Monday, 21 May 2018

Getting An Argument Entirely Backwards (And Why Falling Wages Are A Good Thing Overall)

Sonia Sadha does a brilliant job of getting her argument about pensions and risk entirely the wrong way round. She tells us that:

"We need to ask hard questions about why young people are being expected to bear increasing amounts of individual risk. The obvious example is pensions. Gone are the days when companies pledged to pay retired workers a guaranteed income for the rest of their lives; today’s workers must, instead, save into an individual pot that must last."

I'm sure the irony will be lost on most people associated with The Guardian - but this, of course, from a paper whose columnists continually bleat on about the plight of falling wages. To understand why this article is misjudged, you need to understand why falling wages are not the bogie that most think they are.

But before we get to that, it's a shame Sonia Sadha doesn't seem to grasp that pensions are not separate from the price of labour - they are deferred labour costs bundled into the same overall package as pay. Whether the pay/pension costs to the firm are at a ratio of 90/10, 80/20 or 70/30, they are still total costs that a business must factor into its overall balance sheet.

In an age where firms are forced to pay a minimum wage, which puts the value of labour out of whack with the price of labour, and then consequently only serves to increase both unemployment and consumer prices* - and in an age where people are living longer and longer, making pensions prohibitively expensive - the reality is, more and more employees are not worth the combined costs to their employer of their pay and a lengthy pension payment plan.

Because your pension is deferred pay, the only way for many employers to keep up the kind of pension commitments that were prominent when we didn't live so long would be to increase the pension to pay ratio, which would mean cutting pay to increase pension duration. And that's a policy you will never see a Guardian columnist endorse. What Sonia Sadha sees as the ignominy of apparently "forcing individuals to bear more risk" is really just a simple case of arithmetic.

Why falling wages are a good thing
Now, about falling wages: falling wages are, in net terms, a good thing for an economy overall. Obviously they are bad for the people whose wages have fallen - but falling wages are a transfer from workers to employers (and indirectly, to consumers) - there is no net negative externality, it is merely a distributional effect.

But there are several additional positive elements to lower wages. People tend to confuse economic growth and job creation, but most of the real benefits of economic progress come from saving labour, not increasing its cost. Lower wages means it costs less to produce something, which is a similar benefit to finding a new efficiency or a new technological innovation.

On top of technology improving living standards, and consumers having goods and services more cheaply, there is a third positive to falling wages in places like the UK and USA: such as boosts for our domestic economy (not to mention poorer people in the developing world having more money when home grown inefficiencies are outsourced). This is to do with the ratio of total labour costs to real output, and how the decreasing wage you need to pay employees to produce one unit of output increases the likelihood of keeping it in this country - another thing The Guardian writers have always claimed to like.

* This is basic Econ 101 that politicians love to ignore. The supply and demand curves of labour are factors that mustn't be overlooked, because employment and wages are always in a trade off tension. Price floors like a state-imposed minimum wage artificially hold wages higher than their marginal value, which means when economic supply and demand forces are trying to push wages down, something has got to give with a minimum wage law, and it's usually unemployment and increased prices for consumers.