Further Keynsian Arguments against Cutting Wages to Lower Unemployment

Keynes Book Cover

On Saturday I presented some of the arguments from Keynsian economics in Michael Stewart’s book Keynes and After (London; Penguin 1986) against the Conservative policy, based on Monetarist and Neoliberal economics, that cutting wages will automatically create more jobs as labour becomes more economical to employ. In addition to those I blogged about on Saturday, Stewart makes a number of other arguments against the policy. One of these concerns economies of scale, which state that if unemployment falls, then real wages will actually rise. He states

Thirdly, there is the troublesome fact that in many industries there are increasing, not decreasing, returns to scale: in other words, as output and employment increase, labour productivity rises and unit costs fall. This fact has some awkward implications for much conventional economic theory; in particular it means that as the economy expands and unemployment falls from, say, 10 per cent to 5 per cent, real wages must rise, not fall. (As we noted in Chapter 5, Keynes did not incorporate this insight into the General Theory, but highlighted it in an article in the Economic Journal in 1939) If it is true that real wages will rise as unemployment falls, to postulate, as the monetarists do, that it is necessary to reduce real wages in order to reduce unemployment would seem to be startlingly perverse.

Which again suggests that the Tory policy of cutting wages may be creating unemployment. Not that they have any motivation to see unemployment fall. The Angry Yorkshireman has stated several times that Neoliberal theory after von Hayek and von Mises states that there should be a constant pool of the unemployed at 6 per cent.

Stewart also discusses the way the massive growth in unemployment during the early 1980s actually affected different groups of workers. Some workers actually saw their wages rise, while at the same time suffering unemployment, while the unskilled workers at the bottom of the pile suffered a drop in wages as well as being hit the most by unemployment. Stewart states

Finally, there is some evidence about what actually happened when unemployment in Britain started its big rise early in 1980, and in particular what happened to different groups of workers. Between 1979 and 1983 the real earnings of non-manual workers rose by 10 per cent, while the employment of these manual workers fell by 8 per cent. The real earnings of non-manual workers, on the other hand, rose by 19 per cent – but unemployment of these workers rose by 12 per cent. Even more striking is what happened at the top and bottom of the earnings scale. The real hourly earnings of the top 10 10 per cent of adult male earners (among whom unemployment is very low) rose by 19 per cent between 1979 and 1984. The real hourly earnings of the bottom 10 per cent, which suffered heavily from the rise in unemployment during these five years, actually fell slightly over the period. Thus it is very hard to believe that what happens to real wages determines what happens to employment. The correct inference is surely that the demand for labour determines employment and real wages. Over the four or five years after 1979, groups of workers whose services were in demand suffered little unemployment, and enjoyed rising real wages. Groups of workers whose services were not in demand suffered heavy unemployment, and found it difficult to maintain, let alone increase, their real wage.

He then suggests some methods by which unemployment could be reduced.

The moral of these figures, then, is that if unemployment is to be reduced among low-paid manual workers, the demand for their labour must be increased. One way of doing this (a crucially important ‘supply-side’ measure’) is to train or retrain them in skills that are in demand. Another, more controversial, measure is to reduce or eliminate employers’ social security contributions for the low paid, thus making them more attractive to employ without reducing the take-home payoff the workers themselves. But the basic answer is the Keynsian one: to increase effective demand. This will raise employment and reduce unemployment. It may or may not lead to a fall in real wages, depending on the shape of the average wage curve. But any such fall in the real wage will be the effect, not the cause, of the rise in employment. As Keynes himself put it,

The propensity to consume and the rate of new investment determine between them the volume of employment, and the volume of employment is uniquely related to a given level of real wages – not the other way round.

Blair’s government did have a policy of retraining the unemployed through the establishment of computer literacy courses, which were free to those without jobs. This has, however, been subverted by Osborne and co. into various courses, which are simply chiefly designed to teach the unemployed how to look for work and be a good employee, in order to be successful at job interviews. These have been constructed as a way of psychologically reinforcing the attitude that the unemployed are to be blame for their condition, rather than the economy or the government’s own employment policies.

Osborne is also trying to make the employment of the young unemployed more attractive by cutting employers’ NI contributions. It’s a policy which will also mean that these same workers will thus lack government social security coverage – another policy designed to punish the working class in favour of the employers.

