Perspectives for the European wage and labour market policy

1. Perspectives for the European wage and labour market policy Özlem Onaran University of Greenwich

2. Outline • What is effect of a wage cut on demand? • Empirical findings (Onaran and Galanis, 2012) • Wage policy in Europe • Wage coordination

3. Crisis management and growth • austerity packages, low wages, chronically low demand • uncertainty about the recovery →new investments less likely • income and jobs crisis • Recession in the Eurozone is back in 2012 • race to the bottom in the share of labour • A reason behind the crisis

4. Wage share vs. growth, EU15 Caution: declining wage share since 2010, pay freeze and austerity! Source: Ameco,1960-2011, November 2011 forecast

5. What happens when wage share↓? • What is effect of a wage cut on demand? • Neoclassical/’mainstream’ • Positive; wages merely as a cost item • Neo-Kaleckian/Post-Keynesian model • pro-capital income distribution: + & - effects on aggregate demand - : the relative size of the consumption differential out of wage vs. profit income + : the sensitivity of investment to profits + : the sensitivity of net exports to unit labor costs Total effect on demand is ambiguous -: wage-led demand +: profit-led demand • Bhaduri and Marglin (1990)

6. ...What happens when wage share↓? • Estimation results, 1960-2007, (Onaran& Galanis2012 ILO project • If the wage share ↓ by 1% point: • Consumption↓ by 0.44% points (of GDP) • Investment↑ by 0.28% points • Net exports ↑ by 0.06% points • Aggregate private demand↓ by 0.08% points • +Multiplier effects: Aggregate demand↓ by 0.13% points • →EU as a whole has a wage-led demand regime, • although some individual member states may have a profit-led regime- e.g. if a small country, Austria, is the only one who decreases labor share, it can grow, but if every country does the same, they all contract • Intra European trade is high • Austerity and wage deflation policies are contractionary; particularly if simultaneous • Global race to the bottom by 1% (Estimations and Simulation for G20)→ • EU GDP ↓ by 0.25% • global GDP↓ by 0.36% • Conversely a global wage-led recovery scenario: Global GDP↑ by 3.05%, EU GDP ↑ by 2.4%

7. Implications of the empirical findings • A vicious circle of wage cuts lead to lower growth and fewer jobs • The dilemma of pay vs. jobs is not empirically validated for large economies as well as the EU and the global economy at large • the limits of strategies of international competitiveness based on wage competition in a highly integrated global economy • Macro – micro conflict –firm vs. aggregate and national vs. global • From debt to insolvency for the private & the public sector? • ↑wage share : egalitarian; does not harm growth potential → importance of wage/macro policy coordination • Avoid beggar thy neighbour policies

8. Wage coordination • European system of coordinated wage bargaining (Stockhammer and Onaran, 2012) • As part of a new policy economic policy mix • Aim: • ensure that living standards of the working people are growing • Prevent excessive inflation • Prevent/counteract imbalances • wj = xj + pT + a(ULCEU – ULCj) • w..wage growth, x..productivity growth, pT..inflation target, ULC..unit labour costs, • Subscripts EU and country j • pTwould have to be set such as to avoid deflation in all countries, while allowing rebalancing

9. Wage policy - conclusions • Focus on wage flexibility is misplaced • Does not guarantee full employment • Unable to guarantee a fair and stable distr of income • Unable to avoid international imbalances • Productivity-oriented wage policy to stabilize effective demand • Coordination of wage bargaining systems to prevent a race to the bottom • In the Euro area: wage policy has to take into account current account positions • To avoid a deflationary adjustment: substantially higher wage growth in Germany

10. An alternative macroeconomic paradigm for Europe • Fiscal, monetary, and industrial policy should aim at full employment, ecological sustainability, and equality. • Minimum wages, social benefits and public services across Europe • financed by a European budget funded by increased progressive taxation of corporations, banks, and higher incomes. • The European Central Bank should become a real Central Bank • responsible for the supply of funds necessary for green investments and social cohesion

11. How to create more and better jobs? • Strengthening of the bargaining power of labour. • union legislation, • increasing the coverage of collective bargaining, • increasing the social wage via public goods and social security, • establishing sufficiently high minimum wages, • regulating high/executive pay, • international labour standards • shorten working hours with wage compensation • in particular in the case of low/median wage earners, • More equal countries have shorter working hours. (Schor, 2010) • shortening of hours →higher hourly productivity. • The UK and the US have much longer hours than Germany and Netherlands. • an employer in the UK needs more demand than the German employer to create an additional job

12. ...How to create more and better jobs? • create jobs in labour intensive services -education, child care, nursing homes, health, community and social services & improve pay and working conditions in these industries • different from the former reliance on low pay service jobs with weaker labour unions in the UK. • socializing the invisible care • Strengthen the link between productive investment and profits • if private sector investment had grown at the same pace as GDP during 2000-2009, private sector employment in the advanced economies would have been higher by 5.8 million in 2009 (IILS) • Reverse financialisation and the short-termism/maximisation of the dividends to the share holders and managerial bonuses. • stimulate investments via higher demand • Public investment in renewable energy, infrastructure, public transport, housing

13. Global race to the bottom by 1%→ global GDP↓ by 0.36% Source: Onaran and Galanis (2012)

14. A wage-led recovery scenario (Onaran and Galanis 2012) Global GDP↑ by 3.05%

15. FT on ↓labour share:”threat to recovery” “The decline in the labour share, along with a shift of labour income towards higher earners, may be an important part of why the US economic recovery is so sluggish. Workers on lower wages consume much of their income, while higher wage earners and those with capital income are more likely to save.” Robin Harding, “Pay gap a $740bn threat to US recovery”, Financial Times, December 14, 2011

16. Public debt/GDP and change in debt in 2011-2007 Ameco, 2011 May forecast

17. Unemployment rate, % Ameco, 2011 May forecast

18. % change in real wages (Compensation per employee) A policy of real deflation in 2010-11 in the periphery! Strong wage moderation in Germany (wage increase<productivity) Ameco, 2011 May forecast *UK also in 2008; cumulative change 2011/2007 **Germany fall in 2007, cumulative change 2011/2006 ***Slovenia only in 2011 ****Latvia also in 2008; cumulative change 2011/2007