European Tribune - Community, Politics & Progress.

Low-cost Labour

by afew
Tue May 13th, 2008 at 07:07:33 AM EST

Yet more questioning of conventional wisdom in the Financial Times - not from one of the in-house majors, certainly, but in an opinion piece by trade-union think-tanker Andrew Watt. Overall, it's an attack on the monetary othodoxy of the ECB, and on the labour-cost-reducing "reforms" that financial capitalism's very serious spokespersons never fail to inform us are absolutely necessary to competitiveness in the globalised competitive economy [that financial capitalism has been instrumental in creating - additional note by afew].

Caught between "fire and ice", or the Scylla and Charybdis of rising inflation and slowing growth, the ECB steers one way only by refusing "to cut rates", notes Watt. The ECB's stated aim, of course, is fighting inflation. Watt points to the inconsistencies in the anti-inflation doctrine:

Central banks are not, as many seem to believe, all-powerful. Specifically, they cannot fight imported inflation. To offset it by lowering domestic demand and depressing domestic prices is like cutting off your right arm if the left one is injured in the interest of “balance”. To the extent that domestic prices have risen, it has been profit and not wage driven: unit labour costs in the euro area have been consistently below inflation; the share of wages in national income has fallen.

The horror for the ECB is wage inflation, that must be stopped at all costs - even if those costs include a prolonged economic downturn. While the European Commission frets about budget deficits but offers no plans to deal with the downturn,

Business leaders, led by BusinessEurope, complain about “high wage demands” and a flagging commitment to what is most needed: fast-track labour market reform – again.

And not only business leaders, we might add. The business press, the economic gurus and the pundits, all sing from that hymnbook, with harmony provided by political leaders from New Labour to the right (it's not that the distance is great, but it makes for a lot of political leaders).

But let's be clear about what's meant by "labour market reform". Increased "flexibility" means easier firing; tighter conditions for unemployment benefit mean pressure on the unemployed to take lower-paid jobs (when it is not a specific condition as Sarkozy is proposing for France); weakening collective bargaining means more power to employers in negotiating wages and work conditions. This all heads one way, as it is meant to: reducing labour costs. Watt points to the example of Germany:

within the euro area, cost-cutting by Germany, cheered on by policymakers, has mechanically squeezed the competitiveness of other countries with which it shares a currency. Policymakers point at countries whose unit labour cost increases have threatened their competitiveness and led to current account deficits. But it is just as dangerous, if not more so, for countries in a monetary union to seek consistently to expand market share by driving unit labour cost growth substantially below the inflation target of the central bank. <...>
So-called structural reforms have helped push the share of low-wage workers in countries such as Germany almost to US levels, rising numbers of workers are on flexible contracts and collective bargaining has been decentralised. Yet productivity growth in the euro area has fallen substantially. This is due not least to the undermining of multi-employer collective agreements: why invest in rationalising production if you can browbeat workers into taking a pay cut or working longer hours?

One thing I've been thinking about this is that it lights the way through some of the murk about "globalisation". Because, even if Germany is an exporter of much-desired goods - and it is - the "competitiveness" that it has gained by reducing wages is not so much an edge on Asian competitors as on European, and especially Eurozone countries. No developed economy can hope to compete directly with China or other low labour-cost countries. Yet the existence of those countries and the threat they pose to livelihoods is constantly used to pressure workers into producing more for less remuneration. But the real competition we're being forced into is between similar countries within the EU, within the Eurozone. In other words, the very opposite of increased integration and harmonisation of economic policy. The race to the bottom of supposed high-cost countries towards becoming low-cost countries - in competition with one another. In this game, China is the bogeyman.

Watt pins the blame on a pretty obvious candidate.

Yet consider the following facts. Both the 1999-2000 upturn in Europe and the recent one ended not because of labour market rigidities, but because of the correction of speculative bubbles on financial markets. Prime causes of these had been: myopic shareholder-value orientation; policies that have shifted income to the already wealthy; and financial-market deregulation.

In other words, modern financial capitalism, aka the Anglo Disease.

Yet, since he's calling for immediate ECB interest rate cuts, hasn't he forgotten the great enabling of those speculative bubbles by lax monetary policy on the part of the Fed? How right or wrong is he in asking the ECB to loosen up?

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Low-cost Labour | 14 comments (14 topical, 0 editorial, 0 hidden)

Re: Low-cost Labour (4.00 / 6)

Andrew Watt is a researcher at the European Trade Union Institute and co-ordinator of the European Labour Network for Economic Policy. From their About us page:

About us

The ELNEP was founded in autumn 2006 to provide a counterweight to mainstream policy advice in Europe. The participating institutes identified a worrying lack of diversity in the European economic policy debate, which is biased heavily towards the supply side, exhibits a knee-jerk preference for `market' solutions over social institutions, and draws conclusions from the micro for the macro level and from national for European policies.
The analytical and forecasting activities of the ELNEP put greater emphasis on macro policies and consider both demand and supply side measures to be crucial in supporting growth and employment. The network pays particular attention to issues of the labour market, employment, wages and income distribution, and wherever appropriate takes a European, rather than national, perspective: policies that may work in a single country may be counterproductive at European level.

