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Bill Mitchell — With corporate profits booming, business can afford to pay higher wages

Summary:
Last week, I provided a graph in this blog post – The Left/Right distinction is as relevant as ever as corporations gouge profits out of pushing inflation (May 2, 2022) – which showed negotiated wages growth in Europe was declining and real negotiated wages had fallen sharply over the last several months. I am continually on the lookout for evidence that the current inflationary episode, no matter how alarming, is not being driven by structural forces in the labour market even though unemployment rates have fallen somewhat. A music segment follows.The basic equation is the relationship of capital (ownership) share and labor (individual employee) share of profit. This depends on labor bargaining power, since capital is largely in control of setting the wage owing to its generally superior

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Last week, I provided a graph in this blog post – The Left/Right distinction is as relevant as ever as corporations gouge profits out of pushing inflation (May 2, 2022) – which showed negotiated wages growth in Europe was declining and real negotiated wages had fallen sharply over the last several months. I am continually on the lookout for evidence that the current inflationary episode, no matter how alarming, is not being driven by structural forces in the labour market even though unemployment rates have fallen somewhat. A music segment follows.
The basic equation is the relationship of capital (ownership) share and labor (individual employee) share of profit. This depends on labor bargaining power, since capital is largely in control of setting the wage owing to its generally superior market power. owing to ownership being in a position to set the wage. This can be seen as a type of monopsony.

There are two major factors that influence labor power — availability of workers relative to business need for them based on demand and institutional arrangements that affect labor power, e.g., laws and regulations that support the interests of labor. The first factor comes into play at full employment, when labor becomes scarce. Bill argues that the advanced economies are not at full employment at present.

The second depends on the political power of capital and labor relative to each others. The latter is most decisive. This may have been a factor in the Seventies stagflation when union power was strong, for instance, even though the economy was not. Since then, institutional arrangements have been changed to favor capital, so labor power is not coming from this direction. This is where the left-right divide is most visible relative to labor to capital share.

Stagflation fears are rising again with various explanations and remedies being put forward. Bill and others argue that this is not a period of full employment with labor power increasing owing to scarcity for this reason. If labor is scarce, it is owing to the conditions around the pandemic that make workers reticent to accept the risk of contracting illness relative to the wage offered. Wages need to rise to attract more workers into accepting this risk. 

The other reason for increasing inflation is reduced available real resources owing to lagging production and distribution, again due to the pandemic. 

The pandemic is an exogenous shock so that the currently rising inflation needs to be analyzed on the merits of existing conditions, not textbook theory based on normal times. While some economists are proceeding on this many, many are not and are just using the conventional narratives about "inflation." and proposing conventional remedies for it.

Bill Mitchell – billy blog
With corporate profits booming, business can afford to pay higher wages
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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