The 'If wages at bottom go up prices will rise' meme

[wonderpup]

Radio 4 are carrying an item on the 'plight' of the agricultural sector post Brexit- apparantly tradgedy has struck in the form of labour shortages that have resulted in the need to pay higher wages. Already the demands are being made for the Government to do something about this horrific situation.

(Funny how wage inflation at the top is 'the free market' while wage inflation at the bottom is a problem to be solved by government intervention- how does that work exactly?)

So is this a good news story or a bad news story?

Well from the point of view of the people standing in the mud picking fruit and veg it's a good thing- right? But-of course- as soon as this claim is made up pops some academic to point out that this is but a pyrhric victory- because  while the wages of that fruit picker might rise he will not gain from his good fortune because this rise in wages will be consumed by the price rises that will inevitably follow in it's wake. In other words increasing the incomes of the poor is a zero sum game.

So the argument goes that by raising the incomes of the poor we in fact make the poor worse off- or at least no better off. And there is a persuasive logic to this claim, at least at first glance.

OK;

Let's make another assertion then- let's make the claim that it's impossible for companies to save money by reducing wage costs  because this will in turn reduce demand and therefore consume the savings made on lower wages by reducing the companies profits. In other words reducing wage costs is also a zero sum game.

This argument employs the same kind of logic as the first- but almost no house trained economist would stand behind it- why not? Surely it's common sense that reducing wages must reduce demand, because almost all demand is nothing but wages being spent into the economy. ( Credit is of course just a way to spend tommorrows wages today)

What seems wrong with the second argument- the wage cost argument- is that there is no clear correlation between company A's decision to cut wages and the demand for company A's products- it seems foolish to assert that somehow the profits of company A are a direct derivative of their wage policies.

But surely the same argument could be made regarding our fruit pickers- just because they get a pay rise this will not in itself lead to price rises across the entire economy.

But here's the sting in this particular tale; if the argument is that the aggregate effect is what matters here-not the specific effect in any given instance- then it's true to say that by suppressing wages at the bottom then in aggregate this will have the  effect of suppressing demand and so reducing profits.

Which allows me to make the counter claim that if wages at the low end went up then lowpaid workers would in fact be better off because the increased demand this wage rise would create would generate the additonal profits required to pay for that wage rise- meaning that no price rises would occur as a consequnce of rising wages at the bottom.

So have I succeded in killing the wage rise/price rise meme?

I think the truth is that both claims are equally suspect because both depend on neat correlations between wages, prices and demand that in fact do not really exist- in the real world the relationship between incomes, prices and demand is far more complex and so cannot be reduced to a simple ;If-then-else style equation.

If the wage rise=price rise argument seems more plausible it's only because this claim has been given the blessing of an academic elite who have long since been bought and paid for by those who benefit from the currency of such ideas- what could be more comforting to the wealthy than the notion that any widening gap between their income and the poor is an inevitable consequnce of iron cast economic 'laws' that cannot be gainsaid?

 

[EnglishinWales]

What is the discussion? Vast inequality is bad for the individual and society at large and has been since time immemorial. Just because some stingy snobs are ignoring this truth doesn't make their anxieties worthy of any inspection. The end.

Edited January 19, 2017 by EnglishinWales

[wonderpup]

Quote

What is the discussion? Vast inequality is bad for the individual and society at large and has been since time immemorial. Just because some stingy snobs are ignoring this truth doesn't make their anxieties worthy of any inspection. The end.

Truth these days is just another commodity- that's the really my point. The claim that you can't help the low paid by increasing their incomes seems absurd untill you throw enough money at enough 'experts' - who will then assure you that it's true.

This is the alchemy by which convenient theory is transmuted into apparent cast iron fact. Most economic theory today is serving the interests of whichever wealthy entity is funding the research/institution from which that theory emanates.

So 'truth'  becomes a matter of purchasing power- if you can pay enough intellectual whores to support your view then that view becomes the 'truth'.

 

 

Edited January 19, 2017 by wonderpup

[nome]

The least wealthy (but still not "poor") farmers are the smaller upland sheep farmers and smaller dairy farms and these rely on very little labour if any at all, the work is usually self contained within the family along with just occasional use of contractors. 

 

The wealthiest farmers and the most profitable farms are the large cerial and fruit and veg producers and these could easily afford to raise the rates of pay for their workers and maintain very healthy margins without the need for the cost of their produce to rise significantly

[LiveinHope]

Could raising wages promote/enable inflation in non-discretionary spend, utilities and housing, and could reducing wages see a fall in discretionary spend, both from t0. So, could you could have your cake and eat it in Wonderpups argument, initially?

