Is it time for wage increases?

TheBigShort

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In the context of general economic theory, wage increases are inflationary. Central banks around the world are trying to stoke inflation. Their primary tool is QE which is failing. It is only creating greater divides between rich and poor.
This is why property prices are rising in affluent areas of capital cities around the world, but elsewhere they are stagnant. This is why debt burdens are increasing not reducing as all money issued today is on the basis of a loan taken out rather than the value of productivity.
The quickest and fairest way to stoke inflation into developed economies is through increased wages. This will stoke inflation, increase savings and reduce debt burden.
But it will also mean a massive transfer of capital to labour. Something that right wing free market worshipping monetarists cannot countenance right now.
 

Purple

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In the context of general economic theory, wage increases are inflationary. Central banks around the world are trying to stoke inflation.
Agreed.


Their primary tool is QE which is failing. It is only creating greater divides between rich and poor.
Way too simplistic.


This is why property prices are rising in affluent areas of capital cities around the world, but elsewhere they are stagnant.
I don’t follow that argument.


This is why debt burdens are increasing not reducing as all money issued today is on the basis of a loan taken out rather than the value of productivity.
Excellent point.


The quickest and fairest way to stoke inflation into developed economies is through increased wages. This will stoke inflation, increase savings and reduce debt burden.
Only if everyone does it. If most do it and others don’t then those that don’t will have an advantage as they’ll get the up-side of global inflation while increasing their competitiveness. As a small, very open and very expensive economy I think we should be the last to increase wages.


But it will also mean a massive transfer of capital to labour. Something that right wing free market worshipping monetarists cannot countenance right now.
Why do you think that? Anyone who is really in favour of free markets will be in favour of it.
 

PGF2016

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The quickest and fairest way to stoke inflation into developed economies is through increased wages. This will stoke inflation, increase savings and reduce debt burden.
Has the debt burden in Ireland reduced over the last 30 years as wages have increased? Or is personal debt at an all time high?
 

odyssey06

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A better question would be why haven't wage increases already happened if there is that much pressure? Would it already have happened if labour supply was more constrained?

Right wing free market worshipping monetarists don't have a problem with wage increases. They have a problem with how they come about.
How do you propose to implement a 10% wage increase to all workers in the economy? How will you compel all private sector employers to comply with the increase? How do you guarantee that the wage increase won't simply result in thousands of jobs going to Poland, India or the UK?

How about a tax cut?
 

TheBigShort

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Has the debt burden in Ireland reduced over the last 30 years as wages have increased? Or is personal debt at an all time high?
Personal debt is at an all time high. But it has nothing to do with wages. It has to do with the availability of credit. If a bank is prepared to lend to me 10 times my wage instead of 5 times my wage, then regardless of my wage, if I accept the offer of the larger amount it will increase my indebtedness.
 

dub_nerd

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The quickest and fairest way to stoke inflation into developed economies is through increased wages. This will stoke inflation, increase savings and reduce debt burden.
This sounds wrong on a number of counts. First of all inflation and savings pull in opposite directions. Savings in this country are already increasing at a rapid rate -- the problem is that it is being used to pay down debt (which counts as savings in the statistics), instead of being spent into the economy. It is difficult to increase people's propensity to spend when there is such an overhang of historical debt.

Second, increasing inflation should not be an end in itself without increasing productivity. Otherwise you simply penalise those with savings and give to those with debts. If you merely wanted to increase spending then give to those with no discretionary income who are more likely to spend any additional income, for instance those on welfare. And if you really want to target spending specifically, only give it to those with no debt. But this is neither sensible, fair, nor likely politically doable. And it won't close the rich-poor divide.

Third, the government doesn't directly control wages in general. It could raise the minimum wage but if it wants to use it as a tool to control inflation then it better be prepared to reduce it again, which is historically not done nor politically acceptable. You have similar problems with raising public sector wages. And mandatory wage controls have rarely worked out well, as they interfere with efficiency and price signals. You will probably just increase unemployment.

