The role of wages in European Economic Governance

1. The role of wages in European Economic Governance CAWIE project Brussels, November 2012 rjanssen@etuc.org

2. Threedifferentviews • Absolutepriority for competitiveness : Wagesneed to do nothingelse but to promotecompetitiveness in each and every single country • Wagesfonctioning as communicating barrels • Wages have different masters (objectives) to serve. ‘Competitiveness’ isjust one of them

3. The first view: «Competitiveness to rule all of us» • Wheredoesthisview come from ? • Inspired by or based on tenyears of wage stagnation in Germany: • 2000 – 2008: • Zero unit wagecosts • Falling real wages (particularlyoutspoken for lowwageearners)

4. Unit wagecost 2000 = 100

5. Following the Germanlead • These figures are thenused to claim thatworkers in many countries have livedbeyondtheirmeans…. • In technicalterms, wages have increasedfasterthanproductivity… • This thenneeds to becorrected. Competitivenessthatwaslostneeds to beregained. • Sincewecannotdevalue the currencyanymore, let us devaluewages (the « internal » devaluation)

6. What techniques to arrive at a ‘wagedevaluation’ ? • Again, inspiration isfound in Germany • Reversal of the hierarchy of bargaining (‘Pforzheim’ type agreementsallowing to strikecompanylevelwage/employment deals) • Longer workingweek • Underminewage standards by doubtful ‘trade unions’ • Longer workinghourswithout more pay In Greece, Spain, Portugal, measureslikethese have already been taken • In France, Italy, Belgium, Netherlands, discussions on thesemeasures are gaining traction

7. Bad karaoke • DGB and itssectoraffiliatesdidsee to ‘checks and balances’ • Companyopening clause agreements: Only if wage concessions are temporary, only in return for investment or job guarantees, strict monitoring of companylevelagreements • « Yellow » trade unions: Recentvictories (agencywork deals) by DGB in labour courts • Longer workinghours: rejected by sometrade unions • These « checks and balances » now tend to getignored by the rest of Europe

8. « AlleMenschenwerdenKonkurrenten »: Whyitiswrong • « Fallacy of composition »: The effect of a policyapplied by one country iscompletelydifferentfrom the effectwhen all countries go for the samething • Estimates of elacticity of exports to real exchange rate muchlowerwhenestimated for the entire Euro Area (minus 0.26) than for individual countries takenseparately (between -0.54 and -0.77 for big 4) • Reason : When all go for wagemoderation, relative cost positions do not change whereas export demand perspectives getdepressed (One country’sdomesticdemandisanothercountry’s export perspectives)

9. The second view: Wages as communicating barrels • A variant of the previousview • This view has no problemwith the factthatthatwagesshouldbemoderated/cut in the periphery, providedwages in the core go up. • «  If youwanthigherwageincreases in Germany, youshouldalsoacceptlowwerwages in Spain »

10. Illustrating the « central planification of wages »

11. One problem: Arithmetics are killing

12. Will (wage) reflation end up in ‘deficit’ countries ? • Portugal is not Germany : Bigdifferences in economic and industrial structure, with Germany producing more sophisticatedproducts for special ‘niche’ markets (machinery, telecom infrastructure, transport infrastructure,…): Wages do not playsuch a bigrolehere • Europe is an integratedmarketplace but the integrationbetween Germany and the Euro peripheryis not somuchoutspoken: Imports from IT, ES, PT, GR onlyrepresent 5% of German GDP. • Implications: Revival of wages/demand in Germany: • Good, necessary and long overdue for Germanworkers … • …but doubtfulthatitwillreally end up in those Euro Area countries thatneeditmost

13. Ignore balance sheetrecessionsatyourownperil • ‘Deficit’ countries tend to have a high public debt but an evenhigherprivatedebt. This does change things. • Wagedevaluations have the key objective of reducing nominal values (nominal wages, prices, perhapsevenrents…) • With nominal value of debtremainingfixed, thismeans real value of debt shoots upwards.(Real interest rates increase). • In turn, households and companies have to pay an increasingshare of theirincome to servicingexistingdebt, squeezingeven more demandfrom the economy.

14. Danger of things running out of control

15. The thirdview: Wages have multiple objectives to pursue • Stability of revenue (not giving the employer the right to cut nominal wages) • Stability of prices (contribute to low inflation and preventdeflation) • Engine for demand, growth and thus jobs • An actor for fairness: A fair distribution of incomebetween capital and labour (no excessive profits) • An actor for modernisation of the economy (pushingemployers to innovateinstead of cuttingwages)

16. StabilityPrinciple • Wage trends (not every single year!) to beseenagainst the increase in productivity plus the ECB’s inflation target of 2% • Would show, for example, that minimum wages in France and indexation system in Belgium are NOT a problem

17. Look at French line: Exactly on the ECB’s inflation target

18. Upwardsrebalancing • « Surplus » countries still have 15% to catch up (on top of productivity plus 2% ECB inflation target)

19. Look at the otherside of the coin • Evolution of profits

20. All isgoing down….except profit rates

21. …whileinvestmentisgoing down as well

22. Return on Equity

23. Profit Monitoring Group • Level of profits (share of profits in GDP/ level of Return on Equity Capital) • What are profits beingused for ? Investment? Dividens? Capital BuyBacks? Bonuses for CEO’s? • Are, at the very least paying, ‘decent’ taxes beingpaid on corporate profits ?