Do wage rises fuel inflation?

By Michael O’Brien

From the point of view of the bosses there is never a good time for a pay rise! In the context of inflation being at its highest in decades, a particular line of argument from employers, echoed in the media by establishment politicians and mainstream economists, is that wage rises demanded from workers will fuel inflation.

The subtext of this argument is that it is futile for workers and their unions to press for wage rises that will meet or exceed the rising cost of living. This argument can be taken apart on a number of levels.

Supply chain bottlenecks 

Firstly, the origins of the current inflation rate clearly does not stem from rising wages. Certainly in an Irish context, average wages have been rising in recent years in the public and private sector since the austerity years of 2008-2016. However, during the pandemic it has tended to be low single-digit percentage rises, similar to the average annual inflation rate of 2% that pertained over the same period.

It is basically uncontested that the current bout of inflation arises from a number of supply chain bottlenecks both in terms of components, like semiconductors, as well as logistical and transport related problems linked to the impact of the Covid pandemic. Along with the upending of these global supply chains, migration patterns have been cut across — giving rise to labour shortages, such as drivers in the road haulage sector.  

However, the impact of rising wages has quite a different relationship to prices. The ‘added value’ that takes place in the production process between all the inputs into a good or service and the end product, is human labour. When this added value is realised through the eventual sale on the market, the proceeds are divided between wages for the worker and profits for the capitalist.

Who takes the hit?

Therefore a rise in wages obtained by workers, enabling them to meet the rising cost of living or better still to improve their standard of living, comes at the cost of less profit per unit of output for the capitalist. This means they have less to spend on their own private consumption and / or to reinvest and expand production beyond what they have already produced.

But why cannot the capitalist simply raise the price of their products in line with the wages rises they have been forced to concede? In most circumstances, the competitive pressures between rival capitalists in all sectors force a general alignment between the price of products and the above mentioned inputs of living labour and raw materials, energy, machine depreciation etc.

These competitive pressures are more or less present in all branches of the capitalist economy. In consumer goods and many services they tend to be most present. Where there are monopoly aspects to some goods, such as intellectual property or real estate, this can be less the case.

Ireland: Wages down, profits up

Finally, if you take an economy-wide view of how the proceeds of all economic activity is shared between wages on the one hand and profits on the other, there has been a near constant decline in the former since the mid 1970s in Ireland and beyond. In 1975, wages accounted for an astonishing 92% of GDP in Ireland. By the early 1990s, it was down to 75%. In 2009, it had fallen to 55% and in recent years it has hovered around 50%. 

This decline took place despite the massive growth of the workforce in Ireland. To sum it up, a growing workforce collectively has been receiving a shrinking share of an expanding economy over the last half-century. This observation alone makes total nonsense of the idea that rising wages to meet the recent rise in inflation will do anything other than claw back some of the profits that have been creamed in recent decades. Arguments to the contrary are used only to serve the rule of the bosses. 

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