If you really want to increase inflation, given our situation of considerably less than full employment, you need to increase the number of people getting paid, not the amount earned by people already in employment. The main tool under the government's control is infrastructure spending. Especially at a time of low borrowing costs it could make sense to open taps somewhat on productive public spending. On the other hand we are also at a time of unprecedented government borrowing levels. Any changes in bond yields has the potential for hugely negative impact on the economy.

Arguably, yields are so low because governments are not spending on infrastructure and are trying to reduce debt. On the other hand, as the proverbial "small open economy" with no control of our interest rates, we might get away with something countercyclical while the big boys aren't looking, i.e. use their prudence to our advantage by borrowing hugely at low rates. However, that option is closed to us as the European Fiscal Stability Treaty requires us to balance the books within stringent limits.

So apart from relatively small tweaking around the edges "we are where we are". It is the result of the credit splurges of the 2000s, the crooked practices of banks, and the general demographic decline of the West. If you are optimistic we just have to wait for debt to reduce and inflation to slowly increase. If you are pessimistic we are just waiting for the next economic calamity to befall us, and/or political events to overtake us as the disadvantaged decide they won't put up with it anymore.
 

Purple

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Excellent post dub_nerd.
It is the result of the credit splurges of the 2000s, the crooked practices of banks, and the general demographic decline of the West.
It's also the result of massive and unsustainable increases in wages of state employees (including pensions). Over the last 15 years that's cost more than the direct cost of the bank collapse.
 

TheBigShort

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This sounds wrong on a number of counts. First of all inflation and savings pull in opposite directions. Savings in this country are already increasing at a rapid rate -- the problem is that it is being used to pay down debt (which counts as savings in the statistics), instead of being spent into the economy. It is difficult to increase people's propensity to spend when there is such an overhang of historical debt.
Correct about savings and inflation, my err, it should have read increased consumption, generating further employment.

Second, increasing inflation should not be an end in itself without increasing productivity.
I agree, and its my fault if a straightforward wage increase is interpreted as the answer by itself. But I would argue that wage increases and productivity increases are somewhat a chicken and egg scenario. You cant have wage increases without productivity increases, alternatively productivity increases can be generated through higher wages. It really depends on the business cycle and in my view wage increases are overdue. As such increasing wages will begin to generate increased productivity.

If you merely wanted to increase spending then give to those with no discretionary income who are more likely to spend any additional income
True to an extent, and there is another thread on welfare payments that argues for cutting welfare in order to push people into work. I would argue that increased wages for lower paid workers will also drive spending and increase participation in the workforce.

Third, the government doesn't directly control wages in general. It could raise the minimum wage but if it wants to use it as a tool to control inflation then it better be prepared to reduce it again, which is historically not done nor politically acceptable
Not politically acceptable but historically it was done under the last FF administration.

You have similar problems with raising public sector wages. And mandatory wage controls have rarely worked out well, as they interfere with efficiency and price signals. You will probably just increase unemployment.
I disagree somewhat. Prices tend to be fairly sticky also and even in the face of falling demand, prices can be pretty resilient.

If you really want to increase inflation, given our situation of considerably less than full employment, you need to increase the number of people getting paid, not the amount earned by people already in employment.
Again, my fault for not stating the intent here.
It has been argued elsewhere that there is a welfare dependency culture in this state. And it has been argued that welfare should be cut to 'push' people into working. I have argued that it would push people into poverty. I have argued that a solution, or as part of a solution to unemployment levels and moving people out of welfare traps is to increase wages.

The main tool under the government's control is infrastructure spending.
True, and this would generate the increased participation in the workforce and subsequently the demand for labour.

It is the result of the credit splurges of the 2000s, the crooked practices of banks, and the general demographic decline of the West.
Agreed.
 

Firefly

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Great post dub_nerd and put better than I could. Just to add that just like the unintended consequences of increased homelessness due to the removal of bedsits, I think forcing an increase in wages would disproportionatly affect those on lower paid, temporary jobs. Take the example of the local shop who gets a window cleaner in once a fortnight. Given that his wage costs have just risen, perhaps he might get one of his staff to clean the windows instead. Perhaps the manufacturing plant down the road, weighing up whether to expand their operations here or move abroad would choose the latter.


