, while remaining close, in its individual components, to local communities. Furthermore, the existence of solidarity mechanisms (rescue funds) ensures that temporary difficulties of a bank are tackled without spreading contagion.

The major private commercial banks, very active in international markets, did suffer like in most other countries, were a drain on public finances, and drastically contracted their lending to the real sector. The Sparkassen on the other hand kept their financing steady (especially to SMEs) and required virtually no state aid. As a consequence, the local savings banks cushioned the impact of the financial crisis on the German economy, and their continued financing of firms is certainly a major factor in explaining the quick rebound of the German economy after 2010.

If taken together, the banking sector and the labour market institutions design a remarkably efficient system, geared towards the establishment of long run relationships in which the interests and the objectives (between entrepreneurs and workers, between banks and firms) were aligned.

But this effectiveness did not come without costs. From a macroeconomic point of view, profitability and competitiveness increased, but also precautionary savings, induced by a less generous welfare state, and by the increased uncertainty faced by workers. The “success” of the German export-led economy, that had a 9% current account surplus in 2016, is based on the compression of domestic demand, and on a labour market that is increasingly split in two, and in which inequality increased dramatically.  The low unemployment that should make other countries envious hides a massive increase of the so-called working poor. (See figure 2 here)

I would push this even further: the Hartz Reform had a strong impact on labour market dualism and precariousness, but only a minor one in explaining the resilience of the economy. A recent CER policy brief makes a somewhat similar point.

Following the Jobs Act, the Italian labour market seems to be headed in a similar direction as the German one. The recent data released by ISTAT on labour market development certified the return of employed people to the pre-crisis peak (2008), thus marking, symbolically the end of the crisis. Yet, GDP is still 7% below its 2008 level, meaning that the increase of employment happened in low value added sectors (such as for example tourism and catering), and often with part-time contracts. These are typically sectors with low and very low wages, and stagnant productivity dynamics. At the same time, wages (but not employment) increase in manufacturing-export oriented sectors. The Italian labour market, in a sentence, is heading towards the same dualistic structure that characterizes the German one. This explains why, like in Germany, Italian domestic demand stagnates; why the increase in employment is obtained at the price of increased precariousness and of the working poor; why, finally, while the numbers say that the crisis is beyond us, the actual experience of households is often different. Italy, and to a minor extent Germany, are the best proof that employment and growth do not necessarily go hand in hand with increased well-being.

Focusing exclusively on labour market flexibility, Italy and in France only imported one element of the German “model”; and probably the one that is by far the least important.  The German capacity to put in place long term relationships, the real key to economic resilience success, is lost in our countries.

Filed under: France, Germany, labour markets, Structural Reforms, Wages Tagged: dualism, export-led growth, flexicurity, France, German elections, Germany, Hartz Reform, jobs act, loi travail, long-termism, Macron, Merkel, reforms, sparkassen, wage compression, wage restraints, working poors

Golden Age for American workers?!

Published by Anonymous (not verified) on Thu, 21/09/2017 - 11:00pm in

wage share-growth

We’ve been hearing this since the recovery from the Second Great Depression began: it’s going to be a Golden Age for workers!

The idea is that the decades of wage stagnation are finally over, as the United States enters a new period of labor shortage and workers will be able to recoup what they’ve lost.

The latest to try to tell this story is Eduardo Porter:

the wage picture is looking decidedly brighter. In 2008, in the midst of the recession, the average hourly pay of production and nonsupervisory workers tracked by the Bureau of Labor Statistics — those who toil at a cash register or on a shop floor — was 10 percent below its 1973 peak after accounting for inflation. Since then, wages have regained virtually all of that ground. Median wages for all full-time workers are rising at a pace last achieved in the dot-com boom at the end of the Clinton administration.

And with employers adding more than two million jobs a year, some economists suspect that American workers — after being pummeled by a furious mix of globalization and automation, strangled by monetary policy that has restrained economic activity in the name of low inflation, and slapped around by government hostility toward unions and labor regulations — may finally be in for a break.

The problem is that wages are still growing at a historically slow pace (the green line in the chart above), which means the wage share (the blue line in the chart) is still very low. The only sign that things might be getting better for workers is that the current wage share is slightly above the low recorded in 2013—but, at 43 percent, it remains far below its high of 51.5 percent in 1970.

That’s an awful lot of ground to make up.

productivity-wage share

The situation for American workers is even worse when we compare labor productivity and the wage share. Since 1970, labor productivity (the real output per hour workers in the nonfarm business sector, the red line in the chart above) has more than doubled, while the wage share (the blue line) has fallen precipitously.

We’re a long way from any kind of Golden Age for workers.

But, in the end, that’s not what Porter is particularly interested in. He’s more concerned about what he considers to be a labor shortage caused by a shrinking labor force.

So, what does Porter recommend to, in his words, “protect economic growth and to give American workers a shot at a new golden age of employment”? More immigration, more international trade, cuts in disability insurance, and limiting increases in the minimum wage.

Someone’s going to have to explain to me how that set of policies is going to reverse the declines of recent decades and usher in a Golden Age for American workers.

Tagged: disability, history, immigration, minimum wage, productivity, Second Great Depression, trade, United States, wages, workers

William Blum on Socialism vs. Capitalism

William Blum, the long-time fierce critic of American and western imperialism, has come back to writing his Anti-Empire Report after a period of illness. He’s an older man of 84, and due to kidney failure has been placed on dialysis for the rest of his life. This has left him, as it does others with the same condition, drained of energy, and he says he finds writing the report difficult. Nevertheless, his mind and his dissection of the ruthless, amoral and predatory nature of western capitalism and corporate greed is as acute as ever.

There’s a section in the Anti-Empire Report, where he discusses the advantages of socialism versus capitalism. He notes that there were two studies carried out under George Dubya to see if private corporations were better than federal agencies. And the federal agencies won by a huge margin every time. He writes

Twice in recent times the federal government in Washington has undertaken major studies of many thousands of federal jobs to determine whether they could be done more efficiently by private contractors. On one occasion the federal employees won more than 80% of the time; on the other occasion 91%. Both studies took place under the George W. Bush administration, which was hoping for different results. 1 The American people have to be reminded of what they once knew but seem to have forgotten: that they don’t want BIG government, or SMALL government; they don’t want MORE government, or LESS government; they want government ON THEIR SIDE.

He also states that the juries’ still out on whether socialist countries are more successful than capitalist, as no socialist country has fallen through its own failures. Instead they’ve been subverted and overthrown by the US.

I think he’s wrong about this. The Communist bloc couldn’t provide its people with the same standard of living as the capitalist west, and the state ownership of agriculture was a real obstacle to food production. The bulk of the Soviet Union’s food was produced on private plots. Similarly, Anton Dubcek and the leaders of the Prague Spring, who wanted to reform and democratize Communism, not overthrow it, believed that Czechoslovakia’s industrial development was held back through the rigid structure of Soviet-style central planning.

However, he still has a point, in that very many left and left-leaning regimes have been overthrown by America, particularly in South America, but also across much of the rest of the world, as they were perceived to be a threat to American political and corporate interests. And for the peoples of these nations, it’s questionable how successful capitalism is. For example, in the 1950s the Americans overthrew the Guatemalan government of Jacobo Arbenz after he dared to nationalize the banana plantations, many of which were own by the American corporation, United Fruit. Benz was a democratic socialist – not a Communist, as was claimed by the American secret state – who nationalized the plantations in order to give some dignity and a decent standard of living to the agricultural workers on them. The government that overthrew Benz was a brutal Fascist dictatorship, which imposed conditions very close to feudal serfdom on the plantation labourers.

Which leads to a more general point about the emergence of capitalism, imperialism and the exploitation of the developing world. Marxists have argued that capitalism had partly arisen due to western imperialism. It was the riches looted from their conquered overseas territories that allowed western capitalism to emerge and develop. Again this is a matter of considerable debate, as some historians have argued that the slave trade and plantation slavery only added an extra 5 per cent to the British economy during the period these existed in the British empire, from the mid-17th century to 1840. More recently, historians have argued that it was the compensation given to the slaveowners at emancipation, that allowed capitalism to develop. In the case of the large slaveholders, this compensation was the equivalent of tens of millions of pounds today. At the time the plantation system was in crisis, and many of the plantation owners were heavily in debt. The slaveholders used the money given to them by the British government – £20 million, a colossal sum then-to invest in British industry, thus boosting its development.

