The materially contented working man and woman drive economic growth. Spending by the working and middle class is the panacea for a strong economy. Prosperous societies are made up of working men and women who live well above minimum wage subsistence. The working and middle class spender is the true driver of aggregate demand. Consumer demand is central to modern economic thinking on how to build economic growth in a world where deflation is rearing a head.
Now, a report by one Professor Engelbert Stockhammer of the University of Kingston in England caught this commentator’s eye. Written in 2013, it was titled, “Wage led growth.”
The paper asserted that wage growth supported consumer demand in an economy by driving up consumption and ultimately productivity. In fact, Dr. Stockhammer showed clear evidence in his research that demand in most economies was driven by wages. In other words, what Jack the Consumer took home each week or month in terms of his pay was crucial to the national economy.
Minimum wage
One argument for a minimum wage is based on economics, not necessarily equity. And that is that by increasing the minimum wage in an economy, consumer demand is increased. This increase in demand in turn generates increased productivity and growth. The same argument is made for state welfare. When the poor are looked after in terms of their welfare and well being, this filters through to consumer demand, and subsequently economic growth is strengthened.
Dr. Stockhammer also argued that higher wages induced greater productivity. On the other hand, when Jack the Consumer was squeezed through low pay and a high unemployment environment — the austerity model — economies stagnated through lower consumer demand.
A glimpse into advanced economies, and sectors within these advanced economies, shows clearly that the most productive businesses are those where workers are well paid and well taken care of. This is not rocket science. And it is an idea that is keenly studied by economists in the Keynesian School of Economic Thought: the advocates of economic stimulus.
Why is wage growth, and the condition of the working and middle class, a subject of study for the stimulus warrior? Simply because the poor and middle class spend a higher share of their income than the rich.
Then, when one assesses the percentage of the total population making up these two social groups, the poor and middle class are the overwhelming majority: the 90 percent, so to speak. That is the reason the middle class is viewed as the central generator of economic growth, both at a national level and at an international level.
‘Supply side’
At the other end of the spectrum are those who argue that capital investment drives growth. This is the school of thought of the Supply Side Thinkers of the Chicago School. These are the disciples of the late economist and supply side guru Milton Friedman.
The argument here is that it is the businessman and his enterprise culture that drive economic growth. Consequently, policies such as deregulation, spending cuts and small government are viewed as the drivers of growth.
Dr. Stockhammer disagrees! He describes this mode of thinking as having led to increased inequality, declining wages, and a declining middle class.
In fact, the trend with supply sided thinking has been to grow economies through exports and consumer credit, both of which are unstable. Supply side economics has seen a shift: from earnings from labour to earnings from capital or investment. Growth driven capital is a reason for wealth and social disparity globally.
Demand side economics, on the other hand, argues the case for strong domestic markets with prosperous and high spending consumers who generate rising aggregate demand. This in turn leads to stronger economic growth.
Dr. Stockhammer sees this shift from a consumer demand orientation towards a producer orientation as the leading cause of global wealth inequality and anaemic economic growth. And he is supported in his prognosis by a number of economists with serious credentials like Nobel Prize winners Paul Krugman and Joseph Stiglitz.
There is a paradox in the world of low wages and unemployment much loved by the austerity warriors. A firm may want to reduce wages, but if all firms want the same thing, then there is a reduction in demand right across the market that backfires, hitting the demand for the firm’s own products.
There is a second paradox: the paradox of thrift. This argues that what is good for the individual and family is not necessarily good for business. One man’s frugality may be virtuous. But the frugality of millions of men and women leads to a contraction in demand. Anaemic demand means that firms cease to hire, and even make workers redundant. That in turns leads to slower economic growth, and ultimately recession.
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