Tuesday, August 5, 2014

The Bundesbank calls for higher wages

The idea that the Central Banks may be waking up to the error of their ways is actually quite remarkable.  But here it is.  The Bundesbank is calling for higher wages across the Eurozone.

Bundesbank calls for higher wages across Eurozone

August 3, 2014 merijnknibbe

Not much blogging from my side as Edward tricked me into constructing ‘Piketty series’ for the Netherlands – but this is a game changer (via left foot forward): the Bundesbank finally understands. Economic policies aimed at financial deregulation, low wages and asset price increases instead of low unemployment, high employment and high income have failed.
  • Spending in the Eurozone is too low, unemployment is disastrously high, people are getting evicted from their houses while the number of empty houses increases and in quite some countriespoverty is rising.
  • For obvious reasons, not every country can export itself out of unemployment at the same time (a classic example of a ‘zero sum game’).
  • Present policies to engineer current account surpluses are anyway not based upon any kind of serious export strategy but upon restricting domestic demand, which leads to a ‘race to the bottom’
  • Households and companies are heavily indebted while low spending and high unemployment causes increasing problems with non-performing loans
  • Companies are not going to invest when demand stays low, even when interest rates are low
  • Quite some people do not want the government to act as a ‘spender of last resort’
Which leaves wage increases as the only way to restore demand, increase prosperity and lower unemployment (getting unemployment down to 4% in five years, with 1% productivity growth and 1% inflation and a share of wages (including mixed income) of 70% means that wages can increase with 4 to 5% a year, a little bit less when investments increase). Economies are of course quite unpredictable, but we can start with ‘forward guided’ 4% wage increases for two or three years.
Germany’s Bundesbank, Europe’s largest central bank, has backed a call for higher wages to boost the flat-lining Eurozone economy.

Jens Ulbrich, the bank’s chief economist, has joined a growing list of key players calling for widespread pay rises to fend off the crippling effects of failed austerity and low inflation and to crawl back the falling wage share in national wealth.

Ulbrich told Der Spiegel that recently agreed pay rises of more than 3 per cent were welcome and that recent wage trends were ‘moderate’ given Germany’s relative economic strength and low unemployment. Germany’s average worker’s wage has hardly risen over the last decade, similar to the UK and USA.

Philip Jennings, the general secretary of the global trade union federation, Union Network International, which covers service, financial, media, communications and graphical workers unions first issued a call for worldwide higher wages at the World Economic Forum in Davos in 2013 with his phrase: “The world needs a pay rise.”

In a letter to the Financial Times, Jennings said:

“The Bundesbank has joined a growing list of the great and the good calling for a pay rise for workers. All of these institutions and leaders, from the Pope to President Obama to the CBI and now the Bundesbank recognise that if employees’ pockets are empty they are not in a position to spend to pick up the economy. It is time for the Federal Reserve, the Bank of England and the European Central Bank to heed this message.

“The world needs a pay rise if we want to see our way out of the shadow of the crisis and into the light of global growth. After all, the CEOs can take care of themselves, with their pay rises topping 15 per cent.”

The groundswell of support for higher wages follows a raft of recent reports pinpointing economic inequality as a key threat to the global economy.

The OECD has released its predictions for the world economy until 2060. These are that growth will slow to around two-thirds its current rate; that inequality will increase massively.

A recent IMF study concluded that inequality is damaging to economic growth. The report also dismissed outdated ideas that redistributing wealth could make matters worse. more

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