IMF suggests improving skills of youth & lower pay?… Keynes rolls over
Here is a video from the IMF…
At the 4 minute point, the representative talks about youth unemployment in Europe and recommends two things…
- training to appropriate skills which would make someone more valuable.
- bringing down costs of employment.
Oh, how wonderful!… Make your skills more valuable only to meet wage suppression. They just do not understand that people need to be paid more.
“The insufficiency of effective demand will inhibit the process of production in spite of the fact that the marginal product of labour still exceeds in value the marginal disutility of employment.”
In other words… It is pointless to increase the marginal product of labor when you are faced with insufficient effective demand.
Every country has a self-interest to compete by lowering labor costs. In effect, the advanced world is continually sinking into a secular stagnation. The key is for an organization like the IMF to step in and recommend a coordinated effort among countries to raise labor income, not decrease it, and thus increase effective demand for production. That will create investment.
Just pay labor more!
Umm, she actually says “bring down the hiring costs”. That’s not an exact synonym for “reduce wages”. It could, for example, mean reducing employer paid taxes on employment.
Which are, in Southern Europe at least, high.
“mean reducing employer paid taxes on employment”
Which is Overhead and the ultimate reason for the movement of Labor out of a country.
There are moves within Europe to lower labor costs. You are right to be specific between hiring costs and wage costs. Yet the broader message in Europe is to hold down labor costs.
Let me look for an article on this…
Here is a quote from the article…
“In the peripheral countries, we are seeing a continuous decline in wage costs, which has also been instrumental in reducing their current account deficits.”
“The severe recession and high jobless rates have not done nearly enough to lower labor costs.”
So there is a mindset in Europe to keep lowering labor costs, which means wages.
If you separate the burdening of Labor with these additional costs associated with Labor and not paid in wages, these would be called Overhead. Which none of those actions will do so in any degree to have an impact on Labor costs as direct Labor Costs are small when compared to Overhead and Materials in manufacturing. The ratio of cost for direct Labor in having an impact and a reduction in them would produce a much smaller result. If you cut Overhead which is then associated with Direct Labor, the impact is greater. I would say the cost of not havin Social Security, Medicare, Unemployment Comp, Workman’s comp. Healthcare, Oshsa, epa would only pop up elsewhere.
Sure, there are people who want to lower the workers’ wages. But I’m making that distinction which you’re refusing to allow to the IMF economist.
In Portugal, where I do actually have a small business, social security taxes are 35% of wages. Reducing those might well have beneficial effects upon employment and thus actually raise aggregate demand…..
Obviously someone sees a need to plan now rather than later when the worker is old and cast off by the company.
Business thinks lower wages means higher profits. I don’t know who they think will buy their products if the consumer has less money.
Your post and the associated comments above point out one more problem with globalization.
No single country can control the side effects of globalization.
If your country wants to lessen inequality of incomes, or regulate the production of pollutants, or spread taxation across your economy, or provide a more stable economy over time, then globalization will punish you, severely.
Corporations want to ‘live’ in a country which allows low labor incomes, almost unregulated pollution, and almost nonexistent taxes on them. Their only concern is profits. CEOs and boards of directors understand that if every corporation acted this way then it would become a race to the bottom but all they really care about is the profits generated in this quarter. They regularly tell us exactly that!
Just one more example of unintended consequences. And this was predictable! Tariffs were regulating more than just prices on foreign goods.
You hit it on the nail.
35% social security taxes is a lot from a US perspective. How does the Portugal govt spend that money into aggregate demand? In other words, does the govt maintain aggregate demand by spending that money into the economy?
There is a view that as business is taxed, there are businesses created to get that money back from the govt and put it back into the economy. Once it gets back into the economy, the idea is that people will spend it at your business, which means higher sales for you. The trick is to get into the flow of money.
I ran across an old Tim Worstall article the other day in which he argues that Ford did not raise wages so his workers could afford to buy his cars… because Ford did not have enough workers to buy all of his cars.
(Tim, am I being unfair to you?) Apparently Tim did not think that Mr Ford was smart enough to think that by raising his workers wages he would be putting pressure on other employers to raise wages.. so that ultimately everyone could afford a car.
Actually I am being unfair to me. You’d have to read the original to get a sense of just how shallow it was. Worstall can be counted on to say things that sound wise to the Right and absurd to the people who have to work for a living.