With regard to farmers raising wages, I think that the way we pay for our food in an EU world is so manipulated that it is difficult to determine what would happen or what is a fair price. We pay most for the price of our food through taxation rather than in the price marked on the packet of strawberries and we're competing with imports across Europe. There has to be something wrong when it became economical to hatch turkey chicks in the UK and ship them to Eastern Europe as day-olds where they were reared and slaughtered (cheap food and labour costs) before shipping the refrigerated carcass back to the UK to remove the breasts (the breasts can then be classed as produced in the UK), and then finally, to ship the remains of the carcass back to Poland to be turned into sausages - and make a profit. Most family farmers want an end to subsidies and an end to the EU, and a proper farm gate price for their products and labour. We'd all benefit and we'd probably get more turkey breasts really produced in the UK.

And the cost of living needs to reduce in the UK, which is houseprices and the burdensome public sector.

Edited January 19, 2017 by LiveinHope

[thehowler]

Will bosses ever voluntarily share more of their profits with their workforce? You see it with bonus handouts in a few companies, but the low/static wage culture is pretty entrenched in the UK and despite all the guff at Davos yesterday about sharing out more cake for the workers, they haven't been willing to do it even with the political system tottering around them.

The income multiple cap within companies sounds crazy, but it would be an incentive for top dogs to pay the tea makers more cash.

[darkmarket]

9 hours ago, wonderpup said:

while the wages of that fruit picker might rise he will not gain from his good fortune because this rise in wages will be consumed by the price rises that will inevitably follow in it's wake

At the moment it's quite possible that even small wage rises will be offset by inflation. As an argument against the wage rises though, it's as intelligent as you've noted.

If it were correct, we'd view the labour market clearing at a lower rate as a positive signal for the economy, businesses would view decreased consumption and the expectation of decreased revenue as a signal to invest more and shareholders would buy more shares in the hope of them losing value.

[spyguy]

Over the last 10 years, farmers moved into a lot of high value crops that require a lot more labour- fiddly veg, soft fruit etc.

They sized tax credits to subb their workforce, when the 1£ = ~2E.

Now 1£ ~ 1E their willing work force are less willing.

Farmers can fck off and pay for 100% of their labour cost.

 

[TheCountOfNowhere]

Wages at the bottom not gon up for 15 years....Prices at the bottom gone up 100% in 15 years.

 

Stupid f**king theory.

[zugzwang]

Mother Theresa has been on the stoop this morning making the standard Blairite-Thatcherite market fundamentalist noises about free trade, globalisation and 'partnership'. Partnership being a euphemism for 'take it or leave it', pleb, not an invocation to the merits of co-operative ownership or unionisation. Globalisation works, said Mrs May, quite forgetting to say how, and now Brexit has given us the opportunity to make it work even better.

For the common good, in fact. Whatever that is.

Edited January 19, 2017 by zugzwang

[wonderpup]

Quote

Mother Theresa has been on the stoop this morning making the standard Blairite-Thatcherite market fundamentalist noises about free trade, globalisation and 'partnership'. Partnership being a euphemism for 'take it or leave it', pleb, not an invocation to the merits of co-operative ownership or unionisation. Globalisation works, said Mrs May, quite forgetting to say how, and now Brexit has given us the opportunity to make it work even better.

For the common good, in fact. Whatever that is.

May's postion is hopelessly contradictory- on the one hand she see's the need to stick to the 'free trade' songsheet to promote UK PLC- on the other she's trying to give a wink and a nod to the 'left behind' to show that she is their new best freind- the two cannot be combined into a coherent whole- because they were not 'left behind' they were in fact mowed down by the same Globalisation free trade juggernaut that she is trying to hitch our collective wagon too.

What the Elites seem to have constructed over the past 20 years is a world order that ferments populist backlash as a by product, since it requires the destruction of the living standards of those living in western democracies. Perhaps decades of success in the looting of Banana republics caused them to overlook the fact that in a functioning democracy in which votes are actually counted the plebs have a way to strike back- and they will eventually vote you out of the game if you piss them off in large enough numbers.

Edited January 21, 2017 by wonderpup

[Digsby]

You and I share similar views on a lot of topics, wonderpup, I know already.

When I posted a comment in the Trump thread yesterday linking wage-rises, inflation, and elitism, I had not seen this thread but the thought process that went through my mind in the preceding 5 minutes was pretty much exactly yours.

Hence my conclusion that wage inflation must be a good thing for increasing economic equality and therefore unemployment is required to preserve the wealth of the elites.

[PropertyMania]

One of the few benefits to leaving the EU is that we could abolish these ridiculous farm subsidies that enrich already wealthy farmers and screw the third world. But no, EVERY Brexiter I have heard on the issue says farm subsidies will continue or even increase. WTAF?

