April 11, 2016
As wages rise, so will the industrial temperaturePosted in Sunday Business Post · 136 comments ·
Economic cycles are as old as the Bible. And we are about to go through another one. But this one will involve industrial unrest.
Just to jog your memory. Do you remember when the pharaoh awoke petrified by a dream? The pharaoh dreamed that he was standing by the Nile and that seven cows, “attractive and plump”, came and fed in the rich grass by the waters. Then he saw seven skinny, ugly cows, and they proceeded to eat the fat cows. But having eaten the healthy ones, the cows remained skinny and ugly. Then in his second dream he saw seven ears of grain, “plump and good”, growing from one stalk. Yet again, he saw seven thin, sickly ears of grain emerging and, in front of the pharaoh, these thin ears swallowed up the healthy ones.
Joseph explained to the pharaoh that the dreams represented the fact that seven years of plenty tend to be followed by seven years of famine. The cows and ears of corn represented the good times, followed by the bad times.
This is biblical economics. We have Joseph, the first-ever truly prudent finance minister, explaining a seven-year economic cycle, the type of which we are used to in the western world.
The question is whether the next taoiseach will be our pharaoh, faced with the end of one seven-year economic cycle of subdued wages and elevated profits and the beginning of one where wages rise.
It’s likely that wages are going to rise in the years ahead and this will prompt a titanic struggle between workers and employers which could easily spill over into wildcat strikes and significant industrial disputes.
CSO statistics reveal that in 2011, in the depths of recession, there were just 3,695 days lost to strike action. By last year, that figure had risen to over 32,000 days. This is likely to continue.
But this is not the result of some extreme union activity; it is nothing other than the economic cycle. In recessions, wages fall and profits rise and rise significantly. Then, as the economy improves, the split between wages and profits gradually moves towards wages as workers look for their cut of the spoils. Industrial disputes happen when either workers want too much or employers want to give back too little.
I know it may be difficult to accept the notion that Ireland has been very profitable in the past seven years of the bust, recession and then patchy recovery, but it has been.
In recessions, profits don’t fall: they actually rise! This seems counter-intuitive, but it’s true. In fact, recessions are actually prolonged by too much profit. This might seem odd, but this is how the economy works. Marx made the point that capitalism was a constant struggle between workers and capitalists. He was – and still is – right.
When something is sold, either the returns go to workers in the form of wages, or to capitalists in the form of profits. When more of the returns go to wages, people have more money in their back pockets and more work. They then spend this cash – and this is how the economy grows, purchase by purchase. If more of the economic output goes to profits, these retained profits are saved and don’t re-circulate in the economy because they are usually owned by a small percentage of the population. Therefore, when there is a surge in profits in the economy, there is too little spending and the economy shrinks. This is how recessions can be prolonged.
In contrast, when there is a boom, the rate of unemployment falls dramatically – as it did in Ireland from 2000 to 2007 – and this drove up the share of wages in GNP and drove consumer spending, pushing up the growth rate further. Ironically, the boom was the period when companies in Ireland made least profit, not most profit. This point is rarely appreciated.
The bust occurs because companies try to increase their margins by laying off workers and squeezing wages. This process drives down spending and drives up savings, thereby suppressing activity.
We are now at an inflection point where wages are possibly lowest and profits are highest relative to GDP and a small minority whose wealth is dependent on profits and capital are much richer than the rest of society. This will now change as the pendulum swings back towards wages and employment and away from profits and capital.
Does this mean that Ireland is about to experience a significant rise in wages over the course of the next few years?
Yes, I believe that will happen, not because I have any insider knowledge, but because this is how economies behave and this is how humans behave. Expect the trade unions and workers very soon to demand their share of the pie. Does that mean industrial relations issues? Why, of course.
And naturally, if a government doesn’t get to grips with costs like housing costs, workers will clearly demand more wages. Or if a government increases taxes on workers, it means their take-home pay is smaller and at the first chance they will try to get some of their share back. Obviously, the more a government or political party continues to talk about a recovery, the more it is encouraging this process. All this talk of the recovery gives workers the permission to push for more wages, because they can say, “If the economy is so strong, why don’t I get a few extra quid?”
The implication of this is that the country is facing a summer of discontent as workers agitate, peacefully at first, for higher wages. Employers will point to a rising euro against sterling and say that we are already losing competitiveness. It may also coincide with the price of oil beginning to rise, modestly, driving up costs.
The next taoiseach will have to be like the pharaoh, able to deal with this new cycle. The economic cycle is turning and industrial relations could be very messy, particularly if workers try to claw back wage increases that they believe were postponed in the recession. This is coming at a time when Irish industrial policy is under massive international tax scrutiny, and Brexit is just over the hill.
Given what we have seen from our political leaders in the past few days, how confident are you that they will have the wherewithal to deal with such a poisonous cocktail?