I don’t know what the wages in Portugal are, but it’s not hard for me to imagine that they are low enough so a 35% “tax” would be just enough to support a reasonable lifestyle after retirement, which may be just what the Portuguese want, as opposed to the American idea of spending it all while you are young.
let’s say 35% is one third for all practical purposes, so if you work for forty years and save one third of your money and then retire and live another twenty years, you would expect to live on exactly the same income while retired as while you were working. and if that income is rather low to start with, that may be a sensible trade off. in any case it is NOT a burden on employers. the payroll tax is, as we all know, “really” the employees money. nine out of ten new york economists said so.
note i am quite aware i am not allowing for “investing” that money in high returns on the stock market. that again is a choice some people might make who feel they can’t afford the risk.
and not that i am not arguing that Americans “ought” to pay 35% of their income into their retirement (and medical?) insurance. but i do think that grown up thinking might show that it IS a not unreasonable choice under some circumstances. the worstalls of the world rely on no one ever thinking like a grown up.
oh, almost forgot: from the Worstallian perspective ANY retirement (of workers, as opposed to owners) is bad for the economy. After all you work a horse until all he’s worth is what you can get for him from the knackers, don’t you?
see, if there was a way for workers to save enough of their own money so they could retire, and that’s what they chose to do, all that foregone income… not working in their old age… is a dead loss to “the economy,” never mind that the worker thinks of it as the best thing that could happen to him. his boss can’t enjoy the workers retirement, but his boss sure as hell gets a big take of what the worker produces.
so keep ’em down on the line.
“I ran across an old Tim Worstall article the other day in which he argues that Ford did not raise wages so his workers could afford to buy his cars… because Ford did not have enough workers to buy all of his cars.
(Tim, am I being unfair to you?)”
Yes, you are being unfair. For that’s not the argument I made at all.
Some people, sometimes, make the argument that Ford raised wages so that more of his own workers could afford his own cars. I then pointed out that the rise in the wages he paid was greater than the total revenue he would have gained if each and every one of his workers had bought a new car every year. Thus it cannot be true that he raised wages so that more of his workers in order that hie employees could afford his products.
The importance of this? We really have had a “think tank” stating that if WalMart raised the wages of its workers then WalMart would see increased sales which would make up for those increased wages. And they called Ford’s example as evidence.
Ford’s example not, of course, working.
What percentage of the “Cost of Manufacturing” is direct labor?
i think your argument in both cases is flawed. you seem to be assuming that the raise in wages will be limited to the company making them. And that therefore the employees would have to spend all of their raise at that company. I suspect the advocates of the increase in wages… including Ford… were expecting that the raise in wages would lead to more general wage increases by first encouraging labor to demand higher wages from other employers and second by that higher wage to “trickle” out to become more income to other employers.. etc.
But don’t you also miss the point of Lambert’s post, which might be that IF wages are supposed to be determined by marginal productivity, and increase in worker productivity…from improving skills… ought to show up as increased wages, not reduced, as the IMF seems to be calling for? So much for the marginal productivity theory of wages.
Or do you take the attitude, as sometimes I think Mr Run does, that “overhead” is not “wages” even to the extent that the “overhead” in question are the result of (government) collective action to raise the wages of workers who can’t get those increases as individuals bargaining with a boss whose power is effectively infinitely greater than theirs?
I certainly can’t see how Social Security in this country can be both at the same time “really the workers money” and “a jobs destroying tax,” but the right feels no shame in calling it both when it suits it’s political convenience.
it occurs to me that Ford perhaps did not expect his workers to buy all of his cars with their five dollar a day wage. he may just have felt some shame that none of his workers could expect to ever buy one of his cars with a lower wage. or maybe he only needed them to buy SOME of his cars to make his production line pay for itself.
thing is, i suspect you are in a better position than i am to know the whole history of the famous Ford five dollar wage, including what Ford himself thought about it, or said he thought about it. But your essay about it did not do justice to any of the possibilities I can think of just off the top of my head. And your logic here.. that somehow the only excuse Ford or Wal Mart could have for raising wages would be that those increased wages would directly pay for them selves in increased sales to the workers getting the wages. Even a simple minded mathematician like me can see that is a dubious concept on the face of it.
Just as you seem to accept uncritically the assumption that reducing payroll taxes… paid for by “the workers themselves” according to “most economists”… will “have beneficial effects on employment” even though those “taxes” go directly into spending by retired people and so should have no effect on demand.
the only advantage I can see to cutting Social Security… however big it is as a percent of wages… is that employers make money off of workers wages. they don’t make money off of workers enjoyment of the leisure they can afford by saving their wages. this is great for employers, but hard on the workers when they get old and can’t afford to retire.
i am getting a little old for this myself, and getting too tired of trying to answer the one idea geniuses who come up with one idea about one aspect of a complex situation and if it makes them feel good decide that they have solved the problem.
here is what Tim said:
“There’s an argument you see around sometimes about Henry Ford’s decision to pay his workers those famed $5 a day wages. It was that he realised that he should pay his workers sufficiently large sums to that they could afford the products they were making. In this manner he could expand the market for his products.