The government has not, however, done anything to create demand, following the dictates of Neoliberal economic policy that this would be bad, quite apart from the employers’ class interests, which bitterly resent government interference, except, of course, when it is being subsidised. But until that happens, any policies the government launches ostensibly to tackle unemployment will fail. Not that this worries them, as the Neoliberal economics they have adopted demands that labour should be cheap and so their should be a constant pool of unemployed. They thus have absolutely no desire to see a fall in unemployment, merely its continuing disguise in order to win elections.

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9 Responses to “Further Keynsian Arguments against Cutting Wages to Lower Unemployment”

  1. alittleecon Says:

    Have you read this classic by economist Michal Kalecki – “Political Aspects of Full Employment”, which discusses the political dimensions in detail. An oldie, but a goodie:

    http://mrzine.monthlyreview.org/2010/kalecki220510.html

  2. Further Keynsian Arguments against Cutting Wage... Says:

    […] On Saturday I presented some of the arguments from Keynsian economics in Michael Stewart’s book Keynes and After (London; Penguin 1986) against the Conservative policy, based on Monetarist and Neoliberal economics, that cutting wages will…  […]

  3. Mike Sivier Says:

    Reblogged this on Vox Political.

  4. Darren Says:

    considering when Keynes published his theories I think it is folly to rely too heavily upon what he was proposing. At that time technology had barely started its advance that is now almost blindingly fast. Blair’s government teaching people to use a PC was a step in the right direction, but teaching people how to merge a Word document into an email was never going to be sufficient to bring the unskilled up to speed with their better-educated peers.

    The Telegraph yesterday published an article questioning the future for a wider group than the merely unskilled, as computerisation, automation and roboticisation plays an ever-increasing part in the world of production. We need to be planning for a time when there is likely to be 70%+ unemployment, as the machines take over more and more of the work being done today.

    \\\in my own case, just to back that statement up a little, the exporting of goods can now be done, end to end, by trhe German software programme called SAP. The only labour still required is that needed to load the goods onto the trailers and the driver to take the goods away. Design changes in the layout of trailers is likely to obviate the former within five years, as warehouses become fully automated and linked to progs such as SAP. In that scenario, robots will pick up the barcoded goods and place them onto the trailers.

    Automatic cars are already being trialled. How long will it be before the drivers of pantechs are replaced?

    I say again, we need to be planning for increased human leisure before capitalism manages to collapse its own consumer markets by removing the ability, through the use of expanding technology, for workers to purchase goods.

    That’ll be tuppence, please… πŸ˜‰

  5. Darren Says:

    Interestingly (perhaps) the goods that I was exporting were forklift trucks. In a warehouse where a robot grab will pick uip the goods for loading, even the driver of the forklift – and therefore the truck itself – will become obsolete. That means that, as part of the domino effect, the company making the trucks will go out of business, thereby putting more workers out of their jobs and, in turn, making the robot loading equipment redundant.

    Are we seing the beginning of the end of civilisation as we know it? πŸ˜‰

    • beastrabban Says:

      I had this conversation a little while ago with a friend of mine, who was very techno-savvy. He said that some of the experts on technological change had begun to question the classic assumption that the technological change would offset unemployment in one area by creating jobs in another. You know the argument – the people that are made unemployed by tractors now find work in the factories making them. He told me that various European left-wing parties – one of them was the German Social Democrats, their equivalent of the Labour party, had adopted as party policy a system of extra benefits or purchasing credits to be given to the unemployed so that they could continue purchasing consumer goods and so stimulate production. Unfortunately, nothing like this appears to have occurred to the Coalition, who are continuing to hit the unemployed by telling them that it’s all their own fault.

  6. hstorm Says:

    Can’t help feeling that this has been interpreted back-to-front somewhat. The notion is more that falls in unemployment cause wages to rise, and less that rising wages cause unemployment to fall – this is because as unemployment goes down, the available labour market for employers to hire from becomes smaller, and there are likely to be fewer appropriately skilled workers will be there to choose from. This allows the job-candidate to set the terms of the deal more, including demanding a higher wage.

    Also, the larger the active workforce, the more powerful the Trade Unions are likely to become as their membership will be paying full fees, and have greater numbers to support industrial action.

  7. The Politicoid Says:

    I also like to rail against neo-lib Hayekian economics – you may enjoy a couple of posts that I and others have written

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