Wages, competitiveness and unemployment analysed

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In June 1999, the Institute of Labour of the Greek General Confederation of Labour (INE-GSEE) published a study examining the prevalent orthodox thinking in Greece that increases in real wages reduce profitability, investments, employment and competitiveness. The study claims that this belief is not borne out by the statistical data for Greece.

Since the beginning of the 1990s, unit labour cost has been widely regarded as the principal factor determining the competitiveness of the Greek economy. The Institute of Labour of the Greek General Confederation of Labour (INE-GSEE) has conducted a study, published in June 1999, to examine whether this belief is correct. In particular, the study examined: whether unit labour cost in Greece is high by international standards: whether it is increasing or decreasing; whether changes in unit labour cost reflect increases or decreases in competitiveness; whether reduction of the cost of labour in real terms has led to an increase in investments and employment; and whether reduction of the cost of labour has brought about a reduction in unemployment. The study also examines the determining factors in industrial employment.

Wages and competitiveness

The INE study finds that the statement that employment increases as a result of a decrease in the cost of labour, an increase in competitiveness and exports, and an attendant rise in profitability and investments, is not borne out by the statistical data for Greece. In particular, the study finds that: a) the cost of labour in Greece is low by international standards (in common currency); b) the fall in the cost of labour in national currency and in real terms has not been accompanied by an improvement in competitiveness as evidenced by external trade data (ratio of exports to imports, market share, trade deficit as a percentage of GDP etc), or by lower unemployment; and c) the rise in profitability based on the lower cost of labour in the period from 1986 to 1994 failed to lead to an increase in investments or to a resultant increase in employment.

The study states that there was a redistribution of income to the detriment of workers over the 1986-1994 period, and that this has:

  • caused a significant reduction in the cost of labour (and in workers' share of income), but this has not been transformed into increased competitiveness, because of a very loose relationship between the cost of labour and competitiveness;
  • reduced active demand with an attendant fall in productive investments and GDP growth rates;
  • contributed, aided by high interest rates, to a transfer of resources from paid labour to share capital which is not favourable to productive investment; and
  • led to higher unemployment because it has reduced incomes among workers below a crucial income level deemed necessary to support households in normal circumstances.

In Greece there was a rise between 1995 and 1998 in real wages and unit labour cost in real terms. According to the theory prevailing in Greece, this rise in wages should have caused inflation to rise, due to increases in the real cost of labour which are transferred to prices. The INE study finds that this did not happen, because in the "open" sector of the Greek economy, which is exposed to international competition, prices develop under pressure from the increasing penetration of imports in the domestic market. Such pressure does not allow enterprises to make more than a partial shift of increases in labour costs to prices. This slows down the rate of increase in prices of domestically produced goods, and thereby also slows down the rate of increase of the consumer prices index.

Also of interest is the fact that inflation fell dramatically between 1995 and 1998 - counter to the predictions of the predominant economic theory, according to which increased demand should cause a rise in prices. From 1995 to 1998, total domestic demand rose rapidly, and despite the fact that a major part of demand was diverted to imports due to revaluation of the drachma, it carried the Greek economy forward to recovery. Increased demand was transformed not into a higher rate of inflation, but into increased production. Thus, instead of decreasing due to the increased cost of labour, as foreseen by the dominant theory of labour economists, employment rose in the economy as a whole at an annual rate of 1% for the occupied population, and at an annual rate of 2% for those in paid employment (with the exception of 1997, during which it remained virtually unchanged, falling 0.4%).

Employment in industry

In the second part of its study, INE analyses the factors which have led to a lower employment rate in Greece's manufacturing industry. Beginning in 1986, the fall in industrial employment appears, according to the study, to be a result of longer working time (brought about by the change in the balance of forces between labour and capital), continued replacement of labour by machinery (automation and mechanisation), changes in organisation to increase the capital-intensity of labour, the low rate of investment (ie a low rate of accumulation of capital) and periodic reductions in the degree of utilisation of productive capacity.

Replacement of labour by machinery, longer working time and saving of labour through organisational changes all lead to the creation of "surplus staff". However, the phenomenon of "technological unemployment" is not apparent in the most backward parts of Greek industry, which have adopted a strategy of cheap labour. Here, reductions arise exclusively from clearing less productive capital out of the enterprise (closing down units of production fully or partially).

The INE study states that the reduction in employment could be counterbalanced by a rapid accumulation of capital - ie large investments of fixed capital. However, the higher profitability which is a feature of the recent period of industrial restructuring has not been the only driving force for accumulation of capital, because the manner in which Greece sought to escape the economic crisis in the period up to 1994 was by managing lower demand. The more rapid economic growth achieved from 1996 onwards has allowed fixed capital investments to increase, and according to most indicators to check or at least to slow down the fall in industrial employment.

Commentary

Real wages in Greece have fluctuated around a steady long-term trend: periods of increase follow periods of decrease, so that ultimately the average real wage has remained steady at a level equivalent to the comparable wage at the beginning of the 1980s. This policy has been based, inter alia, on the theory that increases in real wages reduce profitability and therefore also investments and employment, and that they also reduce the competitiveness of the Greek economy and therefore help bring about an increase in unemployment.

The INE study shows that these views, which became prevalent in Greece during the 1990s, are not borne out by the statistical data. It also shows that in order to understand the phenomenon of the spectacular reduction in industrial employment, it is necessary to make an analysis which transcends the simple theoretical schema according to which increases in real wages reduce employment.

The study notes that the Greek economy is in a period of boom, not because the cost of labour has been reduced and profits have increased, but because since 1995 an effective (Keynesian) policy of demand management has been implemented. (Elias Ioakimoglou, INE-GSEE)

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