This system has continued today through what the Swedish economist Gunnar Myrdal termed ‘neocolonialism’. This is the international trading system which the former imperial masters imposed on their colonies after the end of imperialism proper following the Second World War. High tariffs and other barriers were imposed to stop these countries developing their own manufacturing industries, which could produced finished goods that would compete with those of Europe and the west. Instead, the former subject nations were forced through a series of trade agreements to limit themselves to primary industries – mining and agriculture – which would provide western and European industry with the raw materials it needed. As a global system, it’s therefore highly debatable how successful capitalism is in providing for people’s needs, when the relative success of the capitalist west has depended on the immiseration and exploitation of countless millions in the developed world.

And in the developed west itself, capitalism is failing. In the 19th century Marx pointed to the repeated crises and economic slumps that the system created, and predicted that one of these would be so severe that it would destroy capitalism completely. He was wrong. Capitalism did not collapse, and there was a long period of prosperity and growth from the late 19th century onwards.

But terrible, grinding poverty still existed in Britain and the rest of the developed world, even if conditions were slowly improving. And the long period of prosperity and growth after the Second World War was partly due to the foundation of the welfare state, Keynsian economic policies in which the government invested in the economy in order to stimulate it, and a system of state economic planning copied from the French.

Now that Thatcherite governments have rolled back the frontiers of the state, we’ve seen the re-emergence of extreme poverty in Britain. An increasing number of Brits are now homeless. 700,000 odd are forced to use food banks to keep body and soul together, as they can’t afford food. Millions more are faced with the choice between eating and paying the bills. In the school holiday just passed, three million children went hungry. And some historians are predicting that the refusal of the governments that came after the great crash of 2008 to impose controls on the financial sector means that we are heading for the final collapse of capitalism. They argue that the industrial and financial elite in Europe know it’s coming, are just trying to loot as much money as possible before it finally arrives.

The great, free trade capitalism lauded by Thatcher, Reagan and the neoliberal regimes after them has failed to benefit the majority of people in Britain and the rest of the world. But as the rich 1 per cent have benefited immensely, they are still promoting neoliberal, free trade policies and imposing low wages and exploitative working conditions on the rest of the population, all the while telling us that we’re richer and generally more prosperous than ever before.

Back to Blum’s Anti-Empire Report, he also has a few quotes from the American comedian Dick Gregory, who passed away this year. These include the following acute observations

“The way Americans seem to think today, about the only way to end hunger in America would be for Secretary of Defense Melvin Laird to go on national TV and say we are falling behind the Russians in feeding folks.”

“What we’re doing in Vietnam is using the black man to kill the yellow man so the white man can keep the land he took from the red man.”

For more, see https://williamblum.org/aer/read/150

Supply and Demand in California

Published by Anonymous (not verified) on Tue, 19/09/2017 - 3:15pm in

I came across the following graph: (Click to embiggen) Both the supply curve for labor in the state of California and the demand curve for housing in California are made up of the states residents. In general, if you increase the supply of something, all else being equal you bring down its price. On the […]

Break this!

Published by Anonymous (not verified) on Mon, 18/09/2017 - 11:00pm in


David Brooks should have left well enough alone.

Middle-class wage stagnation is the biggest economic fact driving American politics. Over the past many years, so the common argument goes, capitalism has developed structural flaws. Economic gains are not being shared fairly with the middle class. Wages have become decoupled from productivity. Even when the economy grows, everything goes to the rich.

But then Brooks spends the rest of his column trying to convince us that there aren’t any really structural flaws, that “the market is working more or less as it’s supposed to.”

Well, maybe it’s working “more or less as it’s supposed to” for those at the top. But it’s certainly not working for everyone else, for those who actually have to work for a living.

The relevant debate is all about wages and productivity.

For Brooks (and the mainstream economists whose work he relies on), wages aren’t growing not because something is wrong, but because productivity isn’t growing. Or in his inimitable, sloganeering fashion:

It’s not that a rising tide doesn’t lift all boats; it’s that the tide is not rising fast enough.

Except, of course, productivity has grown—and wages haven’t kept up. Not by a long shot!

