Recovery based on debt accumulation instead of pay increases: What is the problem?

The Great Recession in Britain is not over for the majority of the working people writes Özlem Onaran. Real Wages and salaries have increased much less than the rise in prices (measured by Retail Price Index) in the last five years. As of 2014, real wages and salaries are still significantly lower than in 2008 measured in real terms after controlling for price increases. Overall earnings seem to have finally caught up with inflation in 2014, but this is not true for earnings excluding bonuses, which are still lagging behind inflation. Substantial numbers of self-employed people, who have been the locomotive of the so-called jobs recovery miracle, are earning less than what a full time worker on the minimum wage would earn. In the meantime, unemployed people are being pushed by the Job Centres to accept zero-hours contracts in order not to lose their benefits. But would it be enough if wages were simply increasing at the level of inflation? No! If there is a rise in output produced by each worker (i.e., productivity per worker), wages should increase at the rate of increase in prices and productivity. If not, the share of wages in the national income will fall, and the share of profits will rise. This is a redistribution of income away from labour and to capital.

This is what has happened in Britain since the late 1970s. In 2008, the share of wages in GDP in Britain was already 8.8 percentage-points lower than what it was in 1975. Britain is not alone in this trend;, this has taken place in both the advanced capitalist countries and the developing countries. But the fall in the UK or the US appears to be more moderate than in the Eurozone, which is about 11 percentage points in the last three decades. However, this is only because the very high top managerial wages that are very specific to these two countries, are reported in the national accounting statistics as part of labour income. After the US, the share of the top 1% in national income is the highest in Britain with 13% as of 2011; this is comparable to the peak levels before World War I and the Great Depression.

From the IMF to the World Economic Forum, the world’s ruling classes are claiming to be worried about rising inequality. Most of the research effort at the mainstream institutions has concentrated on showing that the fall in labour’s share in income is an inevitable outcome of technological change and globalization; hence nothing can be done about it. This is not true. The fall in labour share has been due to a dramatic fall in the bargaining power of labour in favour of capital. This in turn, has been an outcome of labour market deregulation, changes in union and collective bargaining legislation as well as globalisation, financialization, and welfare state retrenchment. Hence, it is an outcome of changes in policies and legislation.

The ruling classes have also advocated wage moderation (i.e., moderate wage increases at a rate lower than productivity) as the only way for national economies to survive in an increasingly more competitive international market. The argument maintains that wage moderation, which precisely is a falling share of labour in national income, would mean higher investments thanks to higher profits, and higher exports thanks to the lower unit labour costs. In turn, the promise has been that this would generate higher growth and more jobs. This has not happened! Not in Britain, not in Europe, the US, or Japan, and not even in some of the major developing countries in the global South such as Turkey or Korea.

Giorgos Galanis and I have researched the effects of this global race to the bottom in labour’s share on growth in G20 countries and the global growth rate as a whole for the International Labour Office of the United Nations.[1] The results attracted even the attention of investment fund managers, and were presented at the Hermes Investment Conference in September 2013 in London at a session titled “Labour’s Uprising?” The Financial Times has reported our findings with the title “Capital gobbles labour’s share, but victory is empty“.[2] The Financial Times article starts with an anecdote:

“In 1958, Walter Reuther, a powerful US union leader was taken on a tour of a newly automated Ford Motor plant. ‘Aren’t you worried about how you’re going to collect union dues from all these machines?’ he was asked by a (no doubt smug) company manager. ‘The thought that occurred to me,’ Mr Reuther replied, ‘was how are you going to sell cars to these machines?’”

If technological change and rising productivity are not reflected in the growth of the wage share, then even if profits are potentially higher, they cannot be realised, since there is not enough demand to buy the products.

Wages are not just a cost item as mainstream/neoclassical economics argue, but they are also a source of demand. Our research shows that when the share of wages in national income decreases four things happen[3]: First, consumption decreases, since workers consume more as a proportion of their income compared to the capitalists. Second, although private investment increases due to higher profits, this increase is insufficient in every country to offset the negative effects on domestic consumption. Third, net exports (exports-imports) increase due to a fall in the unit labour costs, but in the majority of the countries, this increase is also not enough to offset the negative effect on domestic demand. Finally, in an environment of the global race to the bottom in the wage share, most of the positive effects on net exports are wiped out as labour costs fall simultaneously in all countries, and their international competitiveness relative to each other does not change much. Thus, vast majority of growth in the developed countries and some developing countries are not profit-led; a rise in the profit share leads to lower growth; this is what we call a wage-led growth economy.[4] In these economies, the pro-capital redistribution policies of the post-1980s have been detrimental to growth and employment. Britain is a typical example of that type of economy. Moreover, the effect of the global race to the bottom on overall world income is negative. This makes sense intuitively. Our planet is not trading with Mars or any other planet. Unless the capitalists come up with this solution, the world economy as a whole cannot be profit-led; hence cannot grow along with a (falling?) wage share.

