Wages And Productivity

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by: Marc Chandler

Summary

The major central banks agree that wages are too low.

Even in Germany, where labor is ostensibly strong, wages have not kept pace with productivity gains.

We again are struck with the idea that the biggest challenge of capital come from its strengths not its weakness.

We live in a brave new world. Never before have the major central banks so strongly advocated higher wages. The Yellen Federal Reserve has shifted the focus from the unemployment rate to broader measures, including wages.

The anemic wage growth is one of the signs of the "substantial" slack in the labor market. Weak wage growth in Japan remains one of the missing pieces of Abenomics.

In the UK, weak earnings growth appears to be staying the BOE's hand. The ECB is wrestling with low-flation and seeking to avoid outright deflation. Higher wages, especially in the North, and Germany in particular, would be helpful. Recently, the Bundesbank has come out, also endorsing higher wages. This may very well be the first time that the Bundesbank has come out in favor of labor over capital.

This Great Graphic was created by Bloomberg News and it draws from data produced by the German Federal Statistics Office. It illustrates that even in a country in which labor apparently has a strong voice, represented on boards of directors of large companies, wages have not kept pace with productivity around 17 years.

The distribution of the productivity gains between labor and capital is arguably just as much about politics (power) as it is about economics (supply and demand). The much heralded independence of central banks is to ostensibly insulate them from the vagaries of short-term pressures and allow them to focus the monetary needs of the system as a whole. Until now, central banks sided with capital over labor. The systemic interests of capitalism now require workers get a larger share of the pie.

This underscores a point we have made before, but that is worth repeating in this context. The crisis, and the most serious challenges capitalism faces, grow out of its strengths not its weaknesses. Most reforms seek to address capitalism's weaknesses, which serve to strengthen it and its claim on the social product (productivity gains). That the guardians of the capitalist (and creditor) interests (central banks) now recognize that the pendulum has swung too far is very telling and marks a significant change from the past. Whether this is sustained, or simply a short-run tactic, has yet to be seen.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.