As is clear from the chart above, productivity has increased enormously since 1987—whether measured in terms of real GDP per capita (the orange line) or, even more, real nonfarm business output per hour worked (the green line).

So, yes, Americans have become more productive over the course of the past three decades. But wages have lagged far behind.

In fact, as is also clear in the chart, real wages (measured in terms of real weekly earnings, the blue line) have been virtually stagnant. They’ve risen only 5.5 percent over that period, much less than GDP per capita (54.4 percent) and labor productivity in nonfarm businesses (76.1 percent).

In the end, maybe Brooks is right. Maybe the growing gap between wages and productivity is not a structural flaw. Maybe it’s the way the market is supposed to work.

If so, then it’s time the break the system that both generates and relies on the large and growing gap between wages and productivity—the one Brooks and mainstream economists work so hard to convince us isn’t broken at all.

Our job, then, is to get to work imagining and creating a radically different economic and social system.

Tagged: David Brooks, economy, productivity, United States, wages

Crisis and Closures in the Academy Schools

Published by Anonymous (not verified) on Thu, 14/09/2017 - 4:02am in

One of the major issues is the Tories’ continuing attempts to destroy whatever remains of value in the British education system, all for the profit of big business. Last week, one of the academies closed only a week after it had opened. I did wonder what would happen to its pupils. Would they be thrown out and denied an education, as they had enrolled in the wrong school and there may not be places available in the other local schools.

Fortunately, that’s not going to happen. From what I understand the school will be kept open until someone else is found to take it over.

But it is still absolutely scandalous that British schools are now run by private companies, who can announce at any time that they are no longer interested in running them. Especially as tens of millions of taxpayers’ money is given to individual academies, far beyond the budget for the local LEA. In some cases, the amount spent on an academy can reach £40 million, while the budget for the LEA is under a million.

As for replacing LEA’s, from what I understand from talking to friends about them, the authorities dictate that schools can only join certain academy chains. This makes a mockery of the claim that they are outside LEAs, as these chains in effect act as them. But I suppose as the academy chains are all privately run, the government thinks this is just as well then.

I also understand that one of the academies in Radstock in Somerset doesn’t even belong to a chain based in the UK. The chain’s based in Eire, and all its directors live across the Irish Sea. I can’t say I’m surprised. Eire attempted to encourage investment by massively cutting corporate taxes, in the same way that the Tories are doing for Britain. Thus you find many businesses, that actually do their work in Britain, have their headquarters over there, using the country as a tax haven. And the ordinary people of Ireland have paid for this, just as we Brits are paying for the Tories’ self-same policy over here. One of the books I found rooting through one of the bargain bookshops in Park Street was by an Irish writer describing the way his country’s corporate elite had looted the country and caused its recession. Like the banksters in Britain and America.

The academies are a massive scam. They were launched under Maggie Thatcher, and then quietly wound up as they didn’t work. Blair and New Labour took over the idea, as they did so much else of the Tories’ squalid free market economics, and relaunched them as ‘city academies’. And then, under Dave Cameron, they became just ‘academies’.

They were never about improving education. They were about handing over a lucrative part of the state sector to private industry. They aren’t any better at educating children than state schools. Indeed, many can only maintain in the league tables by excluding poorer students, and those with special needs or learning difficulties. And if state schools had the same amount spent on them as those few, which are more successful than those left in the LEAs, they too would see improved standards.

In fact, academies offer worse teaching, because as private firms in order to make a profit they have to cut wages and conditions for the workforce to a minimum. And with the Tories freezing public sector workers’ wages, it’s no wonder that tens of thousands of teachers are leaving the profession.

And those companies interested in getting a piece of this cool, educational action are hardly those, whose reputation inspires confidence. One of them, apparently, belongs to Rupert Murdoch, at least according to Private Eye again. Yes, the man, who has almost single-handedly aimed at the lowest common denominator in print journalism, lowering the tone and content of whatever newspaper he touches and whose main newspaper, the Sun, is a byword for monosyllabic stupidity and racism, now wants to run schools. Or at least, publish the textbooks for those who do.

Academy schools are a massive failure. They’re another corporate scam in which the public pays well over the odds for a massively inferior service from the private sector, all so that Blair and May’s mates in the private sector could reap the profits.

It’s time they were wound up. Get the Tories out, and private industry out of state education.

