CREATING JOBS BY
INCREASING WAGES ?
Econospheres, Brussels
November 2015
[email protected]
RECALLING THE BACKGROUND
• THE EURO AREA’S EXPERIMENT WITH INTERNAL DEVALUATION
• « IF WE CAN’T DEVALUE THE CURRENCY ANYMORE, WE HAVE TO
DEVALUE WAGES »
THE ROLE OF EUROPEAN ECONOMIC
GOVERNANCE
• BASICALLY A TRANSFER OF NATIONAL COMPETENCE ON WAGES (AND
LABOUR MARKET POLICY) TO THE EUROPEAN LEVEL
• ITS AIM IS TO ALLOW THE EUROPEAN LEVEL TO IMPOSE REFORMS ON
MEMBER STATES THAT WOULD OTHERWISE BE VERY DIFFICULT….
• …. BUT REFORMS THAT ARE NECESSARY TO SAVE THE SINGLE CURRENCY:
• WAGES THAT ARE FLEXIBLE DOWNWARDS
• MANY DIFFERENT WAYS
•
•
•
•
Troika bail outs
Commission issuing each year country specific recommendations
Macro conditionalities in European structural funds
Since 2011, a new policy process (« Excessive Macro Imbalances’) giving the
Commission the possibility to intervene in national economic policy making
(including wages)
THEIR LATEST INVENTION: NATIONAL
COMPETITIVENESS BOARDS
• Commission wants European Council to agree to a Council
Recommendation that requests all euro area member states to
set up a National Competitiveness Board
• (Non euro members can join this if they want)
• Independent experts, not to be influenced by ‘stakeholders’ (social
partners should be consulted as a relevant stakeholder)
WHAT EXACTLY WILL THESE COMPETITIVENESS
BOARDS BE DOING?
• Monitor competitiveness developments relative to global
competitors. This includes wage dynamics (short term).
• Inform the wage setting process by providing relevant information.
• Monitor policies and formulate policy advise in the field of
competitiveness.
• Provide advice on the implementation of the Country Specific
Recommendations
THE COMMISSION’S PROPOSAL
• There is language on taking national wage formation systems into
account and not affecting the right to negotiate collectively and to
take collective action (but this is only written in the recitals)
• However, ‘mission creep’ is already in the pipeline:
• Boards need to be statutory: Points to a legalistic approach to wage
competitivenesstional law.
• Future progress report to see ”whether the adoption of binding provisions
appears necessary” is already being announced (after 6 months)
• Accompanying Commission Communication: “if necessary in stage 2 (…)
common principles by means of a binding instrument will be presented”.
Stage 2 = Mid 2017
THE COMMISSION’S PROPOSAL
• Basically, stage is being set for a general (euro area wide)
trespassing into the domain of wage bargaining…
• … and this under the banner of ‘competitiveness’
• Inspired by the Belgian law on competitiveness and wages
• Experience of Belgian trade unions:
• Works systematically to the advantage of employers,
• Allows government to intervene in wages, even when this goes
against collective agreements already concluded
• Organizes the ‘race to the bottom’: The lower wage dynamics in
Germany/France, the more the legal wage margins in Belgium
get compressed
THE ETUC RESOLUTION EXECUTIVE
COMMITTEE OCTOBER 2015
• Basic position:
• The ETUC rejects these National Competitiveness Boards.
• « We do not accept any institution (or the basis of such institution)
that interfere with the autonomy of the social partners »
COMPETITIVE WAGE DUMPING: DOES IT
MAKE ANY SENSE ?
• NOT ALL OF US CAN BECOME MORE COMPETITIVE AGAINST THE REST
OF US
• IF ALL OR A SERIES OF EURO AREA COUNTRIES SQUEEZE WAGES, NO
ONE IMPROVES ITS COMPETITIVE POSITION….
