Japan should raise wages
I direct you to an article by Adam Posen and Olivier Blanchard called, Japan’s solution is to raise wages by 10%. (Link)
The only way that Japan is going to get its needed inflation is to firmly raise the wages of labor. Many of us knew Abenomics was not going to work unless wages rose. And they never did enough. Now there must be concerted action by labor, business and the government to raise them.
Stating the obvious, none of us want inflation for inflation’s sake. What we want is a healthy vibrant economy and one of the signs of that would be a healthy amount of inflation.
After WWII economists developed a set of theories and models to explain the world they saw. As each decade went by, their theories and models tended to be narrowed to fit a growing economy with intermittent brief recessions. They would be shocked when some of their theories failed spectacularly in the real world. (Removing trade tariffs, and removing financial regulation both had huge unintended consequences in the United States.)
Japan was the canary in the mine. In about 1990 when their economy began to decline, they resorted to the standard monetary policies and later to the standard fiscal policies. They assumed that they were facing a garden variety recession but they were actually facing a change that was not going away. Competition had rapidly increased for the developed world’s import markets and they were at a real disadvantage. The end result has been that Japan has run up a huge government debt. Obviously that can not go on forever, but they deserve an A for their efforts.
See this webpage and click MAX just above the graph:
From that graph it is apparent that the Japanese government began spending beyond its means from the beginnings of their economic problems. After about 25 years, their economy has still not recovered because they have not been dealing with the real source of their problems. (Competition from other southeast Asian countries, especially China.)
In the past couple of years, Japan’s government has pleaded with employers to voluntarily raise wages. The result was always disappointing. Only the strongest businesses can afford to place themselves at a competitive disadvantage and unilaterally raising wages is a disadvantage.
Heaven only knows how the Japanese will resolve their economic problem but using the answers provided by economists’ theories and models has been a dismal failure.
You know I have said before that even if a government floods an economy with fiscal stimulus, the money circulates according to the labor share. And if labor does not rise, as in Japan, the fiscal stimulus will not be effective. The end result has to be more labor share. But just as you pointed out, there is cheap labor elsewhere keeping wages down in one way or another. That vicious cycle has to be broken. Wages have to start going up to cover the social costs of labor in order to maximize net social benefits.
Like you say, inflation is not the goal, but it would be a good consequence.
In my reply I said that fiscal stimulus would not be effective. I really meant that fiscal stimulus would not change the effective demand limit unless it somehow changed labor share.
Labor share up, capital share down. Capital goes offshore or into
non-productive uses (share buybacks, M&A, etc.).
More probable that capital finds non-productive uses with low labor share. When you raise labor share, you raise effective demand in the economy. Then you will see more productive uses of capital income to serve the higher labor share consumption. Profit margins may come down a bit but businesses used to do fine with lower profit margins.
“I really meant that fiscal stimulus would not change the effective demand limit unless it somehow changed labor share.”
Yes, I agree. But I think that would be asking too much out of the Japanese economy.
Theirs is an export based economy. They import raw materials, manufacture goods, and export those products at a profit. That worked well until China started manufacturing those same goods at a cheaper price.
Now you would have them to increase labor share. So they must employ more labor or pay labor higher wages. Either way, their production costs go up. I don’t understand how that could happen, given the competition they face.
Japanese businesses are just as disloyal as ours, they will make a nice profit or else move.
China could bring down disaster on themselves If they fire on a US Navy ship in the South China Sea.
Other than that, I suspect that technology will have to provide some kind of answer. Wind mills and solar arrays are now generating a lot of electrical power but unlike traditional power plants they are spread across the population. Perhaps small cheap intelligent machines could allow some production to be spread across the population. Something like the new 3D printers but after they have been refined over time.
I hear you. So basically Japan is stuck with low inflation because they are unable to raise wages… end of story, right?
Well, they were courageous enough to try Abenomics, so maybe they will be courageous enough to push wages higher and save the country from the burden of public debt. Also, if you increase demand domestically in Japan, the economy will be stronger internally.
When I was Chile, I was studying the records of their central bank. For years the central bank was suggesting that wages be raised so that the economy became stronger internally and not so dependent upon exports. Eventually wages did start to rise and the economy got better. Now we will see if the domestic economy is strong enough to hold off the effects of China buying less copper.
Could they not be bold and institute a Net Worth tax and use the modest revenue increment to lower the VAT and payroll taxes. You want more spending in the population and this may cause some of the general price stats to increase.
The population would spend more if they understood the full contribution burdens won’t be loaded upon them as the very wealthy are also contributing from their accumulated wealth. They save to bear the burdens, lighten the burdens.
It would take a bold, societal-level agreement that seems right to me.
I agree that raising labor share would be better for the majority of the population. The question is, how does the government force employers to hire more employees or to pay them more?
You give Chile as an example of a country where wages did rise, but did those higher wages translate into a higher labor share?
During WWII wages in the US went up dramatically but labor share did not. See Figure 6 on document page 9:
I do not understand this term EFFECTIVE DEMAND.
How does this differ from adjectiveless DEMAND, or from INEFFECTIVE DEMAND?
Just increase net transfers, it doesn’t matter to people where the money comes from, it just matters how much they get.
A question I have Edward, who is this Japan that should raise wages?
I mean, to put it more seriously, how exactly is this supposed to happen?
Let me make a suggestion – the government institutes a national dividend (at say 1% of median income), and then proposes to increase it at 1% every year for the next decade. What effect do you think this will have?
A dividend? From what profits?
It is interesting to raise wages. It is possible that this will be the spark that causes inflation that may lead to hyperinflation. Especially with a culture that saves more than they spend, the government will seek to get their money back somehow, and the first thing if economic history should suggest, is the increased cost of everyday goods. once this happens, what will the country have to do to reverse this tide? Since nothing in Economics is solid nor perfect, it is very difficult to see what exactly might happen until it does actually unfold, but raising wages in a country that predominantly saves money will only make the hole deeper in some regard.
The main reason why Japan is in this pickle in the firs place is because they thoroughly appreciated lower real interest rates compared to other established countries like Germany. The country used the lower interest rates supporting the people that got them into office, like the farmers and the construction workers, rather than taking advantage of it and easing their own debt. If given a second opportunity, can anyone be sure that they will actually use said opportunity with efficiency?
Welcome to AB. I had to approve your first post.
Posen and Blanchard make their pitch in the Nikkei Asian Review :
Getting serious about wage inflation in Japan
Good find Marko…