We need to talk about productivity

Published by Anonymous (not verified) on Wed, 13/09/2017 - 7:19am in

"We need to discuss the complete disconnect between the marginal product of labour and labour wages," said Sir Chris Pissarides, speaking on the closing panel of the Lindau Economics Meeting.

I tweeted this comment. Laurie MacFarlane of the New Economics Foundation promptly responded with this chart that brilliantly illustrates Sir Chris's point:

"Quite why marginal productivity theory is still taught as something which explains the real world is beyond me," commented Laurie.

Marginal productivity theory says that profit-maximising firms will only employ workers who can generate at least as much additional return for the firm as they are paid. Expressed like this, it seems sensible: why would a firm employ a worker who is a net cost? But marginal productivity theory also says that the amount firms pay their workers is equal to their marginal product - in other words, that wages rise in line with productivity.

This is demonstrably untrue. Wages have not kept pace with productivity for the whole of the 21st century. Workers' wages simply don't reflect their marginal productivity any more.

If, indeed, they ever have. This chart, or some version of it, has been doing the rounds for quite some time:

Productivity started to outpace workers' compensation (wages plus benefits such as healthcare and pensions) some time in the early 1970s.

Mind you, not everyone agrees with this analysis. Robert Lawrence at the Peterson Institute, for example, thinks it massively overstates the problem. By deflating not with CPI, but with the lower business sector deflator, and accounting for use of capital, Lawrence manages to eliminate all but the last ten years or so of the divergence:

Back to Laurie's chart, then - though not everyone is convinced that the divergence of productivity and wages is entirely a 21st century problem.

Various people have attempted to explain why wages and productivity diverged from about the year 2000 onwards. Explanations broadly fall into two categories:

  • globalisation: the entry of large numbers of people in developed countries, particularly China, to the global workforce has created a labour supply glut. Dorn, Autor and Hanson explain how the "China Shock" has destroyed jobs and depressed wages for manufacturing workers in the USA. Replacing skilled workers in developed countries with skilled workers in developing countries at lower wages itself widens the gap between wages and productivity. In developed countries, there is a further effect, which we might term "hysteresis": displaced skilled workers, unable to find work that uses their skills, are forced down the jobs hierarchy, creating a glut of unskilled labour. The combination of disappearing skilled jobs and rising demand for unskilled jobs depresses wages along the job distribution, except at the very top. Kremer & Maskin show how global job competition raises inequality in developed countries. 
  • technology: the "skilled middle" are losing out as their jobs are automated. As Ryan Avent explains, robots who can do skilled routine work faster, cheaper and better displace humans, who are forced into low-skill, low-wage, low-productivity jobs such as care work and hospitality. This creates a productivity boom for robots, coupled with declining wages for humans. Hence the productivity-wage divergence. 

Noah Smith thinks that the first of these effects offsets the second to some degree. He says that the China Shock discouraged firms from investing in technology. After all, why invest in expensive machinery when there is a glut of cheap humans? He has a point. It's not much of a productivity boom, really - the divergence is mostly because wage growth is truly awful. One of the mysteries of the "technological revolution" is why, with all those robots, productivity gains are so poor.

But whether the productivity-wage divergence is caused by China or technology, or both, underlying it is a human tragedy. People displaced from skilled jobs can be permanently hurt: when large numbers are affected, the result is long-term degradation of the workforce, accompanied by rising poverty and associated mental and physical health problems. "Hysteresis" is too dry a term for such misery. Tyler Cowan calls it "unemployment scarring".

However, Noah thinks that the China shock, and associated hysteresis, is backward looking. The China shock is largely ended, as China's wages rise to Western levels and its middle classes grow. It will never return. Looking back further (to pacify those who disagree with Lawrence's dismissal of productivity-wage divergence prior to the year 2000), the entry of women into the workforce and the post-war "baby boom" were both positive labour supply shocks from the 1970s. They, too, will not be repeated. And as for all those scarred humans - yes, it is sad, and they are understandably angry, but eventually they will reach the natural end of their working lives, and those who come after them will benefit from new types of jobs arising from the new technology.

