Saturday, 11 July 2015

Wages, Productivity and Unemployment

George Osborne, in his budget, has introduced a National Living Wage for over 25's. His motivation for doing so, he says, is that “Britain deserves a pay rise.” He claims that he wants to develop a high wage, low tax, low welfare economy. In reality, his announcement is part political con-trick, and part necessity dressed up as virtue.

Britain's low wage/high debt/high welfare economy is, in fact, a consequence of the economic policies pursued by Thatcher and Major in the 1980's and 1990's. Thatcher wasted much of Britain's North Sea oil revenues, to pay for an increased welfare bill, as she pushed up unemployment, as a means of defeating workers in a series of industrial disputes that had been planned out by the Tories in the Ridley Plan. A whole series of staple industries from coal mining through steel production and shipbuilding, and the car industry were closed down. The relatively stable, high paid jobs in those industries disappeared, the production often moving to Asia. On the sites where these industries existed, a whole series of retail parks emerged, selling commodities now made overseas. The less stable, unskilled, and low paid jobs provided on them, were often taken up, not by those who had lost their jobs, but by their wives, or children, reminiscent of the way, capital in the 19th century equipped itself with lower paid labour.

On the one hand, the skilled workers from the previous industries found themselves amongst the ranks of the long term unemployed, or else driven into “self-employment” (which meant eking out a living finding work wherever they could) or else flitting from one precarious job to another. On the other, the low paid, often temporary nature of the new jobs, failed to compensate for the drop in family earnings, which was now made up by resort to credit, which, especially from the late 1980's, the Tories made much easier to obtain, and was collateralised on the back of what appeared to be ever rising property prices. In other words, workers were driven into higher and higher levels of debt.

The main criticism of Blair and Brown's governments, is that they failed to reverse this model. And, whatever Osborne is saying now, the Tories have followed the same path over the last five years. Osborne's National Living Wage, is nothing of the sort. It is a repackaged Minimum Wage, that excludes the under 25's. It gives the government the opportunity to bypass the Low Pay Commission in setting the Minimum Wage level. The aim is partly, to enable the shift away from in-work benefits that the Tories need, to reduce the size of the welfare bill. In that, it is to be welcomed. Tax Credits and other in work benefits, have long been criticised as a means of subsidising the inefficient, usually (but not always) small, low paying employers.

Removing that subsidy means that those employers will have to increase wages, or they will find workers will not take up jobs with them, as unemployment begins to fall. If those employers cannot afford to pay the higher wages, they will either have to find ways of becoming more efficient, and raising productivity, or they will go bust, and their capital is then released to be used elsewhere. Society has no obligation to subsidise the profits of inefficient capitalists.

The reality of Osborne's new Minimum Wage, is that it does not cover the reduction in income that is brought about by the removal of Tax Credits. An effective Minimum Wage today would be more in the order of £12 an hour, now. Moreover, part of the problem of low pay, is also the fact of its precarious and sporadic nature. An hourly minimum only encourages employers to put workers on part-time, or zero hours contracts. What would be better, would be to have a minimum weekly wage, or better still minimum monthly wage, so that however few hours workers were employed, they would have the confidence of knowing that their income for the month would not fall below a given minimum.

The reality of Osborne's talk about Britain needing a pay rise is exposed by his announcement that Public Sector wage rises will be limited to 1% p.a. for the next five years. For five years the Tories have answered the criticism that all of the new jobs that have been created have been low paid jobs, by saying that its better to have a low paid job than no job at all. But, economic theory going back 200 years, suggests that even for a capitalist economy that is not true.

Adam Smith, for example, said that wherever wages were low, labour was expensive. By that what he meant was that if wages are low, capital will tend to use labour inefficiently. Capital will tend to use the cheap labour, rather than invest in equipment to raise productivity, and so the unit labour cost of production will be high. David Ricardo, argued that, for this very reason, wages had to reach a certain minimum, before capital would begin to develop machinery so as to raise productivity.

Ricardo recognised, that it was this efficiency, which created the potential for a larger net product (surplus value), which was more significant than a society's ability to create a larger gross product. Adam Smith, Ricardo argued, placed too much attention on the size of the gross product, and not enough on the size of the net product.

This is a direct parallel with the question of whether it is better to have a large number of workers employed on low wages (a large gross product), or fewer workers employed on high wages (a large net product). If a lot of workers are employed on low wages, this implies that their productivity is low (which is what we see in the UK economy), whereas if fewer workers are employed on high wages, this implies that their productivity is high.

