Duncan’s Economic Blog

Increase Wages to End the Crisis (Says the IMF!)

Posted in Uncategorized by duncanseconomicblog on December 20, 2010

Last week I again argued for “re-balanced domestic demand” as a solution to Britain’s economic woes and questioned the Coalition’s emphasis on “export-led growth”. Simply put, policy should aim to increase the share of GDP going to workers by increasing wages.

A policy based on rising wages and employment would allow for sustainable domestic consumption without recourse to consumer borrowing. This would be coupled with policies aimed to unlock the corporate surplus and increase investment (whether though public capital spending or subsidies to private business investment). I consider such a policy to be not only more likely to succeed than a policy of gambling on export recovery but also far more in keeping with Social Democratic aims.

So, I’m pleased to see some new analysis from the IMF (pdf), an institution notoriously staffed entirely by Bolsheviks and widely known for it’s pro-labour sympathies and heterodox solutions. (Or maybe not!)

As a Fistful of Euros reports:

The other was to shift the labour share of income upwards. They found that this achieved a faster, bigger, and more lasting reduction in leverage and a reduced probability of crises. In their own words:

“The main difference to Figure 14 however is observed following period 30, where under a loan restructuring leverage and default probability resume an upward trajectory for several additional decades, while under the bargaining power solution both immediately go onto a declining path. By year 50 leverage is around 20 percentage points lower under the bargaining power solution than under the loan restructuring solution. For long-run sustainability a permanent flow adjustment, giving workers the means to repay their obligations over time, is therefore much more successful than a stock adjustment, unless the latter is extremely large….But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy.”

They also argue that the inequality-finance-lending transmission mechanism might also explain the global imbalances, with the emergence of a globalised rich elite driving the demand for AAA-rated assets, the growth of the financial sector, and the emergence of persistent large capital account surpluses and trade deficits. (My emphasis).

There we have it, the IMF thinks that policies designed to raise the share of GDP going to wages would produce a “faster, bigger and more lasting reduction in leverage” and reduce the probability of further crises occurring.

This should be Labour’s agenda.

(Hat top for the link to the ever-insightful Luis in the comments).


9 Responses

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  1. Tim Worstall said, on December 20, 2010 at 1:20 pm

    “A policy based on rising wages and employment ”

    Have fun squating that circle. Increasing employment while making employing people more expensive.

    • duncanseconomicblog said, on December 20, 2010 at 1:38 pm

      Or “a policy based on increasing employment by increasing demand in the economy”, if you prefer.

    • Neil Wilson said, on December 20, 2010 at 3:19 pm

      Dead easy. Just set a minimum price for labour and the state clears the market at that price if there is insufficient other demand. The labour so cleared can then be supplied to voluntary groups, etc to do things the private sector doesn’t consider economic.

      Completely automatic and counter cyclical buffer employment system that puts a floor under wages and conditions.

      • Tim Worstall said, on December 20, 2010 at 3:44 pm

        That is exactly what is being suggested by the coalition though. The minimum price is the benefits package and to get it you’ve got to do “voluntary” work.

        I do seem to recall various people screaming about the iniquities of this plan though….

        • Neil Wilson said, on December 20, 2010 at 5:42 pm

          That’s not available to everybody who wants work though is it. So it is not what is suggested at all.

          The minimum price needs to be available to anybody who wants work or extra work up to a full working week to clear the market. And the amount paid needs to allow people to obtain sufficient resources to free them from relative poverty.

          Unless you are genuinely suggesting a return to slavery?

    • Peter Kunzmann said, on December 24, 2010 at 12:11 am

      Increasing wages and employing more people shouldn’t be a problem. Take a look at the evidence for the ‘wage curve’ e.g. http://www.dartmouth.edu/~blnchflr/papers/WageCurve.pdf

      Empirically, low unemployment and high wages go hand in hand.

  2. Mr. Mxyzptlk said, on December 20, 2010 at 6:56 pm


    Me eyes got bigger than me belly reading ‘rising wages’ thats what we need to counter the ‘Austerity’ mantra with manna from heaven……

    Back in the day 20% 30% inflation busting wage rises

    OH! pleasant exercise of hope and joy!
    For mighty were the auxiliars which then stood
    Upon our side, we who were strong in love!
    Bliss was it in that dawn to be alive,
    But to be young was very heaven!

    Oh! and by the way………..Merry Christmas

  3. […] Increase Wages to End the Crisis (Says the IMF!) « Duncan’s Economic Blog The IMF says raising wages is the route to recovery. Right on, comrades. […]

  4. […] in this context, calls from Duncan Weldon and Brendan Barber for wage-led growth make some sense. After all, if bashing the working […]

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