Interestingly, it seems that there is nothing new about diverging productivity and wages in a period of industrialisation. From a new economics textbook produced by the CORE project comes this chart, which shows the relationship of real wages to productivity during the UK's industrial revolution:

Looks amazingly similar to Laurie's chart, doesn't it? It is, of course, subject to the same criticisms. It compares productivity with real wages, not total compensation, it is probably deflated by CPI not the business deflator and it doesn't account for use of capital. However, thanks to Thomas Piketty's work we know that during this period capital grew enormously, so it is hard to argue that all - or even most - of the productivity gains went to labour.

Nonetheless, this chart tells an important story. Industrialisation changes the composition of the workforce. As prosperity rises, marginal workers such as the old, the sick and the disabled are able to leave the workforce and be supported from the earnings of more productive workers. Children, too, leave the workforce so that they can be educated, thus improving their skills and their future productivity. The chart shows when children left the workforce: the old, sick and disabled left it in the early 20th century (the first old age pension was introduced in 1908). Interestingly, in 1847 women also left the full-time workforce, after which male wages rose. This could simply be a compositional effect, of course. Women and children were paid less than men. If you remove lower-paid people from a workforce, the average wage rises even if there is no rise in individual pay.

CORE seems to think that it was growing worker power that caused the rising wages of the latter half of the 19th century:

I am unconvinced. Despite the rise of labour unions during this time, real wages did not keep pace with productivity. Indeed in the last couple of decades before World War I, real wages actually fell despite rising productivity. The exit of less productive workers from the workforce, coupled with fast technological change, should have enabled both wages and productivity to rise, especially if the stronger workforce that remained developed industrial muscle because of growing political power. Perhaps population increase and the contribution of lower-paid workers in Britain's growing empire prevented wages from rising as much as they should. After all, if globalisation can depress wages in the 21st century, so too could it have depressed them in the previous golden age of global trade and industry.

But this chart shows that the gap between wages and productivity did close, after World War I and the extension of voting rights to all men. Allegedly, a similar thing happened after the Black Death in the 14th century. It's amazing what wiping out a large proportion of your most productive workers does for wages. As CORE says, falling labour supply increases bargaining power, and that in turn raises wages.

This brings us to the future. Is it really going to be as bright as Noah seems to think?

Looking ahead, workforces are set to shrink significantly as birth rates fall and populations age, not only in developed countries but also in developing countries - including China. The OECD forecasts that by 2050, one third of the global adult population will be 65 or over. In some countries, such as Japan, Germany and Korea, the proportion will be much higher. Charles Goodhart predicts that the global decline in the working-age population will tighten labour markets, pushing up wages.

Rising wages might in turn encourage firms to invest in technology, thus improving productivity. It's sort of the marginal productivity theory backwards (or Karl Marx, if you prefer). If firms have to pay more for their workers, because a tight labour market means there aren't so many of them, they will have an incentive to invest in technology to enable those workers to produce more. Though they might invest in technology to replace those workers, of course. But as CORE points out, when there are fewer workers, governments fight on their behalf. Social safety nets enable workers to refuse poorly paid, dangerous and degrading work, while regulation prevents companies from offering such work or mistreating workers in other ways. So, if labour markets tighten as Goodhart envisages, then the lot of workers might improve quite considerably.

There is some historical support for this argument. World War I was a very large negative labour supply shock, and it was followed fairly quickly by an even larger one, namely World War II. The power of labour unions reached its zenith in the rebuilding after World War II, when there was much to be done and not all that many people to do it. This was also the golden age of the welfare state, when governments promised "cradle to grave" support for workers and their families.

But as labour markets slackened due to the positive labour supply shocks of the 1970s onwards and the advent of globalisation, governments took to fighting for companies against their workers - systematic destruction of union power, preferential tax treatment of capital and corporate incomes, watering down of employment standards and practices. And as social safety nets are progressively shredded, marginal workers - the old, the sick, the disabled, mothers of young children, students - are coming back into the workforce. Some, of course, are coming back willingly, attracted by the possibility of higher incomes and a better standard of living: but for too many, the work they are being forced into is simple drudgery, making an already difficult life much worse. The concept of work as a moral imperative - the "workhouse ethic" - has returned, with attendant harshness. The re-entry of these people to the workforce is almost certainly depressing both productivity and wages.

