Europe’s Low-Wage Economy

 

There are few examples (certainly in the developed world) of countries choosing to be low-wage economies and it’s safe to say, usually, the economic goals of governments are quite the opposite.

 

Regimes which have actively pursued penury in the past have almost always been feudalistic despots and oligarchs – Yelstin’s Russia (which wasn’t really Yesltin’s),  the extractive fiefdoms of Africa, the banana republics of Central and South America.

 

To hoard profits at the expense of investment and development has, however, been a growing trend in the financialised economies of Europe over the last few decades, but nowhere is this more crude, or the hoarders more empowered in and by the legislature, than in the Sick Man of Europe (soon to be the Sick Man of Nowhere), Britain (oh, sorry Great Britain).

 

In the endless debate over what caused the Industrial Revolution – something of a Holy Grail for economic historians – one of the more substantive arguments comes from Bob Allen’s The British Industrial Revolution in Global Perspective. It’s argument is quite simple, “The Industrial Revolution, in short, was invented in Britain in the eighteenth century because it paid to invent it there”.

 

To summarize, taking “macro-inventions” (like the spinning jenny, Arkwright’s mill and coke smelting) and investing in them, innovating them, till they were commercially viable was a worthwhile investment in GB because of its historically high labour costs and relatively cheap coal. While “macro-inventions” occurred throughout Europe, a French entrepreneur, for example, would never rationally make such a large and uncertain investment because labour was so cheap and readily available (they did not need to be replaced or made more productive to be competitive). In Belgium, while labour was also costly, so was coal and so went any incentive to replace the former with the latter.

 

While there were many other essential prerequisites, such as the preceding agrarian revolution and the development of capitalists in the colonies, Allen’s factor price assessment certainly makes for some interesting incites as we look at the sorry state of Britain today and its chronic productivity.

 

While claims that the employment rate is at a “record high” are clearly misleading (the population is at a record high), there is no doubt that unemployment is incredibly low – its 4% being the lowest since 1974/5.  Even involuntary part-time employment is lower in the UK (10.5 per cent of the total employment figures) than the EU average (26.4 per cent) and has fallen in recent years.

 

Brits reading this, however, may be forgiven for not feeling all that optimistic. Orthodox economics decrees, in its infallible wisdom, that low unemployment (and, thus, a scarcity of labour) should permeate wage growth but Britain is currently enduring the longest period of wage stagnation since the Napoleonic Wars and, among OECD countries, only Greece and Mexico fared worse in wage growth since the financial crisis.

 

Of course, we are all aware of this and, as Planet Money listeners among you will attest, so is the economic orthodoxy – which has been trying to wrap its head around the problem for the last year or so. One of its great obstacles, though, is that it is missing an important observation, the separation of wages from productivity precedes 2008.

 

Since about the 1970s, in most developed economies productivity has risen faster than wages. This meant shareholders and corporate executives keeping more of their businesses’ profits for themselves. In the US, for example, wages ground to a complete halt under Clinton with real median household income in 2014 barely any higher than in 1990, despite GDP growth of 78% since 1990 and labour productivity growth of 85% since 1980 (This, for my money, is the predominate cause behind Trump’s success). In the UK, though many workers at the bottom of the income spectrum are paid less than their marginal productivity, many at the top are paid more.

 

What does all this have to do with Bob? Well, the separation of profits from wages is, in turn, separating profits from productivity.

 

Before the 2008 crisis, much of Britain’s productivity growth was driven by illusory gains in financial and professional services, which have now evaporated. The financialised growth model gave rise to a highly imbalanced economy, with the finance and property sectors sucking in capital from the rest of the world, driving up the value of sterling and damaging our more productive manufacturing exporters. These sectors have also attracted the highest-skilled workers and domestic investment, leaving less for knowledge-intensive industries. The result has been a preponderance of low-paid, low-productivity employment in the services sector.

 

Combine Britain’s lack of knowledge-intensive industries, its low wages and its staunch ideological opposition to either public investment or incentivising private sector investment and employment increases suddenly become less a sign of productivity growth than of under investment. With labour so cheap, many businesses have chosen to hire more staff rather than invest in new machinery, thus burning a new economic path for Britain; one whose trend growth and opportunities will be, perhaps irrevocably, downgraded.

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