In my many years of experience in Brussels and at the OECD, of all employers’ representatives those from Austria were amongst those that could usually be relied upon for a fair-minded and fact-based exchange on economic-policy issues. This undoubtedly reflected a well-entrenched system of “Sozialpartnerschaft” in the Alpine republic. All the more disturbing, therefore, to hear Karlheinz Kopf, General-Secretary of the Austrian statutory employer federation WKÖ, entirely misrepresent the basis for a sensible wage policy. This cannot stand uncorrected.
In a debate with his counterpart from the Chamber of Labour, Christoph Klein, Mr. Kopf argued as follows: employers recognize the principle that both those who put their capital at risk and those that commit their labour are entitled to share in the gains resulting from higher productivity. Respecting this principle means giving workers nominal wage increases that compensate for price increases plus one half of productivity increases. This, he claimed, is the way to ensure that capital and labour benefit equally from technical progress.
That may sound reasonable, but it is either breathtakingly ignorant in macroeconomic terms or is a clever but dishonest way to achieve the opposite effect, namely a permanent shift in income away from workers and in favour of capital. In fact the correct formula for a wage policy that achieves a balanced distribution of gains is inflation compensation plus a (real) increase fully in line with productivity gains. This is easily shown.
Let us start with the idea that capital and labour make an equal contribution to output. (As we will soon see this is not correct, but it is in line with Mr. Kopf’s reasoning, so we will take it as a point of departure.) Initially output (Y) consists of wages (W) and profits (P) in equal proportions. For instance 100 = 50 + 50. Let us suppose, to keep the numbers simple, that both inflation and productivity growth are at 2%. So nominal output rises to 104. In Mr. Kopf’s view a fair and balanced outcome would give workers price compensation (2%, i.e. €1) and half of productivity gains (1%, i.e. €0.50). In other words workers receive €51.50. But because nominal output is 104, capitalists now take home €52.50 (104-51.50). What sounds balanced is in fact completely unbalanced. If this process is maintained, labour’s share of national income will steadily shrink and capital’s share rise.
What nominal wage increase would ensure balanced participation of labour and capital? Obviously: an increase to 52% with a matching rise for profit-earners. That’s a 4% increase, the sum of 2% inflation and – even if this is counter-intuitive – the entirety of the 2% productivity increase.
In actual fact it is worse than that. Wage and profit shares are in reality closer to two thirds for the former and one third for the latter. (This is the example that Markus Marterbauer uses.) In this case if real wages increase by only half of productivity growth, then there is scope for profits to increase by 4%. The equal-sounding distribution norm in fact generates real profit growth that is four times as fast that of wages.
(If you want to check the maths: From 100 = 662/3 + 331/3 the distribution shifts in nominal terms to 104 = 682/3 + 351/3 and in real terms to 102 = 671/3 + 342/3. The real increase for workers of 2/3 represents 1%, that for capitalists of 11/3 represents 4%.)
Here again, and indeed whatever the initial wage/profit split might happen to be, the only way to have balanced income growth and an unchanged so-called “functional” income distribution, is for both wages and profits to grow in real terms at the full rate of productivity growth; and in nominal terms at that rate plus inflation. Anything less (more) implies a permanent shift in national income in favour of profits (wages).
This is a simple matter, but bears reiterating, because the real-world and policy implications of this so-called “golden wage rule” are very profound, particularly if we also consider the issue of which inflation rate is the right benchmark. Interested readers may like to look further here and here.
I would certainly like to retain my favourable opinion of Austrian employer representatives and hope that Mr. Kopf will see fit to clarify that a simple error was made rather than an attempt at sleight of hand. Agreement by both the social partners and other economic policymakers on the golden wage rule is a precondition for balanced distribution and tension-free economic development.
 You can listen to the entire discussion in German here. The relevant passage starts around 9:50. I am indebted to Markus Marterbauer, Chief Economist at the Chamber of Labour, for directing my attention to this. I also draw on a numerical illustration of his which can be found on his twitter account: https://twitter.com/MarterbauerM
Honi soit qui mal y pense…This really is most basic economics. But-in Germany it´s even worse. Almost no share of productivity gains for the workers. Beeing an economist by training,I´m not so much concerned with matters of distributional justice.
However, a rising share of capital income needs to be offset with rising indebtedness, since the recipients of capital income tend to hoard money. This is a recipe for desaster, as repaying debts requires “de-hoarding”, (unless creditors are willing to roll-over outstanding debt indefinitely) Which the “hoarders” will never do. A financial crisis ensues-and guess who foots the bill? And who will come out of that mess unscathed? That´s what angers me. And that´s what´s really happened in the so called “euro-crisis”