High wages are good for growth: jobs and growth

I’ve always thought that, if there’s an economic driver for Australian culture it’s the high demand for labour – exceeding supply a lot of the time – that applied in Australia from the convict period on and the resulting uppityness of workers – including convict workers judging from John Hirst’s work. That put us in the running to benefit from a virtuous cycle instead of the usual vicious one. Instead of low wages driving down worker morale, worker initiative, investment in workers – by both workers and their employers – high wages led to the opposite virtuous circle. The same phenomenon that led Lee Kwan Yew to target high wages in Singapore in the 1960s and the Northern European countries to do it beyond then – and arguably to this day.

I’ve always thought the instinct economists had for thinking that the relationship between output and equality was negative was stupid – that it depends on context and that there are lots of things that promote both. And here’s some interesting corroborating economic history.

Australian Squatters, Convicts, and Capitalists: Dividing Up a Fast-Growing Frontier Pie 1821-1871, by Laura Panza, Jeffrey G. Williamson – #23416 (DEV)

Abstract:

Compared with its nineteenth century competitors, Australian GDP per worker grew exceptionally fast, about twice that of the US and three times that of Britain. This paper asks whether the fast growth performance produced rising inequality. Using a novel data set we offer new evidence supporting unambiguously the view that, in sharp contrast with US, Australia underwent a revolutionary levelling in incomes between the 1820s and the 1870s. This assessment is based on our annual estimates of functional shares in the form of land rents, convict incomes, free unskilled incomes, free skill premiums, British imperial transfers and a capitalist residual.

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8 Responses to High wages are good for growth: jobs and growth

  1. Paul Frijters says:

    high wages in government employment, no: high wage growth is often a problem. The problems of Southern Europe are all about being in a currency unit whilst having too high wage increases amongst the civil service and dependents. High wages in private enterprises however, a tentative yes.

    • Nicholas Gruen says:

      Yes, it’s true that it doesn’t make much sense to be in favour of high wages – or low ones any more than high exchange rates or low ones. It depends how high. But there are strong gains in both equity and efficiency in moving wages from low to high-ish provided some adequate standard of management. And being in a currency unit like the Euro – especially one with such bad fiscal arrangements is about the worst arrangement one could have sadly.

  2. Ken Parish says:

    Workers are not just an “input” to production and productivity. If they were then it might make sense to think that you could increase both productivity and profit by coercing them to work harder and cutting their wages (and hence cost of production).
    But they are not just inputs. They are both the creators of product and productivity and the purchasers and consumers of the product. If you coerce/flog them they get resentful and demotivated; if you cut their wages (or refuse to increase them in a time of increasing profits and keep all the profits for yourself) then they can’t afford to buy your products and/or they will save their income for an even rainier day due to justified feelings of insecurity. It is surprising that classical economics appears not to comprehend and encompass these seemingly self-evident facts.

    Labor in government should undertake a major reform of the Fair Work Act (a fairly gutless effort by Rudd/Gillard that re-enacted far too many of the draconian provisions of Howard’s Work Choices legislation) , and rebalance it to allow workers to bargain collectively much more effectively, while still having effective barriers to heavy-handed coercive tactics by unions/workers against employers.

    There also needs to be some sort of Minimum Income Guarantee system, preferably of the sort I have previously advocated here at Troppo. That is necessary because it is impossible (and probably undesirable) to put the “flexible labour market” genie back in its bottle. Thus you need a liveable MIG to provide basic economic security for the following groups not effectively represented by the union movement:

    – long-term unemployed people (who will often also need a range of other social and medical supports given the prevalence of people with various disabilities among their ranks);
    – an increasingly casualised and totally insecure workforce;
    – “outsourced” workers artificially characterised as independent contractors (usually via a labour hire company) to allow the boss to dodge most normal employment terms, conditions and protections;
    – Students, tourists and 457 visa holders being exploited on rorted 7-Eleven and similar gross wage underpayment scams.

    • Moz of Yarramulla says:

      tourists and 457 visa holders being exploited on rorted 7-Eleven and similar gross wage underpayment scams.

      I think applying a MIG to illegals would make it even harder to get through. Australia doesn’t even let those people vote, paying them to stay here would be a real challenge.

      I suspect that a MIG would actually lower apparent wages in many cases because people will rely on the guarantee. By people I mean employers, I’m in a generous mood. Not that that is actually a big change, we already have a great number of “working poor” whose employers rely on state subsidies to keep their staff alive.

    • Only because the European crowns had sufficient incentive not to back the landlord cartel in reimposing bondage. Labour shortages elsewhere in history usually resulted in some sort of bondage system. That this did not happen in Western Europe after the Black Death was a powerful indicator it had embarked on a new economic path.

  3. Of course, one could argue this was a good reason to allow temperate zone labour flows (higher levels of compatible social capital) but not tropical zone labour flows. Indeed, that the Australia selective immigration system is an effective updating of this approach.

  4. With human capital as the emphasis.

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