When locusts move on, they leave nothing behind

by afew (afew(a in a circle)eurotrib_dot_com) on Tue May 13th, 2008 at 07:12:25 AM EST

Re: Low-cost Labour (4.00 / 2)

Well, dropping interest rates isn't likely to do much for inflation either, and might encourage people into anglo-style borrow-and-spend behaviour.

by Colman (colman at eurotrib.com) on Tue May 13th, 2008 at 08:03:40 AM EST

Another important quote (4.00 / 4)

From their much-reduced share of national income, wage-earner taxpayers are now being called on, in various ways, to ease the pain of the few who have been greedy or reckless.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Tue May 13th, 2008 at 09:17:08 AM EST

Re: Low-cost Labour (4.00 / 2)

Thanks for this afew, and for your commentary with the quotes. It's useful to see a deconstruction of this practice within the EU which can show us how reduction of wages and less favourable terms and conditions for the workforce actually doesn't do a great deal for benefiting the European economy in the grand scheme of things.

Having a large disparity in average worker income across the EU, I don't think is favourable at all, especially at regional levels eg UK business being relocated to Eastern Europe may benefit the country it moves to, slightly (but won't bring wages to being on par with UK averages) but it can have a significant negative impact on the area the business moves from and thus on the wider economy of that country.

And of course anything that could further damage the role and strength of trade unions is not a good thing, because collective bargaining is crucial in realising a safe and healthy workplace, adequate protection of worker's rights including the 'right' to a living wage and decent terms and conditions. Lose that, and you start destroying people which is no good for any business in the long run.

Ad astra per aspera

by In Wales (inwales aaat eurotrib.com) on Tue May 13th, 2008 at 10:16:16 AM EST

Re: Low-cost Labour (4.00 / 4)

I'm really interested by this part:

the "competitiveness" that it has gained by reducing wages is not so much an edge on Asian competitors as on European, and especially Eurozone countries.

Because that means -and I am convinced of it since a long time ago - that what is currently a problem is not so much the economic thesis that grounds BCE policies than the lack of cooperation between UE countries, which is a purely political issue.

The question you can address the voters is:
Would you rather transfer fiscal and social responsibilities to the UE or die from internal wage war (delocalisation and so on)?

This could constitute a simple moto for the next european elections...and would give an innovative solution to the problem, instead of resorting to old fashioned (and outright dangerous) nationalism (such as present in Sarkozy electoral program for example).

by Xavier in Paris on Tue May 13th, 2008 at 02:11:08 PM EST
[ Parent ]

The ECB is, via overtight monetary (none / 1)

policy, the single biggest impediment to progress of EU institutions, imho.

The undemocratic ECB, far more than other European institutions, helps feed the widespread attitudes of EU citizens that the EU is undemocratic, out of touch with their concerns, and unconcerned with their lot.

Freiheit ist immer Freiheit der Andersdenkenden

by redstar on Tue May 13th, 2008 at 10:53:41 AM EST

Re: The ECB is, via overtight monetary (4.00 / 2)

The problem here is, that different nations feel different on this.
Most Germans (including me) - and not only rich ones - want the ECB to be independent. It was a prerequisite for the Germans to agree on the Euro, along with the single goal approach of keeping inflation down - and with such a single goal political influence doesn't make too much sense anyhow.
There is no chance that this will change.

by Martin (weiser.mensch(at)googlemail.com) on Tue May 13th, 2008 at 11:17:21 AM EST
[ Parent ]

Re: The ECB is, via overtight monetary (none / 0)

This is one of the elements of the situation.

But what do you think, personally, about interest rates? Do you simply hold to the standard German strong-currency position, or can you see advantages to lower rates?

When locusts move on, they leave nothing behind

by afew (afew(a in a circle)eurotrib_dot_com) on Tue May 13th, 2008 at 11:45:47 AM EST
[ Parent ]

Re: The ECB is, via overtight monetary (4.00 / 4)

Generally I prefer to have low inflation and believe that it is very difficult to have low rates over a longer time, as creditors want to have higher rates, when they don't believe in contained inflation. As volatility increases, usually even higher real interest.
Certainly some things are easier to handle with a bit weaker currency/higher inflation. E.g. currency depression is certainly an easier way to gain competiveness than wage moderation.

I believe it is an advantage to have to be able to borrow in one's own currency, have the seignorage effect etc. The Euro has unique credibility due to the ECB statute. I'm not sure, but I guess the measures redstar suggests would reduce this credibility. While there is the advantage not to need wage moderation, there is also the disadvantage, e.g. for retired people, students on stipendium,... who can not strike, and often have a fixed amount of many, whichs value would shrink with inflation.