Suppose 100 workers are employed who produce £10,000 of new value, but because their productivity is low, a large part of this is required to cover their wages, say £9,000. In that case, the net product, or surplus value is is £1,000. On the other hand, if 50 workers are employed who produce £8,000 of new value, but because of their higher productivity, their net product is £3,000, with their wages amounting to £5,000, although wages are higher in the second case, the surplus value is three times what it was in the first case.

In the first case, the wage per worker is £90, and in the second case £100. The gross product in the second case is 20% lower than in the first case, but the net product is three times what it was in the first case. Marx quotes, Ricardo making this point.

“In Chapter XXVI [of his Principles] Ricardo observes: 

“Adam Smith constantly magnifies the advantages which a country derives from a large gross, rather than a large net income… What would be the advantage resulting to a country from the employment of a great quantity of productive labour, if, whether it employed that quantity or a smaller, its net rent and profits together would be the same? “ Whether a nation employs five or seven million productive labourers to produce the net revenue on which five million others live, “the food and clothing of five millions would be still the net revenue. The employing of a greater number of men would enable us neither to add a man to our army and navy, nor to contribute one guinea more in taxes” (l.c., p. 215). 

This reminds us of the ancient Germans, of whom one part in turn took the field and the other cultivated the field. The smaller the number that was indispensable for cultivating the field, the greater the number who were able to war. It would not have helped them if the number of people had increased by one-third, so that instead of 1,000 they had 1,500, if 1,000 were then required to cultivate the field while previously it was 500. Their disposable forces would have consisted of only 500 men both before and after. If on the other hand the productivity of their labour had increased, so that 250 sufficed to cultivate the field, 750 of the 1,000 could have taken the field, whereas in the opposite case, if the productivity of their labour had fallen, it would be only 500 out of the 1,500.”

Marx says that, for Ricardo, the labourer is the producer of surplus value, but for someone else, i.e. the capitalist. The position of labourer, therefore, is one that as few people should be placed in as possible. If 200 workers can produce the same amount of surplus value, as 300, then its better that only 200 are employed, so that the other 100 are relieved of being in that position.

For other economists, against whom Marx was polemicising, such as Charles Ganilh, limiting the number of productive labourers employed, meant that the capitalist and landlord could employ these workers unproductively. They believed that this meant that society, via these unproductive labours, was lifted on to a higher cultural level. But, Ricardo was only concerned with driving capitalist production on. The point of keeping the number of workers employed to the minimum was that this increased the net product, and it was this net product, Ricardo recognised, which was the key to the growth of capital, not the gross product. Moreover, it was this expansion of capital, which he recognised was also key to raising workers wages and living standards.

Yet, as a bourgeois economist, even Ricardo found himself in a contradiction in this respect. It is a contradiction that social democracy finds itself in today. 

“Hence too his contradictory admonitions and consoling remarks to the labourers. They are the people most interested in the accumulation of capital, because it is on this that the demand for them depends. If this demand rises, then the price of labour rises. They must therefore themselves desire the lowering of wages, so that the surplus taken from them, once more filtered through capital, is returned to them for new labour and their wages rise. This rise in wages however is bad, because it restricts accumulation. On the one hand they must not produce children. This brings a fall in the supply of labour, and so its price rises. But this rise diminishes the rate of accumulation, and so diminishes the demand for them and brings down the price of labour. Even quicker than the supply of them falls, capital falls along with it. If they produce children, then they increase their own supply and reduce the price of labour; thus the rate of profit rises, and with it the accumulation of capital. But the labouring population must rise in the same degree as the accumulation of capital; that is to say, the labouring population must be there exactly in the numbers that the capitalist needs—which it does anyway.”


And so, today, we find social democracy always warning workers about demanding pay rises that are too high. In some of the economic analysis that has come out in relation to the effect of removing tax credits, and encouraging higher wages, the idea is put forward that this may result in a loss of jobs, precisely because if firms introduce more efficient methods of production, they will require fewer workers. But, this misses a key point, which is that at the same time that this occurs, profits rise, and this creates the potential for increased accumulation, and it is this increased accumulation, which then leads to expanding employment, at even higher levels than existed previously. That is why over the last 200 years, more or less continuous, and at times very rapid, rises in productivity have resulted not in a continual rise of mass unemployment, and sinking living standards, but to the opposite, ever higher levels of employment and higher living standards.

The criticism of capitalism is not that it does not achieve this, because clearly it does, but that it achieves it in a very crisis ridden, chaotic manner, which in the meantime causes misery for large numbers of people.

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