Ideas to boost wage growth from the Resolution Foundation

March 26th, 2015 at 3:38 pm

I’ve often touted the UK think tank, the Resolution Foundation, for their timely, accessible, and smart policy work on all the key issues–macro, micro, budgets. But their work has been particularly important in raising the issue of wage stagnation in the UK–basically, the Brits caught our wage disease–median and low-wage stagnation, growing dispersion–later than us, but catch it they did.

Now RF’s out with an edited volume called Securing a pay rise: The path back to shared wage growth with chapters by some of the top UK economists (and a couple of Yanks thrown in for good measure, including myself and Arin Dube, one of the top authorities on the minimum wage).

I’ve not yet read everything in there but here are a few highlights:

–John Van Rheenen writes about the productivity/wage split, particularly regarding the median wage. Both he and Steve Machin lean strongly into the idea that faster productivity growth would help boost wages, though I didn’t think either said enough about what it would take to reconnect faster productivity growth to median and low-wage growth. OTOH, Van Reenen does something you don’t see enough of: he thinks in some depth about ways in which the UK could boost what’s been a flat productivity trend, including a pretty granular set of ideas for investments in public infrastructure (guided by an independent board/planning commission), housing reform (the housing market in big UK cities has looked awfully bubbly for a while now), skills training, and incentives for more patient capital.

Alan Manning presents one of the more in depth analyses I seen recently of the decline in worker bargaining power. I find this to be a resonant point (despite the fact that they refuse to spell labor the way we do! Don’t they know the credo of US union-busters?: “There’s no (yo)u in labor!”):

When it comes to thinking about how wages are determined, these days one must think about things from the perspectives of employers as that is with whom the decision now lies. Once workers would have been looking for the first opportunity to press for higher wages, now employers are looking at pay rises as a last resort. What makes employers pay higher wages is when they are struggling to recruit and retain workers, as a result of competing for labour directly with other employers. One of the features of the labour market in recent years (and not just the UK, the US as well) is that the level of direct job-to-job moves has been falling – these days a higher proportion of new hires are from non-employment rather than from other jobs.  And when your latest hire is from non-employment there is no other employer to compete directly with.

As he notes, there’s been less employment churn here as well and that’s one reason for reduced wage pressures. His solutions include full employment, improved labor standards, more union power, and grass roots mobilization around pay.

–Like all of these authors, Simon Wren-Lewis calls for better macro policy in the interest of promoting full employment–I mean, it is the land of Keynes. He makes a point that I’ve been featuring in much of my writing lately as well: when the Fed funds rate is stuck at zero and demand remains weak, fiscal policy is that much more important. But with politicians turning to austerity at tremendous costs to their constituents, Wren recognizes the need for a plan B:

Central banks have tried quantitative easing (QE), and this has had some effect, but it remains a very uncertain and ineffective policy. There is a simple and straightforward alternative which would be much more effective: creating money and giving it to people to spend. This is what economists call helicopter money, although some have recently called it QE for the people. QE involves creating large amounts of money to buy financial assets, with highly uncertain effects on demand. Helicopter money would involve creating much less money with a much more certain positive impact on demand.

He goes through the reasons why this could work (convincingly, I thought)–and not necessary risk spiraling inflation–but at least here, I’m quite certain our Fed’s charter would disallow QE for people. Last I checked, the Fed couldn’t even buy municipal bonds (they were restricted to Treasuries and “agency” MBS). Thus, it would take Congress to legislate a peoples’ QE, which um…isn’t gonna happen. Still, I get his motivation–he’s trying to simulate more direct fiscal policy measures through the independent monetary authority. Good for him for thinking outside the box!

I look forward to reading the rest of the entries and suggest you do as well.


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3 comments in reply to "Ideas to boost wage growth from the Resolution Foundation"

  1. urban legend says:

    I wish we could see some discussion of deficient infrastructure spending over the last 30 years as an important underlying cause of the stagnant labor market we’ve seen in the absence of a bubble of some kind (and even with a bubble in the GW Bush year). If Democrats are going to win again, they will need to overcome a massive deficiency in the propaganda machinery. Having a coherent explanation of recent history as experienced by ordinary Americans that contains the seeds of a solution would seem to be an essential element of such a story. Merely staking out positions based on polling results — we need infrastructure, rah, rah! — has been what Democrats do, and the failure to develop a story of what has gone wrong and how only Democrats will do what it takes to fix it — bringing the country’s long-neglected infrastructure up to modern standards and generating important jobs for several million people in the process — is an important part of why we suffered the worst mid-term disasters in modern history despite a President who won election handily twice.

    • Richard Solomon says:

      Although Obama talked about ‘shovel ready’ projects, these never really happened in a substantial and ongoing way. Perhaps his heart wasn’t up’to’the fight it would have required with Congress to get these projects set up and going over the last few years. Maybe with the 2016 election coming up more potential candidates could use these to show they are in support of ‘job creation?’ Admittedly somewhat cynical but could still be helpful.

  2. William Meyer says:

    I am a big fan of this site, congratulations on fighting the good fight.

    Having said that, however, I would ask that you cease “stopping short” in your discussions when you run into politics (see your comments on helicopter money). If there is any systemic flaw that economics must overcome, it is abandoning the pretext that the realms of economics and politics are separate. It would be, I think, most valuable to frankly discuss why the Federal Reserve cannot undertake helicopter money (as in whose interests are being served by such a restriction). It reminds of the constant invocation that in 2008-9 “we” (?) “saved the financial system.” What I never hear is an answer to the obvious question “who, exactly, is the financial system?” Obviously lots of people got thrown under the bus in those years, so “the financial system” clearly isn’t everybody. How were the winners and losers chosen? Many people don’t want to think about such matters, but these questions won’t get any prettier by being ignored or kept in darkened cellars.