Austerity never ends: Economists say wages are too high

No, you can’t really make this stuff up: Orthodox economists continue to tell us that the reason for ongoing economic stagnation is that wages and unemployment benefits are too high. Yes, that’s right. You haven’t suffered enough.

Given that orthodox economics (or “neoclassical” or Chicago School, if you prefer alternate labels) exists as a propaganda tool to justify all manner of capitalist excesses and inequality, it’s not actually surprising that such snake oil continues to be peddled with a straight face. Never mind the years of stagnant wages, the decades of wages trailing productivity ever further, housing costs rising far more sharply than inflation, and the increased use of debt just to stay afloat.

(Photo by Gargolla)

If you would just work for less, all would be well. The basic reason for that belief is an admission that, in a capitalist economy, wages are a commodity. (That really means human beings are commodities, but we can only expect so much truth here.) This underlying belief is succinctly summarized by this commentary offered by the conservative Library of Economics and Liberty:

“Unemployment is just a labor surplus; since wages are the price of labor, the fundamental cause of unemployment has to be excessive wages.”

But capitalism is supposed to be a perfect system, always moving toward equilibrium, according to capitalist dogma. So there should be no unemployment. There obviously is, so what’s the culprit? You’ve likely already guessed — it’s the government’s fault. The self-proclaimed capitalist tool, Forbes magazine, claims that wages aren’t increasing because “pent-up wage cuts didn’t happen” following the 2008 global economic meltdown and so poor downtrodden corporations have no choice but to keep wages from rising to make up for those cuts that should have been imposed. If only government policies wouldn’t interfere with the magic of the market, all would be well, Forbes asserts:

“To summarize, government regulation and policy are very much linked to the enduring presence of wage stickiness and slow wage growth since the Great Recession.”

There’s ideology, and then there’s the real world

You can even win a Nobel Prize for these beliefs. The Nobel Prize for economics isn’t actually a Nobel Prize (officially, it is an add-on called the “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”), but, still, it’s widely considered one and it’s the highest honor an economist can receive. It almost invariably goes to a conservative economist who upholds orthodox ideology. One recent recipient is Thomas Sargent. Although he formally received his prize for other work, Dr. Sargent is known for writings in which he argues that unemployment benefits are too generous, and if such benefits were reduced, there would be “incentive” for people to go back to work.

Here in the real world, there are many more candidates than jobs that pay a living wage, and unemployment benefits are insufficient to live on. Depending on the state, unemployment benefits amount to 30 to 50 percent of lost wages in the United States — hardly enough to live comfortably on, and it’s cut off after 26 weeks. British benefits are capped at £73.10, and it can be less if you have savings you have yet to tap. Nobody is living large on that amount.

Continental European unemployment coverage is better, and, interestingly, some of the countries with the highest levels of benefits, such as Denmark, Norway and Finland, have among the lowest unemployment rates, although those benefits have eroded in recent years. Nonetheless, social safety nets in general lead to unemployment, Dr. Sargent believes. In an interview with Swedish Television, he said workers ought to be prepared for having low unemployment compensation in order to get the right incentives to search for jobs.

“Sargent, with Swedish economist Lars Ljungqvist, found that high, long-lasting unemployment benefits in Europe have caused many European workers who lost their jobs to stay unemployed for years and, thereby, erode their human capital. This makes them less employable in the long run. The fact that the U.S. government extended unemployment benefits in many U.S. states to 99 weeks, said Sargent in the 2010 interview … ‘fills me with dread.’ ”

Those extended terms of unemployment have since been rescinded, so he can hopefully now sleep at night. Related to supposedly overly generous social safety nets, is the idea that working people stubbornly refuse to accept wage cuts. This is not entirely true, as the effects of the North American Free Trade Agreement demonstrate. NAFTA has caused a persistent decline in wages for displaced workers and manufacturers routinely threaten to shut down and/or move their facilities in response to unionization drives since NAFTA came into force. But, remember, we’re dealing with ideology here, not practical reality. Two years ago, the San Francisco branch of the Federal Reserve issued a report that blamed ongoing economic weakness on wages not falling enough. The paper claimed:

“One explanation for this pattern is the hesitancy of employers to reduce wages and the reluctance of workers to accept wage cuts, even during recessions, a behavior known as downward nominal wage rigidity.”

