From the TUC

A glimmer of sanity? The new OECD Employment Outlook on wages, hardship and deficient demand

03 Sep 2014, by in Labour market

Ever since the crisis the stern mantra of policymakers has been that countries must improve ‘competitiveness’.  The onus was therefore on the victims of the crisis to take even more punishment in the form of wage cuts. On a certain view, with investment falling and given the imposition of cuts in government demand, a reduction in wages (and hence household demand) would seem like the last thing countries would need. 

In the wake of the consequent and entirely predictable concerns about deflation, the latest Employment Outlook betrays some welcome backtracking on the part of the OECD. (Though the word deflation occurs only once in their report.)

In Chapter Two, ‘sharing the pain equally? Wage adjustments during the crisis and recovery’, the OECD recognise both fairness and macroeconomic concerns:

  • “wages also provide the dominant source of income for households and stagnant or falling real wages tend to be associated with economic hardship, especially for the most disadvantaged”.
  • “Reductions in earnings also reduce consumer spending and dampen aggregate demand” [my emphasis].

In the ‘key findings’ section, the OECD catalogue the extent of these wage adjustments, and the resultant ‘severe hardship for low-paid workers’. ‘The United Kingdom’ frequently recurs in this litany of hardship.  Their figures below shows UK earnings growth third from bottom of all OECD countries.

Average annual real wage growth, per cent, 2007 to 2013


Source: OECD statistical appendix table M

 In what a colleague described as ‘classic two handed  economist stuff’, the OECD also defends its past position by maintaining that

Thus, while cuts in earnings have contributed to hardship and social distress in a number of countries, they have also played an important role in restoring external competitiveness, rebalancing current accounts and promoting external demand (even if potentially at the cost of curbing domestic demand).

 But the balance has clearly changed, and they now say that ‘further adjustments based on wage cuts may be difficult to achieve. Instead policy attention needs to focus elsewhere’.

Then the tantalizing statement:  “Macroeconomic policies have an important role to play”. But this is left up in the air, and instead various tired structural reforms enhancing the operation of product and labour markets are detailed. Whether these actions will resolve the shortfall in domestic demand that the OECD implicitly acknowledge is more doubtful. But there is here a glimmer of sanity.

2 Responses to A glimmer of sanity? The new OECD Employment Outlook on wages, hardship and deficient demand

  1. postkey
    Sep 4th 2014, 8:12 am

    ” . . . a reduction in wages (and hence household demand) would seem like the last thing countries would need. ”

    This ‘Marxist’? thinks that New Deal-type reform programs “are bound to be ignored by governments that are elected and controlled by powerful moneyed interests.”
    Also, increases in aggregate demand or wages are not needed by ‘capitalists’.
    ” The first problem is that it assumes (implicitly) that US producers depend on domestic workers not only for employment but also for sale of their products-as if it were a closed economy. In reality, however, US producers are increasingly becoming less and less dependent on domestic labor for either employment or sales as they steadily expand their production and sales markets abroad: “On both the supply [employment] side and the demand side, the US worker/consumer is perceived as incrementally inessential.” [15]
    The second problem with the argument is that wages and benefits are micro- or enterprise-level categories that are decided on by individual employers or corporate managers, not by some macro or national level planners of aggregate demand (as in a centrally-planned economy). Individual producers (large or small) view wages and benefits first, and foremost, as a major cost of production that needs to be minimized as much as possible; and only secondarily, if ever, as part of the national aggregate demand that may (in roundabout ways) contribute to the sale of their products.”

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