After all I believe as well that the current credit mess at least would have been smaller, if the interest rates in the US would have been higher. Certainly the interest rates of the Eurozone were even too low for Spain and Ireland. Malinvestment may not be better than no investment, even if it provides temporary work.

by Martin (weiser.mensch(at)googlemail.com) on Tue May 13th, 2008 at 03:27:17 PM EST
[ Parent ]

Re: The ECB is, via overtight monetary (4.00 / 2)

I understand the need, for some constituencies, for there to be at least ideologically the veneer of central bank independence . But really, let's deconstruct what an "independent" central bank really means. What is such an institution's aim? Who, ultimately, is its prime constituency?

I would argue that there is no such thing as an independent central bank. In decoupling the central bank from the explicitly political process, you simply make it less accountable to all citizens are more explicitly accountable to the most powerful, those who own assets in the currency which a given central bank issues and manages.

But very much understood the popular view of the BUBA...er...ECB on the part of most Germans.

Freiheit ist immer Freiheit der Andersdenkenden

by redstar on Tue May 13th, 2008 at 12:08:50 PM EST
[ Parent ]

Re: The ECB is, via overtight monetary (4.00 / 2)

Yeah, as Jacques Delors once said: "Not all Germans believe in God but they all believe in the Bundesbank."

We like the constitutional court, the president, the central bank, the 'Kaiser' Franz Beckenbauer, the Bundestrainer,... All these jobs/people have one thing in common: Most people don't know how one gets this job. But nobody trusts the parliament or the government, they are mostly what they are because of elections.

The ECB is not accountable to anybody in a sense. It is a bit like the pope. It shall keep inflation low, but nobody really controls them. Of course keeping inflation low is helpful mostly for those who have assets. That's true. But it is so on purpose. And in the long run it is useful for those who intent to borrow, too, because real(!) interest payment is lower(, in theory).

by Martin (weiser.mensch(at)googlemail.com) on Tue May 13th, 2008 at 02:58:57 PM EST
[ Parent ]

Re: Low-cost Labour (4.00 / 3)

Yet, since he's calling for immediate ECB interest rate cuts, hasn't he forgotten the great enabling of those speculative bubbles by lax monetary policy on the part of the Fed? How right or wrong is he in asking the ECB to loosen up?

Not necessarily. There can be more than one target rate. There can be, for instance, one rate for investments in assets which do such things as directly generate employment growth, and another for investments in such things as real estate or consumer goods.

All it takes is coordination between institutions accountable to people (eg, at least theoretically, governments) and those which should be (eg the ECB).

Freiheit ist immer Freiheit der Andersdenkenden

by redstar on Tue May 13th, 2008 at 11:09:20 AM EST

Re: Low-cost Labour (4.00 / 7)

Heh, aargh.

Note how all these folks get so worried about increasing wages at the bottom end, but never the top end. I don't mean this as simply a moral observation. In America income distribution is so skewed that to the extent that one worries about inflationary effects of rising income (and to be fair it isn't irrelevant), one would logically do so in a weighted manner - i.e. the top one percent matter a hell of a lot more than the bottom twenty. Similarly, everybody seems to agree that asset appreciation - whether real estate or financial - has an effect on spending. Again, somehow that's seen as not that much of an issue. Finally, given that what matters is not so much income but spending, lower savings rates would presumably have an inflationary effect, but again, not an issue.

So to sum up, this is yet another example of ideology and class warfare masquerading as science. Like any good propaganda, it uses a kernel of truth to promote policies which don't logically follow from the facts.

by MarekNYC on Tue May 13th, 2008 at 11:45:02 AM EST

Re: Low-cost Labour (4.00 / 4)

I personally support a high interest rate now in Europe. first, for Spain it is absolutely needed to correct the bubbles in the housing market.. to have a healthier growth, we need high interest rates.

So, it is good on the bubble front.

Another problem is how to combat inflation when finite-Earth effects appear in the market. I prefer to have high itnerest rates in this case and to use taxes on the rich to redistribute.

In Spain, the proposal is to increase wages above inflation for the middle and lower class in exchange for time-shift flexibility or temporal reduction in hours. I still do not know if temproal firings will be ont eh table int he next roudn of talks between unions and bosses...but they all are singing the same tune, reducing wages would be economic suicide, absolute rigidity in some labour sectors too.

But again none these solves the high inflation due to high oil prices (helps to overcome the increase for more people, tha'ts all)... inflation can only be solved via transport infraestructure investment... and for this you need a lot of state investment... and this is out of the scope of the ECB.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue May 13th, 2008 at 12:33:55 PM EST

Low-cost Labour | 14 comments (14 topical, 0 editorial, 0 hidden)

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