Cutting wages won’t be a panacea

Falling wages might provide a short-term boost to corporate profits, but the reduced purchasing power of working people would soon cause people to buy less. That is disastrous in advanced capitalist countries, where consumer spending generally accounts for anywhere from 60 to 70 percent of gross domestic product.

Lars Syll, a heterodox economist and self-described critic of market fundamentalism writing on the Real-World Economics Review Blog, put this plainly:

“The aggregate effects of wage cuts would, as shown by Keynes, be catastrophical. They would start a cumulative spiral of lower prices that would make the real debts of individuals and firms increase since the nominal debts wouldn’t be affected by the general price and wage decrease. In an economy that more and more has come to rest on increased debt and borrowing this would be the entrance-gate to a debt deflation crises with decreasing investments and higher unemployment. In short, it would make depression knock on the door.”

A food line in Toronto in 1931; falling wages didn’t work out during the Great Depression.

Falling wages were a reality during the Great Depression, but that didn’t help matters. By 1933 in the United States, manufacturing wages fell 34 percent and unemployment rose to about 25 percent. The Canadian economy contracted by more than 40 percent and unemployment reached 30 percent in 1933. Collapses in wages did not bring better times; only the massive government spending to wage World War II put an end to the Depression.

Moreover, already existing low wages come at a high cost. A 2015 study by the researchers at the University of California Berkeley Center for Labor Research and Education found that public benefits given to people who have jobs but can’t live on their meager wages cost the public more than $150 billion annually in the United States — more than half of total public-assistance spending by federal and state governments. Wal-Mart alone costs taxpayers an estimated $6 billion per year subsidizing the retailer’s low pay and paltry benefits at the same time it pays out similar amounts in dividends, half of which go to the Walton family.

Working harder for less

As all of you doing the jobs of two or three people at your place of employment have undoubtedly noticed, more work is not being rewarded with more pay. The average U.S. household earns about $18,000 less than it would had wages kept pace with productivity gains, and the average Canadian household is short at least $10,000 per year because of pay lagging productivity gains. Workers across Europe, including in Britain, Germany and Spain, have also seen pay lag productivity.

The upward flow of money not only causes more inequality but further concentrates power in the hands of plutocrats. As David Ruccio summarized in a separate Real-World Economics Review Blog post:

“If you put the two trends together—increased individual income inequality and increased corporate savings—what we’re witnessing then is increasing private control over the social surplus. Wealthy individuals and large corporations are able to capture and decide on their own what to do with the surplus, with all the social ramifications associated with their decisions to invest where and when they want—or not to invest, and thus to accumulate cash, repay debt, and repurchase their own equity shares.

And proposals to decrease tax rates for wealthy individuals and corporations will only increase that private control.”

And that is the context to keep in mind when one reads fairy tales such as this from the far right Mises Institute:

“Ending poverty and giving people additional income are praiseworthy goals, but there are no free lunches in this world. And trying to force prosperity through a minimum wage simply creates a whole host of negative and unintended consequences especially for those who are the most vulnerable.”

The value of the minimum wage in the U.S. is about two-thirds of what it was when it reached its inflation-adjusted peak in 1968. The Canadian minimum wage is worth about a dollar less than its peak in 1976. Australia’s minimum wage is well below what it was worth in 1985.

Even in these bare bottom-line terms, a higher minimum wage is hardly a “free lunch.” It is still less so when we realize that jobs don’t come from the great benevolence of bosses nor are profits conjured out of thin air by the genius of capitalists. Employers generate profits by paying employees much less than the value of what they produce. Increased exploitation through work speedups, increased workloads and benefits reductions mean that capitalists are taking a bigger share of the value of what you produce.

And here we come to the real meaning of “freedom” that capitalists and their publicists so love to extol. “Freedom” for industrialists and financiers is freedom to rule over, control and exploit others; “justice” is the unfettered ability to enjoy this freedom, a justice reflected in legal structures. Working people are “free” to compete in a race to the bottom set up by capitalists. The world’s central banks have printed and spent $8 trillion (€7.4 trillion) to buy bonds, mostly those issued by their own governments. Imagine what that spending could have done if that money had been given to people or used for productive social spending instead of a free lunch for financial speculators.