In the context of general economic theory, wage increases are inflationary. Central banks around the world are trying to stoke inflation.
I suppose the first question is do we need to raise inflation in Ireland? Perhaps you could provide evidence of this requirement?

The quickest and fairest way to stoke inflation into developed economies is through increased wages. This will stoke inflation, increase savings and reduce debt burden.
But it will also mean a massive transfer of capital to labour. Something that right wing free market worshipping monetarists cannot countenance right now.
Why is it fair, per se, to increase everyone's wages?
 

PGF2016

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Personal debt is at an all time high. But it has nothing to do with wages.
So why state that higher wages reduce the debt burden?

Higher wages should reduce the debt burden but in practice rarely does (and human behaviour is to blame for this).
 

Firefly

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Personal debt is at an all time high. But it has nothing to do with wages. It has to do with the availability of credit.
I'm not so sure about that - debt levels rose here due to availability of credit certainly, but this also happened at a time of wage increases. In fact, if wages have nothing to do with debt levels as you say, then would you foresee people borrowing more if they knew their wages were due to be cut?
 

Purple

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You cant have wage increases without productivity increases,
Tell that the Dublin Bus and LUAS employees (soon to be followed by all other CIE company employees).

alternatively productivity increases can be generated through higher wages.
Can you explain that please?



It really depends on the business cycle and in my view wage increases are overdue. As such increasing wages will begin to generate increased productivity.
Different businesses have different cycles. The business I’m in thrived through the last few years but we are down by 40% on turnover from 18 months ago (hence the 45% pay cut I took). That is the opposite of what is happening generally for businesses selling into the Irish market.




True to an extent, and there is another thread on welfare payments that argues for cutting welfare in order to push people into work. I would argue that increased wages for lower paid workers will also drive spending and increase participation in the workforce.
That thread is about welfare traps.



Not politically acceptable but historically it was done under the last FF administration.
Yep, an FF government which was willing to make hard decisions; a rare thing. They got hammered though so they’ll be back to populism in future.
 

TheBigShort

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I suppose the first question is do we need to raise inflation in Ireland? Perhaps you could provide evidence of this requirement?
http://www.cso.ie/multiquicktables/quickTables.aspx?id=cpm01_1

The CSO data above shows that country is languishing very close to a deflationary trap. If deflation is not desirable at this time, then some inflation is.

How does that happen ?
Ever heard of overtime, bonuses, commission?
If you earn €30,000 pa to produce 30,000 cremeggs and then I ask you to change operations so that you now could produce 40,000 for the same money, you may or may not be agreeable to that. If I offer €5,000 extra in wages you may be more agreeable. As a consequence, wages rise followed by productivity increases.

So why state that higher wages reduce the debt burden?

Higher wages should reduce the debt burden but in practice rarely does (and human behaviour is to blame for this).
You can only get into debt if you borrow money. For sure, the more you earn the more confident you may be to borrow bigger sums. But thats why we are supposed to have financial regulation. So that borrowers and lenders dont get carried away with themselves.

How do you propose this should happen? Raising the minimum wage?
Raising the minimum wage would be a start. But I think the minimum wage in itself is inadequate. I do think there is a premium to be paid over and above the minimum wage for a worker who is reliable, punctual, good at their job, and who provides continuous service.

I'm not so sure about that - debt levels rose here due to availability of credit certainly, but this also happened at a time of wage increases. In fact, if wages have nothing to do with debt levels as you say, then would you foresee people borrowing more if they knew their wages were due to be cut?
Increasing wages for sure will give the earner confidence of taking on more debt, but it still should all be relative. If I earn €50000 I may think I can borrow €150,000 for a property. If I earn €150,000 I may think I can borrow €600,000. But its up to the bank (in their capacity as expert financiers) to tell me I would be out of my depth and at risk of negative equity.