[Mikhail Liebenstein]

On 19/01/2017 at 11:14 AM, spyguy said:

Over the last 10 years, farmers moved into a lot of high value crops that require a lot more labour- fiddly veg, soft fruit etc.

They sized tax credits to subb their workforce, when the 1£ = ~2E.

Now 1£ ~ 1E their willing work force are less willing.

Farmers can fck off and pay for 100% of their labour cost.

 

This is basic economics.

The UK has never been very efficient at food production as it is labour intensive, and has only got away with things due to imported cheap labour and tax credits.

This is the problem with the fall in the Pound due to Brexit, whilst in theory we might be a cheaper place to produce stuff, the reality is a lot of our businesses rely heavily on imports even if they are exporters and that includes labour as well as goods.

Brexit will leave most of the people who voted for it much worse off, whilst those in more internationally anchored jobs like banking and technology will make out like bandits. 

I'm seeing this already, I work it IT Sales, and we along with all our competitors have put up prices as universally everyone works in Dollars, and guess what, most of our customers just have to bite the bullet and spend the money as price have risen across the board. It's similar in the steel industry for car manufacturers, they can't stop making cars, so just have to pay more for their imported steel.

The rebalancing of the economy needed post a Brexit could easily take 30 years, as there are a lot of indigenous industries we no longer have, and even if some try and start up they may well fail due to a lack of a ecosystem to supply them.

 

 

[goldbug9999]

On 1/19/2017 at 0:54 AM, wonderpup said:

Which allows me to make the counter claim that if wages at the low end went up then lowpaid workers would in fact be better off because the increased demand this wage rise would create would generate the additonal profits required to pay for that wage rise- meaning that no price rises would occur as a consequnce of rising wages at the bottom.

The increase demand would not create more profit unless prices were increased.

No matter how many times you try to restate the same thing using different words, your assertions are nonsense because you choose to ignore the key factor of productivity.

General wage increase and reductions are both self-cancelling so long as productivity remains constant. All you are doing is changing the amount of nominal currency units for prices and wages up or down without affecting aggregate buying power (or true demand). Its only by increasing aggregate productivity that we can increase aggregate buying power.

Edited January 21, 2017 by goldbug9999

[Democorruptcy]

On 19/01/2017 at 4:50 AM, nome said:

The least wealthy (but still not "poor") farmers are the smaller upland sheep farmers and smaller dairy farms and these rely on very little labour if any at all, the work is usually self contained within the family along with just occasional use of contractors. 

 

The wealthiest farmers and the most profitable farms are the large cerial and fruit and veg producers and these could easily afford to raise the rates of pay for their workers and maintain very healthy margins without the need for the cost of their produce to rise significantly

The most money is in farming houses:

 

Quote

 

Such recipients includes Stephen Strathdee (pictured above with what appears to be a Bentley Continental GT) . His company, Glenmore Properties Ltd. (from May 2010 Strathdee Properties Ltd.) owns 39 farms. On one farm alone, 18 housing plots have been sold for £1.3 million since the the farm was originally bought for £300,000). In March 2009, a total of 24 plots of land were being advertised for sale at a total guide price of £2,935,000. He is a farmer and a property developer.

Mr Strathdee and his family clearly work hard. He started life with £200 in 1970.

But why, when benefits received by poor families in the UK are to be capped at £26,000 and housing benefit at £400 per week, did Mr Strathde’s company receive £1,038,124.52 in public subsidy in 2009? And why, in the years since 2000, did it receive a total of £3.5 million in public subsidy? And why do all the other noble families listed above receive such largesse from the public purse?

http://www.andywightman.com/archives/91

 

 

Quote

 

4. Stephen Strathdee’s Glenmore Properties, based at Viewfield Farm at Craigellachie in Aberlour was given £1.04 million in 2009. Along with his family, he runs 39 farms in Moray, Aberdeenshire and the Highlands, as well as a quarry, forestry and other businesses. “I was entitled to the money and it’s within the rules,” he said. “I’ve worked hard for everything I’ve got.”

http://www.robedwards.com/2010/05/revealed-scotlands-farm-subsidy-millionaires.html

 

 

 

The Express suggests another £916k in 2015 while listing lots of individual amounts

http://www.express.co.uk/news/uk/648108/EU-farming-cash-squandered-wealthy-David-Cameron-wealthy-uncle

 

[nightowl]

Places in the world with high wages generally have high living costs. Places with low living costs have low wages.  Compare Denmark to vietnam for example... Things in Denmark are expensive but it enjoys a better standard of living overall.

