Further Keynsian Arguments against Cutting Wages to Lower Unemployment

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.

12 Per Cent of Workers’ Income Now Eaten Up by Job Costs

According to this item on yesterday’s MSN News, http://money.uk.msn.com/news/workers-spend-12percent-on-job-costs, workers are now spending up to 12 per cent of their annual income on job costs, such as commuting to work, child care, work clothes and computer equipment. These cost the average full-time employee £2,681 per year. The report notes that although wages have risen by 1.4 per cent, the cost of working has increased by ten per cent. The report comes from a survey of about 2,000 people for Santander’s cards department. The chief executive of Santander’s cards department, Alan Mathewson said: “Earning a living can be an expensive task, particularly against a backdrop of rising living costs. The price of going to work has increased significantly since last year but average salaries have not and, as a result, workers are considerably worse off.’

With companies increasing trying to cut down on costs by turning to workfare and internships to recruit unpaid labour, employees are having to bear the costs of their own employment. In the case of unpaid internships, they are effectively having to pay for the privilege of having a job. This also partly explains why the government is so keen to cut benefits to the unemployed on the grounds that they should not be better off than the poor souls fortunate enough to be working. In the current jobs market, where having a job may effectively mean a reduction in salary in real terms due to inflation and rising job costs, or indeed are forced to pay for the privilege of working as an unpaid intern or volunteer, many people would feel that they are effectively being penalised for working to the point where they may wonder why they bothered taking the job at all. In order to keep the supply of low or unpaid labour going, the Coalition is forced to cut benefits to the unemployed as far as possible and beyond. The reduction in unemployment benefits and the shabby treatment of those out of work is directly connected and part of the same employment strategy that sees the salaries of those in work reduced, and their conditions of employment lowered. And all the while the Tories announce loudly that in penalising the unemployed, they are somehow preserving the dignity and morale of the aspirational employees, who don’t want to go to work while others in their street still have their curtains closed. The real benefit of these policies isn’t to the employees, but to the Tories’ immensely wealth paymasters in Tesco, ASDA, News International and the like. For their company executives, it is, as Private Eye would say, very much a case of ‘trebles all round’.

Archbishop John Sentamu: Workers Should Be Paid Living Wage

Over at my bro’s blog, Vox Political, there’s an interesting piece on an article by the Archbishop of York, John Sentamu, in yesterday’s Observer. His grace has stated that workers should be paid a living wage, and that the taxpayer should not fund big business, views with which I entirely concur. Sentamu is an excellent defender of Christianity in a Britain that is increasingly hostile to it, and like many in the church is keenly aware of social injustice. My brother’s article begins

How pleasing it is to see the Archbishop of York agrees with the view, long-held by Vox Political, that British workers should be paid a living wage, and that the taxpayer should not be subsidising big business!

Archbishop John Sentamu is to chair a year-long commission investigating the need for a living wage. In The Observer, he wrote: “The holes in millions of paycheques are being plugged by in-work support to the tune of £4 billion a year. But why aren’t those who are profiting from their workers paying up? Why is government having to subsidise businesses who don’t pay their employees enough to live on? It is a question we need to answer and act on – fast. The cost of living is rising but wages are not. In the rush for profit, and for high pay at the top, too many companies have forgotten the basic moral imperative that employees be paid enough to live on.”

This is a sentiment that Vox Political wholly supports.

Needless to say, there are also detractors. A commenter known as ‘neilcon’ pointed out: “The high cost of running a small business in this country is one of the main reasons why the hourly rates are so low. If you employ someone at £8 you then have to pay a further 13 per cent to the government in employer’s National Insurance contributions for the privilege of employing someone; you have to supply that person with suitable equipment for their work.” The commenter reeled off a few other business-related expenses before going on to “the issue of the banks utterly refusing to lend to small businesses, the high cost of renting office premises, business rates on your office premises to the government, the high cost of VAT, together with clients trying to squeeze the final price as much as possible and the very late payments by bigger companies.

The Vox Political post is here:http://mikesivier.wordpress.com/2013/07/21/are-wages-too-low-or-is-the-cost-of-living-too-high-or-both/

And The Observer article is here:http://www.guardian.co.uk/society/2013/jul/20/low-pay-scandal-john-sentamu