Transcript Presentation - The Cambridge Trust for New Thinking in Economics

The role of wage policy in Europe:
Implications of the
wage-led demand regime
Ozlem Onaran, Middlesex University
and
Engelbert Stockhammer, Kingston University
Motivation
• Wage policy
– Full employment
– Fair and stable income distribution
– Balanced international positions
• Neoclassical/’mainstream’/NCM
– Wage flexibility – in theory, wage moderation – in practice
– wages merely as a cost item, and ignores the role of wages as a source
of demand
• Post-Keynesian/New Economics
– Eurozone: wage-led demand
• wage moderation→growth↓, unemployment↑
– Productivity-oriented wage policy
– coordination of (national) wage bargaining systems
– Take into account inflation target and external position
– In the € area: higher wages in Germany!
Outline
• What is the effect of a wage cut on demand?
• Theoretical background
– Wage-led vs. profit-led demand regime
– Neo-Kaleckian/Post-Keynesian model
• Empirical literature
• wage policy in Europe
– Imbalances: export-led growth and credit-led
growth
– Wage coordination
3
Wage share and GDP growth, 1961-2010
70
7
68
66
Wage
share
5
64
growth
3
62
60
1
58
-1
56
54
-3
52
50
-5
1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Adjusted Wage share
4
Growth
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Wage share and unemployment, 1961-2010
70
12
68
unemployment
66
60
56
50
Adjusted Wage share
Unemployment
5
10
64
8
62
6
58
4
Wage share
54
2
52
0
Model
• What is the effect of a wage cut on demand?
• Neo-Kaleckian/Post-Keynesian model
• pro-capital income distribution: + & - effects on aggregate
demand
- effect on C: the relative size of the consumption differential
out of wage vs. profit income
+ effect on I: the sensitivity of investment to profits
+ effect on NX: 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)
Empirical Literature
• Systems approach (VAR): Deals with simultaneity, weak in
identifying effects on C and I (few if any control variables)
– small effects (Stockhammer & Onaran 04, US, UK, F; Onaran &
Stockhammer 05, Korea, Turkey) or profit-led demand (Barbosa-Filho &
Taylor 06, US; Flaschel & Proano 07)
• Single equation approach: Good in identifying effects, bad in
dealing with endogeneity
– estimate separate C, I, NX functions.
• Bowles & Boyer 95; Naastepad & Storm 06; Hein and Vogel 08: OECD6/8
– estimate separate C, I, X, M, P functions
• Onaran, Stockhammer, Grafl 11, Stockhammer, Onaran, Ederer 09;
Ederer & Sto. 07, Sto. & Ederer 08, Sto./Hein/Grafl 10: US, Eurozone,
France, Austria, Germany respectively
• US: effects of financialization
• Most find wage-led private domestic demand regimes
– Onaran et al11, Stockhammer et 7al09, Storm&Naastepad06, Hein&Vogel08,
Sto.&Ste09
Empirical findings: Euro area
• Stockhammer, Onaran, Ederer, CJE 2009
• low degree of openness (X/Y: 12%) -> wage-led regime
• Estimate the effects of functional income distribution
consumption, investment and net exports
• A 1%-pt decrease in the wage share (WS) leads to
• Consumption ↓ by 0.4%-pt (as a ratio to GDP)
• Investment ↑ by 0.1%-pt (as a ratio to GDP)
• Domestic private demand ↓ by 0.3%
• Net exports ↑ by 0.1%-pt (0.06-0.13%-pt )
• Aggregate demand (private) ↓ by 0.2%
→EU as a whole has a wage-led demand regime,
although some individual member states may have a
profit-led regime
Wage policy in the Euro area
• Race to the bottom: declining wage shares (22 wage pacts
aimed at improving competitiveness)
• Fall in wage share has led to a stagnation of domestic demand
• 2 growth models in response: credit-led and export-led
growth
• → imbalances within the Euro area
Credit-led
Export-led
Center
(US, UK)
Germany, Austria
(Japan)
Periphery
Greece, Ireland,
Portugal, Spain
(China)
Germany: GDP, priv. cons., adj WS (1994 = 1)
1.25
1.00
1.20
1.15
0.98
0.97
0.96
1.10
1.05
0.95
0.94
0.93
1.00
0.92
adj. wage share
GDP, consumption
0.99
Priv cons.Ger
GDP.Germany
Adj WS.Ger
ULC (2000 = 100; AMECO)
140
135
130
125
Germany
Netherlands
120
Austria
Ireland
115
Greece
110
Spain
Italy
105
Portugal
100
95
90
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Current account (% GDP)
Current account (% GDP), avg. 2000-07
Germany
3.8
Greece
-8.5
Austria
1.7
Portugal
-8.9
Netherlands
5.6
Spain
-5.8
Italy
-1.3
Ireland
-2.1
Increases in household debt
Increase in HH debt (in % GDP) 2000/04 and 2000/08
2000/08
Germany
2000/08
-11.34
Ireland
61.72
Netherlands
29.1
Greece
18.26
Austria
7.21
Spain
32.53
Italy
18.09
Portugal
21.31
2000/05
How can the €-zone re-balance?
• How much rebalancing is necessary?
– ULC 25-30%
– German wage growth has to be 2.5%-pts. above
mediterranean wage growth for 10 years!
• 1 deflation
– Big contraction in PIIGS to bring down GDP and ULC
and thus, ultimately, CA-deficit
– But: that means rising debt ratios!
• 2 inflation
– Expansion and/or wage inflation in Germany
– Higher inflation target in € area!
Wage coordination
• European system of coordinated wage bargaining
• As part of a new policy economic policy mix
• Aim:
– ensure that living standards of the working class 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
– pT would have to be set such as to avoid deflation in all
countries, while allowing rebalancing
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 (mediterranean wages +3%-pts.
for 10 yrs)