Tell that the Dublin Bus and LUAS employees (soon to be followed by all other CIE company employees).
You should go to the Transdev Ireland website where they openly boast about all the productivity increases they achieved with the workers, during the period of pay freezes and increased revenue streams.
Dublin Bus is back in profit, what is there to be told?

Can you explain that please?
If im not mistaken, the offer of higher wages can act as a motivating force to produce more?

Different businesses have different cycles. The business I’m in thrived through the last few years but we are down by 40% on turnover from 18 months ago (hence the 45% pay cut I took). That is the opposite of what is happening generally for businesses selling into the Irish market.
Yes, we can all point to micro elements of the economy that work conversely to overall trends.

Yep, an FF government which was willing to make hard decisions; a rare thing. They got hammered though so they’ll be back to populism in future.
Targeting minimum wage workers for wage cuts could in no way be regarded as a 'hard' decision. Minimum wage workers were identified as an easy target.
 

Firefly

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http://www.cso.ie/multiquicktables/quickTables.aspx?id=cpm01_1
The CSO data above shows that country is languishing very close to a deflationary trap.
No it doesn't. If you look at 2015 you will see negative figures for 10 months out of 12, but in 2012 there are negative figures in only 4 out of 8 months, so it could actually be just as easily argued we are seeing more inflation!!

In fact if you look at 2009 - 2011 when we can see prices were really falling, do you think that was the time to force wages to be increased when the economy was close to falling off a cliff and there was talk of the eurozone itself imploding?

In any case, these are just tables. Do you have a link that backs up your assertion that we need inflation in Ireland?
 

TheBigShort

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No it doesn't. If you look at 2015 you will see negative figures for 10 months out of 12, but in 2012 there are negative figures in only 4 out of 8 months, so it could actually be just as easily argued we are seeing more inflation!!

In fact if you look at 2009 - 2011 when we can see prices were really falling, do you think that was the time to force wages to be increased when the economy was close to falling off a cliff and there was talk of the eurozone itself imploding?

In any case, these are just tables. Do you have a link that backs up your assertion that we need inflation in Ireland?
But its 2016 and what is to come that is of interest. The trend is clear that since 2015 inflation is barely getting off the ground.

Its not a question of whether I think we need inflation or not, its a question of whether the ECB thinks we do or not. Its mandate is to manage inflation at around 2-3% and it has embarked on a QE program to induce inflation into the eurozone economies.
This has not worked in Europe and is not working in Ireland. It is my view that rather than engage in this program of QE that a preferential approach would be to start increasing wages.
 

Firefly

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I think you are contradicting yourself. First you say (emphasis mine)

Personal debt is at an all time high. But it has nothing to do with wages. It has to do with the availability of credit.
Then you go on to provide an example of where someone would borrow more money based on higher wage levels!

Increasing wages for sure will give the earner confidence of taking on more debt, but it still should all be relative. If I earn €50000 I may think I can borrow €150,000 for a property. If I earn €150,000 I may think I can borrow €600,000.
 

Firefly

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Its not a question of whether I think we need inflation or not, its a question of whether the ECB thinks we do or not. Its mandate is to manage inflation at around 2-3% and it has embarked on a QE program to induce inflation into the eurozone economies.
This has not worked in Europe and is not working in Ireland. It is my view that rather than engage in this program of QE that a preferential approach would be to start increasing wages.
Simple question...let's say inflation was running above target at say 5%. Would you be as eager to seek wage cuts to reduce inflation?
 

TheBigShort

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I think you are contradicting yourself. First you say (emphasis mine)



Then you go on to provide an example of where someone would borrow more money based on higher wage levels!
Yes, I agree, the more a person earns, the more inclined he may be to borrow over and above what is financially sound.
But that doesn't mean a bank should lend the money does it? The banks are the self-proclaimed expert financiers, the regulator is there to ensure a responsible approach to borrowing and lending.
Private debt got out of hand, not because of wages, but because of irresponsible banking and lack of regulation. When someone on minimum wage can borrow 10 times income for a mortgage, its not their wages that is leading to unsuitable debt, its wreckless borrowing and lending.
 
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