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[1] 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. [Read more…]