This has now gone too far. It is time to redress the balance. Of course, the unions of the past are not coming back: they are as redundant as the "human robots" they represent. We need to find ways of supporting and empowering the displaced and atomised workers of today.

But I look at technology, and I look at the CORE chart, and I wonder with Laurie whether wages in profit-maximising firms (which is all privately-owned firms, of course) ever really relate to productivity. After all, if what you want to do is maximise profits, you want all the gains from increased productivity to go into profits, not into workers' pay. The Marginal Productivity of Wages theory correctly identifies the maximum a firm will pay, but it is completely wrong about the minimum. If the worker's job is under threat, and the social safety net has been shredded, and union power has been broken, the minimum is all but zero. Employers have an incentive to bid down wages to the floor if they can get away with it, regardless of productivity.

Mind you, bidding down wages to the floor has consequences for productivity. If employers have an incentive to pay as little as they can get away with, equally workers have an incentive to do as little as they can get away with. So, if wages are low, productivity is likely to be too. After all, as the Russians say, "They pretend to pay us and we pretend to work".

Frankly, I'd rather have an economy where robots did the work and humans pursued other creative and caring interests. I think it would be not only more productive, but a much nicer way to live. Bring it on.

Related reading:

Towards a new golden age - Pieria
The changing nature of work
Reinventing work for the future

How do you like them facts?

Published by Anonymous (not verified) on Tue, 12/09/2017 - 11:00pm in


Apologists for mainstream economics (such as Noah Smith) like to claim that things are OK because good empirical research is crowding out bad theory.

I have no doubt about the fact that the theory of mainstream economics has been bad. But is the empirical research any better?

Not, as I see it, in the academy, in the departments that are dominated by mainstream economics. But there is interesting empirical work going on elsewhere, including of all places in the International Monetary Fund (as I have noted before, e.g., here and here).

The latest, from Mai Dao, Mitali Das, Zsoka Koczan, and Weicheng Lian, documents two important facts: the decline in labor’s share of income—in both developed and developing economies—and the relationship between the fall in the labor share and the rise in inequality.

I demonstrate both facts for the United States in the chart above: the labor share (the red line, measured on the left) has been falling since 1970, while the share of income captured by those in the top 1 percent (the blue line, measured on the right) has been rising.

labor shares

Dao et al. make the same argument, both across countries and within countries over time: declining labor shares are associated with rising inequality.

And they’re clearly concerned about these facts, because inequality can fuel social tension and harm economic growth. It can also lead to a backlash against economic integration and outward-looking policies, which the IMF has a clear stake in defending:

the benefits of trade and financial integration to emerging market and developing economies—where they have fostered convergence, raised incomes, expanded access to goods and services, and lifted millions from poverty—are well documented.

But, of course, there are no facts without theories. What is missing from the IMF facts is a theory of how a falling labor share fuels inequality—and, in turn, has created such a reaction against capitalist globalization.

Let me see if I can help them. When the labor share of national income falls—the result of the forces Dao et al. document, such as outsourcing and new labor-saving technologies—the surplus appropriated from those workers rises. Then, when a share of that growing surplus is distributed to those at the top—for example, to those in the top 1 percent, via high salaries and returns on capital ownership—income inequality rises. Moreover, the ability of those at the top to capture the surplus means they are able to shape economic and political decisions that serve to keep workers’ share of national income on its downward slide.

The problem is mainstream economists are not particularly interested in those facts. Or, for that matter, the theory that can make sense of those facts.

Tagged: 1 percent, economics, economists, exploitation, facts, inequality, mainstream, outsourcing, surplus, technology, theory, wages, workers

Cartoon of the day

Published by Anonymous (not verified) on Tue, 05/09/2017 - 9:00pm in

Chart of the day

Published by Anonymous (not verified) on Sat, 02/09/2017 - 12:25am in


The new jobs report is out and, once again, little has changed—including wage growth (the blue line in the chart above), which for production and nonsupervisory workers was only 2.3 percent.

That may not be good for workers but their employers and stock-market investors couldn’t be happier. The Dow Jones Industrial Average (the red line in the chart above) continues to soar, on the expectation of higher future profits.


Just in the first couple of hours of trading today, the average is up more than 58 points.

Tagged: chart, DJIA, employers, profits, stock market, stocks, wages, workers