[nightowl]

1 minute ago, nightowl said:

Places in the world with high wages generally have high living costs. Places with low living costs have low wages.  Compare Denmark to vietnam for example... Things in Denmark are expensive but it enjoys a better standard of living overall.

Oops almost forgot.....the key thing seems to be how well that countries economy functions rather than lowest costs. Our economy has been becoming more and more dysfunctional and pushing us the Vietnam direction.

[wonderpup]

Quote

The increase demand would not create more profit unless prices were increased.

No matter how many times you try to restate the same thing using different words, your assertions are nonsense because you choose to ignore the key factor of productivity.

General wage increase and reductions are both self-cancelling so long as productivity remains constant. All you are doing is changing the amount of nominal currency units for prices and wages up or down without affecting aggregate buying power (or true demand). Its only by increasing aggregate productivity that we can increase aggregate buying power.

Your post demonstrates the point I was making in my OP- trying to make neat correlations between pay and prices is not really possible.

For instance you argue here that if we become more producitive we increase aggregate buying power. But what does 'become more productive' actually mean? Well it can only mean that we need to employ less people to achive the same output. But how does employing less people increase aggregate demand? Surely demand will go down as productivity goes up since less people are needed to produce the same outputs?

So the argument that the way for the low paid to get better off is for them to become more productive is wrong- because the more productive they are the less of them will be required making their labour less valuable as the amount of surplus labour increases.

In fact a hyper productive system would be one in which demand would be all but destroyed since so few poeple would need to be employed to make everything there would be no wages to spend.

[goldbug9999]

2 minutes ago, wonderpup said:

But what does 'become more productive' actually mean? Well it can only mean that we need to employ less people to achive the same output. But how does employing less people increase aggregate demand? Surely demand will go down as productivity goes up since less people are needed to produce the same outputs?

Right so the industrial revolution resulted in 20% of the population making all the food and clothes everyone needs and everybody else sitting around doing nothing ? - well clearly not.

"it can only mean that we need to employ less people to achive the same output" - it does mean that but history has shown that we don't stick with same output, we use the extra productive capacity to produce more/different things which we then buy with the increased purchasing power, if this were not true then our standards of living wouldnt have progressed past the caveman stage.

 

[Digsby]

7 hours ago, goldbug9999 said:

The increase demand would not create more profit unless prices were increased.

No matter how many times you try to restate the same thing using different words, your assertions are nonsense because you choose to ignore the key factor of productivity.

General wage increase and reductions are both self-cancelling so long as productivity remains constant. All you are doing is changing the amount of nominal currency units for prices and wages up or down without affecting aggregate buying power (or true demand). Its only by increasing aggregate productivity that we can increase aggregate buying power.

You're totally missing the point. Wonderpup doesn't think that is true, he (or she) is simply posting out that it is no more or less true than the counter claim.

You are correct, the buying power is unchanged. So therfore who cares whether wages are increasing driving prices up or decreasing driving prices down?

There *should* be a shortage of labour.

[Digsby]

3 hours ago, goldbug9999 said:

Right so the industrial revolution resulted in 20% of the population making all the food and clothes everyone needs and everybody else sitting around doing nothing ? - well clearly not.

"it can only mean that we need to employ less people to achive the same output" - it does mean that but history has shown that we don't stick with same output, we use the extra productive capacity to produce more/different things which we then buy with the increased purchasing power, if this were not true then our standards of living wouldnt have progressed past the caveman stage.

 

Shoe Event Horizon 

[PopGun]

I wonder how much houses would be now, if over the last 30 years wages increases in real terms 3%pa yet credit expansion and affordability (interest rates) remained static...

Happy to be proved wrong, but my guess would be prices to wages wouldn't be so out of kilter, and people would have to work for their wealth instead of speculating for it.

Edited January 22, 2017 by PopGun

[winkie]

Prices for the basics in life will only go up as much as the lowest paid in society income increases.....that is why a loaf of bread here is £1 rising to £1.20 and a loaf of bread in say India is approx equivalent of ~25p or less.....raising of wages is the indication/justification for other things to rise.....the very wealthy rise above it all, they do not know the price of bread they don't need to.....inflation of prices is good for the few and bad for the rest......in one hand out the other.

[winkie]

19 hours ago, nightowl said:

Places in the world with high wages generally have high living costs. Places with low living costs have low wages.  Compare Denmark to vietnam for example... Things in Denmark are expensive but it enjoys a better standard of living overall.

Taxes are also higher in Denmark so everyone therefore enjoys a better standard of living, sharing today's income collected today possibly, rather than building up deficit/debt to roll over and pay interest ongoing into the future?.....live now pay tomorrow attitude.