• …. BUT IF ALL OF US SQUEEZE WAGES WE UNDERMINE OUR OWN
DOMESTIC DEMAND DYNAMICS…
• ….AS WELL AS EACH OTHERS’ EXPORT MARKETS
RECENT IMF STUDY SEEMS TO CONFIRM THIS
• IMF STAFF DISCUSSION NOTE: WAGE MODERATION IN CRISIS 15/22
• SIMULATES SCENARIO WHEREBY 5 CRISIS COUNTRIES
(GREECE,ITALY,SPAIN,IRELAND,PORTUGAL) JOINTLY PUSH NOMINAL
WAGES DOWN BY 2% OVER TWO YEARS
• IMF ALSO ASSUMES NOMINAL INTEREST RATES ARE ALREADY AT THE
ZERO BOUND, SO ECB CAN NOT CUT INTEREST RATES AS IT IS
DIFFICULT TO HAVE INTEREST RATES BELOW ZERO
THE RESULTS FOR THE ENTIRE EURO AREA
ANOTHER SIMULATION: ALL, NOT JUST FIVE
COUNTRIES, SQUEEZE WAGES BY 2%
THE MECHANISM BEHIND
• 2% WAGE MODERATION IN ALL EURO AREA COUNTRIES (HENCE NO
CHANGES IN INTRA EURO AREA COMPETITIVE POSITIONS)
• PULLS INFLATION DOWN BY 2%
• NOMINAL INTEREST RATES ARE STUCK AT THE ZERO LEVEL
• SO REAL INTEREST RATES INCREASE
• AND STIFLE CONSUMPTION AND INVESTMENT EXPENDITURE
• END RESULT : WAGE MODERATION KILLS JOBS
THE INVERSE MECHANISM
• WHAT IF ALL EURO AREA MEMBER STATES RAISE WAGES BY 2% ?
• NO ONE LOSES COMPETITIVENESS TO ANOTHER EURO AREA
COUNTRY
• INFLATION GOES UP AND GOES BACK FROM ZERO NOW TO 2%
• WHICH IS WHAT THE ECB LIKES TO SEE AS IT DEFINES A PRICE
STABIITY TARGET OF 2%
• SO THERE IS NO REASON FOR THE ECB TO RAISE INTEREST RATES
• HIGHER INFLATION WITH NOMINAL INTEREST RATES STAYING PUT
IMPLY LOWER REAL INTEREST RATES
• CONSUMPTION AND INVESTMENT TAKE OFF: WE HAVE A RECOVERY!
PICTURE YOURSELF THIS GRAPH INVERTED
OTHER RESEARCH CONFIRMS THIS
• OZLEM ONARAM/THOMAS OBST: WAGE LED GROWTH IN EU 15
MEMBER STATES – FEPS 2015 PAPER
• STARTS FROM OBSERVATION THAT WAGE SHARES HAVE BEEN
FALLING ALL OVER EUROPE
• SIMULATES WHAT WOULD HAPPEN IF WAGE SHARES ARE
SIMULTANEOUSLY INCREASED BACK TO THEIR PEAK LEVELS IN THE EU
15
A SIMULTANEOUS WAGE LED RECOVERY FOR
EU 15
MECHANISM BEHIND THESE RESULTS
• TENDENCY TO CONSUME OUT OF WAGE INCOME IS HIGHER THAN
TENDENCY OF CAPITAL OWNERS TO CONSUME OUT OF PROFITS
• REDISTRIBUTION FROM PROFITS TO WAGES BOOSTS CONSUMPTION
DEMAND
• IMPROVED DEMAND PERSPECTIVES IMPLY HIGHER INVESTMENT ,
EVEN IF PROFIT SHARE IS LOWER
• ON TOP OF THAT: INCREASE IN DOMESTIC CONSUMPTION IN ONE
MEMBER STATE PROVIDES EXPORT MARKET FOR OTHERS AND VICE
VERSA: INVESTMENT EVERYWHERE GETS AN EXTRA UPWARD PUSH
CONCLUSION
• OUR DEMAND FOR AN INCREASE IN PAY FOR ALL WORKERS ACROSS
EUROPE MAKES MUCH SENSE IN THIS CONTEXT OF LOW INFLATION
• PROBLEM HOWEVER: HOW TO CONVINCE POLICY MAKERS ?