How did the world or British economy grow in the run up to the Great Recession? Thanks to debt accumulation. The list of countries where household debt maintained consumption in the absence of strong wage growth is long: Britain, the US, Ireland, Spain, Greece, Portugal, Hungary, Baltic Countries, Turkey, South Africa. How was debt financed? Housing bubbles, financial deregulation, and capital inflows made this possible. Capital inflows came from countries like Germany, Japan, and China. The latter group were exporting to the former group, and in return lending the foreign currency surpluses to the former group. The trade surplus of the export-led countries financed the debt of the debt-led countries. The export-led countries tried to export their way out of the problem of low domestic demand due to the fall in the wage shares. However, they needed a deficit country and debt accumulation elsewhere to buy their exports. Both the export-led and debt-led models are mirror images of each other, and they are equally fragile as they can only be maintained by rising debt levels. The Great Recession has proved this to be fragile and unsustainable. The solution to this problem requires wage increases as a source of demand, and the ruling classes are not ready to accept this. As a result the so-called recovery in Britain and elsewhere is based on the repetition of the same old model and a symbiosis of debt-led and export-led countries.

A wage-led recovery out of the crisis would be feasible. The push for wage-led recovery, which would correct the increased gap between the changes in productivity and wages in the last three decades, can primarily come through a strengthening of the bargaining power of labour. An improvement in union legislation, increasing the coverage of collective bargaining, establishing sufficiently high minimum wages, regulating high/executive pay, increasing the social wage via a stronger welfare state supplying public goods and social security, taming financialization and regulating finance are the key elements in changing the balance of power relations in favour of labour and at the expense of capital.

The effects that can derive from a wage-led recovery on growth and hence employment however are modest, albeit positive. This is not a problem, since the aim is not to achieve high growth in itself; rather the goal is decent jobs for all, ecological sustainability, and equality. For this we need to mobilize all the tools of economic policy and in particular public spending for an investment programme to generate green and public jobs with decent pay and shorter working hours.[5] Such an investment programme should aim at creating green public jobs in renewable energy, public transport, and housing; and purple jobs in education, child care, nursing homes, and health. Purple jobs are jobs for both men and women, but they are purple in the sense that they would help to socialize the unpaid invisible care job done by women in the private sphere and support women to participate in the society on equal grounds.

What are the barriers to a wage-led recovery? In the short-run, raising the share of wages is against the individual interests of each capitalist. There is a conflict between the micro rationale of the individual firm and the macro rationale of the sustainability of capitalism as a system. Capitalists lack a Bonapartist state to intervene for the collective capitalist. History shows that such a uniting force to save capitalism from itself comes only after long catastrophes and a credible threat from the labour movement to capitalism as a system. Furthermore, there is the lack of international coordination. Although a global race to the bottom in labour share leads to negative effects on growth for the majority of the countries, the area of manoeuvre for an individual country to benefit from increasing the wage share is limited if all the other countries are continuing their “beggar thy neighbour” policies. Large countries like Britain or the EU would be the major beneficiaries of a global wage-led recovery, and could and should take the initiative to export the good pro-labour policies to the rest of the world. But the lack of a Bonaparte is even more pronounced when it comes to international coordination.

In the medium run, Michal Kalecki gives the answer why capitalists would resist a rise in the wage share and full employment, even if it leads to higher growth and possibly a higher income for the capitalists themselves:

“[…] the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders.  Indeed, under a regime of permanent full employment, the ‘sack’ would cease to play its role as a ‘disciplinary’ measure.  The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow.  …  It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire…  But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders.  Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.”[6]

In the long run, a rise in the wage share would contribute to a squeeze in profits along with the longer term tendencies of the profit rate to fall due to a rise in the organic composition of capital. Wage-led recovery today is a transitional demand as is the demand of full employment. There may be eras in history where it can be achieved, but it is not compatible with the logic of a capitalist economy over an extended period of time. It is like a mirage; just when you achieve it, the labour movement has to decide whether it wants to moderate conflict to save capitalism or demolish it as a system.


[1]Onaran, Ö. and Galanis, G. (2012). “Is aggregate demand wage-led or profit-led? National and global effects,” ILO, Conditions of Work and Employment Series No. 31, Geneva.

[2]Johnson, S. 2013 “Capital gobbles labour’s share, but victory is empty,“ October 13, 2013, Financial Times.


[3]The research is based on a post-Kaleckian model, which builds on the ideas of a Polish economist called Michal Kalecki; the model synthesizes ideas from both Kalecki and Marx.

[4]We find that in the environment characterised bythe global race to the bottom in wages, that Britain, the Euro-area, Germany, France, Italy, the US, Japan, and Canada as the advanced capitalist countries in the G20 as well as Turkey, Korea, India, Mexico and Argentina as the developing countries are all wage-led growth economies.

[5]I have outlined key elements of a transitional programme in

[6]Kalecki, M. 1943. “Political Aspects of Full Employment” Political Quarterly. Kazimierz Laski, Kalecki’s colleague, has told me about Kalecki’s attitude of the regime in Poland in comparison to a capitalist economy in the 1950s: “I would rather see people queue for goods than for jobs”.

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