14 comments on “Austerity never ends: Economists say wages are too high

  1. Terrific report – the ultimate low wage solution used to be slavery, but then you had to feed and clothe slaves, which cut into profits. Now, we let the wage slaves get just enough money to live like – slaves – with no “free” medical, housing and food.

    • Greetings, Fred. Slavery was a primary component of the accumulations of capital that were necessary for the takeoff of capitalism, and we’ve yet to come to terms with it, so we’re less distant from it than we ordinarily might think.

  2. […] Source: Austerity never ends: Economists say wages are too high […]

  3. aciddc says:

    It gives the neoclassical economists too much credit to call them “orthodox economists.” They are a weird, awful cancer on orthodox economics, which is pretty Keynesian and doesn’t offer any support for austerity.

    • Greetings, acciddc. Unfortunately, the Chicago School economists gained the upper hand on the Keynesians in the 1970s, and the economic academy continues to be dominated by them. Times change and perhaps Keynesians will become ascendant as they once were, but there is really isn’t a Keynesian solution to our troubles, however much better those prescriptions would be than our current neoliberal nightmare.

  4. dmorista says:

    The biggest example of a rapid transformation from a society with some decent level of wages and social welfare benefits to an Austrian School nightmare was, of course, Chile after the Pinochet – CIA coup. Milton Friedman (another Nobel Prize winner) was the leading ideologue and the University of Chicago supplied the PhD economists to run the transformation. Of course, the torture chambers were full all opponents and dissidents were either killed or went into exile. And the loathsome regime there was backed up by the dominant capitalist state of the era, the U.S.

    Now, China is the dominant capitalist economy, and the real reason for the current depression conditions is that the 30 project of building the fixed capital plant and 21st Century infrastructure there came to an end in the early 2000s; the massive swindles that collapsed in the U.S. and Europe in 2007 – 2008 merely triggered the New Great Depression. It took the Chinese leadership a few years to figure out they could not continue to prosper with the export led development model when their main markets in the U.S. and Europe were in disarray, with declining buying power. The final response, however, was the One-Belt One-Road program that might serve to reinstate a new era of capitalist accumulation if they can pull it off.

    The U.S. could prosper in this milieu, if it pursued a massive rebuilding of its own physical infrastructure and social institutions, and began a significant process of armament reduction. A society cannot prosper in the modern high technology and high population world if its populace is poor, unhealthy, insecure, and poorly educated. If the U.S. does not want to become a Third World resource extraction colony of East Asia it must pursue policies that include the program outlined in your fine article.

    • You gave us much to think about here. There may be more Pinochet-style dictatorships in the future if industrialists and financiers see no other way to keep their party going and we fail to create effective grassroots movements.

  5. Jonathan says:

    Your right about the obscene inequality. But the problem is, even the average American way of life still massively overconsumes resources etc…an inevitable bi-product of various systems and structures. We need large scale degrowth and de-development. It has to be an egalitarian process, in defiance of capitalism etc. But it will not mean higher incomes…quite the contrary. Our predicament is deep and multi-dimentional.

    • Until we face the hard reality that you have just laid out here, Jonathan, we aren’t serious about the long-term viability of the environment. A steady-state economy (one that can shrink if human population declines) is impossible under capitalism, nor it is possible to have infinite growth on a finite planet.

      • The electric company sells me on saving electric, and when I do, the rate goes up to where I pay as much or more than it was before I conserved. Could we be fooled by corporate bean counters who want us to conserve so they can raise the per unit price, reducing production costs, and really bumping up profits, while avoiding the cost of capital for expansion? Charlemagne preached conservation of firewood, but he had 64 castles he heated, while the serfs froze.

        • The power company where I live likes to have young people work tables promising that you can save money and get your power from a renewable source. A friend of mine signed up, only to find that her rates rose and the renewable energy company was a subsidiary of the local monopoly. Surprise!

          And to you last point, I’d wager that some of those serfs who froze provided the firewood for the castles.

  6. troutsky says:

    While the gap between productivity and wages is real another troubling phenomenon is the recent flattening of productivity gains themselves. Between 2011 and 2015 just 0.4 annual growth in output per hour worked, far below average (since 50’s) of 2.3. Mainstream economists are puzzled but it might be that the party is really over. On so many levels, capitalism doesn’t work.

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