It should be obvious that this story doesn’t work: Boeing would most certainly be in trouble if they had to pay their workers sufficient to afford a new jetliner. It’s also obviously true that you want every other employer to be paying their workers sufficient that they can afford your products: but that’s very much not the same as claiming that Ford should pay his workers so that they can afford Fords.”
if you think the argument about the jetliner holds for ford cars, you are just the kind of person Tim is writing to. You might ask yourself why the “ford” argument fails as “so the workers could afford the product” and yet the “boeing” argument succeeds if “you want every other employer to be paying their workers sufficient so that they can afford your product.” Ford doesn’t want his workers to afford a Ford, but Boeing wants other employers’ workers to be able to afford a new jetliner?
as for the flabby logic of the rest of Worstall’s piece, you are welcome to it if you have a taste for such things, but since, apparently, according to Worstall the argument is “really” about the minimum wage, which cannot accomplish what the Ford raise was meant to accomplish because it does not create a differential advantage to the workers for one company… it could not possibly be the point that the minimum wage works because it avoids a differential DISadvantage to any company that would raise its wages, and hence its costs and perhaps its prices with respect to its competitors… well, no, its better to sweep that under the rug and talk fast and wave your arms and send the rubes away thinking, “boy, that worstall sure put the quietus on calls to raise the minimum wage.”
because you don’t want them thinking why would raising the raises of workers provided an advantage to Ford but be a disadvantage to, say, McDonalds.
I would imagine that Ford’s reasoning for raising wages is rooted in this quote…
you’ll ahve to explain that to Worstall. I can see why Ford went out of business.
i am not knowledgeable enough to relate this to the strikes at Dearborn by UAW .
“thing is, i suspect you are in a better position than i am to know the whole history of the famous Ford five dollar wage, including what Ford himself thought about it, or said he thought about it. ”
Indeed I do. As I explain in the piece. Ford, the year before the age rise, had 51,000 workers in order to have 13,000 permanent workers. People just kept quitting at the boredom and hard work of the assembly line.
The year after that wage increase he had something like 15,000 workers to get those 13,000. This obivously significantly reduced his hiring and training costs and also the losses from interruptions to production as people walked off the line.
Note that this is the same argument we see today, where people say that higher wages will lead to greater loyalty and productivity. And it’s an entirely true argument as well. And as Krugman has said about the Living Wage, it relies on paying higher wages than those around you, not just paying higher wages in general. If everyone starts to pay those higher wages then the advantage disappears.
There is also a minority view which is that the Dodge Brothers were shareholders in Ford and were using the dividends to set up their own, rival, company, Dodge. So Ford deliberately set out to reduce profits, thus dividends, to starve Dodge of finance. I don’t know enough about that one to be able to pronounce upon it but it is a minority view out there.
“Just as you seem to accept uncritically the assumption that reducing payroll taxes… paid for by “the workers themselves” according to “most economists”… will “have beneficial effects on employment” even though those “taxes” go directly into spending by retired people and so should have no effect on demand”
Yo’re assuming that the European social security systems work the same way as the US system. With a trust fund and some, at least theoretical, connection between the amount colleccted in premiums this month and the amount paid out this month. Not so: near all European systems claim to have some such connection, of course, between lifetime premiums and pensions received. But the real finances just run through the general government account.
Thus reducing premiums paid today will not change pensions paid out today. We would thus, actually, find that a reduction in premiums paid today will provide fiscal stimulus. Workers today are paying less in SS taxes and thus have more money in their pockets. Current pensioners are receiving the same as they did. The balance being taken up by increased subsidy of SS from elsewhere in the budget. Given current reality that would mean increased borrowing by government: which is, as we all know, fiscal stimulus.
Things might change in the future as those reduced premium pensions mature but as we all also all know, in the long run we’re all dead.
thanks for the reply. you’re a good soldier.
i understood about the “differential advantage” you say, and the Ford citation says, Ford was looking for. I had “understood” that Ford himself said something about “so workers can afford to buy my cars,” and I was defending that proposition from what I thought… and still think… was the bad logic of your argument.
As for the European social security coming out of “government” as opposed to being paid by the worker… I would hope that puts you on my side with respect to those misguided liberals in this country who want to raise taxes on the rich to pay for Social Security… a terrible mistake.
I am not so sure, either, that I favor mindless stimulus. Sometimes “stimulus” is the right thing to do. Sometimes it may not be. I am not familiar with Portugal, but I would bet their problem is NOT that workers are not spending enough money. I think it may be that they are not making enough money. Different thing. I don’t think that cocaine will continue to “stimulate” an economy that needs better food.
in the long run, the workers, even in Portugal, pay for their own Social Security, even if it is made to look like a “tax transfer” with “the rich” paying for it. the point about American Social Security is that “worker paid” is direct and obvious and gives the workers a direct, personal, claim on their own benefits. this is politically and psychologically important… and much safer for them.
with regard to cutting the payroll tax as a stimulus:
you could have a stimulus without cutting any tax. just borrow and spend more for, say, something that would increase productivity overall.
in any case the IMF lady did not say “increase the skills of workers and provide a stimulus to the ecnomy” she said “increase the skills of workers and reduce the cost of labor.”
that means cutting wages, whether cutting them directly, or cutting them indirectly by reducing “benefits.” i am reasonably sure that reduce the “social security tax” would very quickly result in reducing benefits.
which is what all the twisting and turning of logic from the “right” is all about in the first place. they simply are not and never have been interested in a general increase in prosperity. they are interested in increasing their own wealth and power and reducing the wages and potential power of workers is the obvious place to get there.
and i am truly sorry if this sounds like the general rant of the leftists. most of them think i am a shill for the rich.