The Madness of the Drive to Lower Wages

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Michael Burke argues on Progressive Economy that IBEC’s attack on the JLC wage setting mechanisms in order to drive pay lower ‘is not simply morally indefensible. It is economically illiterate’.

Looking at the main sectors of the economy: households, corporates and goverments in terms of saving and investment he points out that in a normally functioning market economy households save a proportion of their net incomes which are used by corporations to borrow for the purposes of investment. Governments then run a surplus or deficit depending on their policy positions.

However, Ireland has not been a normally functioning market economy for some time. Between 2002-2008 the household sector has been a net borrower, while the corporate sector has been a net saver and “has significantly increased its savings in the economic slump”. And when “both the household sector and corporate sectors are net savers government is obliged to become a net borrower”.

And the government’s response to becoming the net borrower was to try to reduce that borrowing by taking more of the household sector’s income through taxes, pay cuts and reducing government’s own investment.

As a policy decision this failed for two reasons: Firstly, it forced the household sector to save even more, and not to spend. And secondly, with both households and government reducing their own spending the corporate sector did not see the need to increase its investment and instead increases its savings. As a result, Michael argues, “the economy goes into a tail-spin and the government borrowing remains stubbornly high”.

It is this reluctance of the corporate sector to borrow for investment and to save instead which is the cause of the imbalances within the economy.

“The slump in investment arithmetically accounts for the entire slump in the GDP of this economy. It is the corporate refusal to invest which both accounts for the slump and will prove hugely damaging to the economy over the long run- if it is not corrected.”

Talk of the country being ‘broke’ however, hides the fact that in 2009 the net income of the corporate sector was €38.8bn. While this has been reduced by the slump it remains uninvested as the corporate sector continues to be a net lender.

The solution to end the crisis, rather than reducing household savings by cutting wages (IBECs plan) is to:

“consider temporary measures to access these huge cash balances for investment purposes – taxes, levies, windfall payments and so on. These should be directed to key sectors of the economy which suffer a chronic investment deficit, infrastructure, rail, ports, broadband, health and education and so on.”

The investment of savings, primarily from households, is the key to future prosperity, not the opposite which the attack on the JLC wage setting mechanisms amounts to, and which we can see is just more of the same.

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Donagh is the editor of Irish Left Review. Contact Donagh through email: