The Relationship between Wage Inequality and the Economic Crisis

There is a debate in Europe on how to solve the debt crisis, particularly the relationship between large core countries (France and Germany) and Ireland. For the sake of parsimony we can argue that there are two counter views on how the core should relate to the periphery. The first view can be classified as a centre-right conservative monetarism. This dominates the political economic thinking in the ECB, IMF, OECD, Business Europe and the EU Commission. It also dominates most of the Irish public sphere. It is premised on the assumption that Ireland;

  • lost competitiveness (measured by high growth in unit labour costs) and must solve this by wage cuts (including cuts in the minimum wage, REAs, EROs) and a decentralisation of wage setting institutions. It must follow the German route of low nominal pay rates.
  • increased public spending that now requires adjustment through cuts in current public expenditure (i.e. social protection, public sector wages, public services)
  • socialised private bank debt but this must be paid in full by Irish taxpayers as they benefited from years of high growth provided by the availability of cheap capital for over ten years.

There is a recognition that given Ireland cannot adjust its exchange rate, devalue its currency or borrow to stimulate aggregate demand. Thus, it must engage in structural adjustment through a domestic devaluation. This equates to a further de-regulation of labour markets, wage cuts and a reduction in public spending whilst simultaneously borrowing at high interest rates to pay back the debt incurred by insolvent banks. What is central to this political perspective is that it does not hold the ECB, EU commission or any European institution responsible for the crisis. It does not accept structural imbalances across the Eurozone. It is, despite all the rhetoric, premised on national inter-governmentalism rather than European coordinated economic governance.

The second view reflects a broad centre-left ‘social Europe’ perspective. This is reflected in a variety of European institutes including the ETUC, ETUI, ILO and political representatives in the European parliament. It is premised on the assumption that Ireland;

  • does not have a competitiveness problem. Productivity increases far outstripped unit labour costs from 2000-2008. When measured by hourly labour costs Ireland remains at the EU average. Furthermore, Ireland already has an extremely flexible labour market and requires more not less employment protection to reduce job losses. To solve the wage problem requires an increase in German pay rates (which have increased, in real terms at around 1 percent per annum since 2000).
  • increased public spending in a period of high growth but total government expenditure as a percentage of GNP is still low by comparative EU standards. Ireland institutionalised a low tax regime that was unsustainable. Thus, its fiscal problems are related to low taxes not high public spending. Cutting spending will further deflate the economy. It requires a European investment program to stimulate aggregate demand.
  • socialised bank debt and this should now be restructured. Sovereign and bank debt need to be distinguished. The banking problem is a shared problem across Europe and reflects poor domestic and European wide financial regulation. 1.8 million Irish taxpayers simply cannot afford to pay the creditors of private European banks who lent recklessly to Irish banks – accumulating over €150bn in debt.

The assumption is that Ireland cannot adjust its exchange rate, devalue its currency or engage in years of austerity in the absence of a coordinated public investment plan from Europe. The focus has to be on growth and jobs. This is not a case of welfare transfers or the begging bowel but solidarity between core and periphery. Elite policy makers in both countries and across the EU are responsible for the Eurozone debt crisis.  Irelands problem is a European problem and reflects a structural imbalance between core and periphery.

Needless to say, I agree with the latter perspective and primarily for the following reason. Germany has engaged in years of wage depression. According to a recent survey by the ILO on global wage trends – wage growth in Germany, in real terms, has been practically zero since 2000. There has been a significant decentralisation of their collective bargaining institutions. This has been a strategy by both business actors and given their weakened position, accepted by German trade unions in return for working time flexibilisation. However, this wage depression forced the ECB to set interest rates at extremely low rates from 2001. This was aimed at generating consumption and investment in the German economy. But, it was much too low for peripheral economies such as Ireland. These low rates triggered an irrational debt boom in peripheral countries financed by core European banks with excessive capital reserves.

Furthermore, all of the focus on competitiveness, reflected in the recent ‘competitiveness pact’,  agreed by the EU commission, is based on the assumption that the low wage growth as occurred in Germany should be followed by all countries.  That is, all European countries should become surplus exporters. But, to whom? Furthermore, according to the ILO, one of the most worrying trends in western economies since 2000 has been the decreasing return to wage earners. Global wages increased on average (monthly, in real terms) by 22 percent from 2000-2009. In advanced economies (American and Europe) it only increased by 5 percent. Labour productivity on the other hand increased by 11 percent. In other words wages grew half as fast as productivity.

In this regard, the biggest beneficaries to the growth in productivity, profit and capital surplus in advanced economies have been employers. Yet, it is wage earners who are being asked to carry the burden for the reckless behaviour of those in finance-capital markets. Since 2000, there has been a significant rise in economic inequality. Those who benefitted from the cheap money boom are those in the top 10 percent of the income distribution. Yet, they are being asked to contribute nothing toward solving their own mess. You really couldn’t make it up.

One response to “The Relationship between Wage Inequality and the Economic Crisis

  1. Pingback: Ireland: The Relationship between Wage Inequality and the Economic Crisis | Euro Economy

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