Work on a pay cut better than no work

Press, 10 December 1982, Page 16

Work on a pay cut better than no work

From “The Economist," London

If the 30 million people unemployed in the 24 largest industrial countries of the capitalist world were to march 10 abreast down Wall Street, they would still be filing past the banks and the broking houses after 24 days and nights. Told that’the quickest way to cut unemployment is to cut wages, their most printable reply would probably be that capitalism is now proposing to add a fraud to its failure.

They might not have noticed that Sweden's new Social Democrat Government is trying to arrange a more-jobs-for-lower-real-wages swap; and that Europe's most thoughtful trade unionists, the Dutch, are thinking the same way; and that a big country with a low jobless rate, Japan, has a system of lifetime employment that is made possible only by pay packets which can in very bad years drop by 30 per cent below the level of a year before. 'Sweden and the Netherlands may be the first European countries to abandon the myths of the 1920 s and 19305. Japan, to its great good fortune, never suffered from them. Most other industrial countries believe that Keynes proved in the 1930 s that wage cuts in a recession were positively damaging, which is precisely what

he did not do. Many Western Governments have been devaluing their exchange rates and then trying to hold down wages with an incomes policy, and also offering employers subsidies to take on labour. The purpose is identical to a wage cut: to bring the real cost of employing people down to a level at which the labour market will clear. By using stealth and subsidy, however, governments have kept the issue of. real wages out of the unemployment debate. Instead they are sliding towards two supposed cures — trade protectionism and monetary reflation — which history (actual, not myth) has shown would add new millions to the ranks of the unemployed. The three largest capitalist economies have now brought inflation; down to levels reminiscent of the full-employment 19605. The United States has inflation down to 5.1 per cent, Japan down to 3.2 per cent. West Germany down to 4.9 per cent; Britain, with 6.8 per cent,, is moving their way. These four may be close to the point where modest increases in their money supplies would translate into real increases in demand, but there are two reasons why they unfortunately may not reach it.

First, "wait for a spontaneous reflation" is a counsel of patience, which is why it may be ignored. Americas Federal Reserve seems to have started force-feeding recovery with large increases in the money supply. If it carries on doing so. all American price setters — businessmen, trade unionists, moneymen — will start translating the Federal Reserve's extra cash into higher prices, higher wages and higher interest rates. The unemployed will not get even crumbs. Second, even at low levels of inflation, companies may not respond to the higher demand by taking on many more workers, because labour is more substitutable than before. Most businesses have literally hundreds of ways of making their widgets or providing their services. By varying the amount of raw’materials, energy, machinery, brainpower, and elbow grease they use, they come up with things they can sell for the biggest profit. They will steer away from expensive labour if cheaper machinery ■ can do the same job. Since the payroll accounts for about half of industry’s total costs, it is bound to be slimmed if wages are too high. “Too high" means the level of wages relative to profits, compared with some point in the past when unemployment

was. by today's standards, enviably low. Like the 19605. By our calculations, wages in the five largest capitalist economies are now between 8 per cent and 24 per cent higher than they ought to be if profits are to regain the share of national income they held then. Part of the profits squeeze is cyclical, the result of recession. But profit shares have been falling secularly as well, and (next year's?) economic recovery will do nothing to change the trend. Most industrial countries are therefore caught in the worst kind of squeeze because (a) company boards are not keen to invest if the rewards are poor and (b) even if they expand or buy new machinery, they will do so in ways that save labour. Especially as governments have carried on making capital cheap by all manner of tax allowances and subsidies for investment, the recent fall in interest rates has also started to cut the cost of capital in real terms. The rise in wages would have mattered less if the other costs of employing people — pensions, holidays, social security. and so on — had not been rising even faster. These ‘'overheads" made up 21 per cent of total American labour costs in 1970, and 27 per cent in 1980; for a European country like Belgium, their share rose from

37 per cent to 44 per cent. Such social benefits, once improved, are almost impossible to reduce. The main exception is the growing social security burden, which could be financed in ways that do not add to labour costs. Even if countries made this switch in social security finance — and no country is doing so yet — governments, and unions will some day have to face up to the need for lower wages. Reducing nominal wages has two merits — speed and honesty — which themselves explain why only companies on the verge of bankrup ey (like Pan Am last year) can persuade their workers to accept them. Of the two national schemes for flexible real wages. Sweden's depends on planning for prices to rise by more than wages. Mr Olof Palme has made it clear that the kroner's 16 per cent devaluation will help Sweden regain competitiveness only if wages do not rise to compensate for higher import prices. But profits will increase, and the Government wants them to finance expansion. It has spoilt the clarity of its explanation by proposing a complicated scheme for transferring 20 per cent of next year's profits to the central bank, withdrawable for investments approved, by the trade

unions. Since trade-union officials are seldom wizards with a balance sheet, the whole scheme may collapse in a few vears when Swedish workers discover that their sacrificed wages were poured into projects with low returns and few lasting jobs. The better approach is Japanese. Virtually every employee in Japans private sector gets paid 14 limes a year: a monthly pay packet (modest, with annual increases), phis a bonus every six months tied to the company's profits. When profits boom, everybody benefits. In a good year, bonuses could be worth as much as six pav packets. In a bad year, they can be worth nothing so a transition from a very good year to a very bad one might see a drop in wages by 30 per cent. Bonus schemes are not a miracle cure for shrinking profits. They would do nothing to boost a firm's retentions if. under their trendy new title, they carried on giving wage earners the same old slice of the cake. For several years, retained profits would have to rise a lot and bonuses very little, but companies need to start talking about ways of tying pay packets to each business's prosperity, especially at this time of recession when everybody knows that losing his or her job is the biggest pay cut of all.