There are two ways a capitalist economy can get out of slump. The first is by raising the rate of exploitation of the workforce enough to drive up profits and renew investment. The second is to liquidate weak and unprofitable capital (i.e companies) or write off old machinery, equipment and plant from company books (i.e. devalue the stock of capital). Of course, capitalists attempt to do both in order to restore profits and profitability after a slump. This is taking a long time in the current crisis since the bottom of the Great Recession in mid-2009.
Progress in devaluing and deleveraging the stock of capital and debt built up before is taking time and even being avoided by monetary policy. But progress in raising the rate of exploitation has been considerable. I took a look at the EU’s AMECO database to see if I could measure the progress by different capitalist economies in squeezing wages and raising the rate of exploitation.
I used the AMECO database measure of adjusted wage share, defined there as compensation per employee as percentage of GDP at factor cost per person employed. In effect, this is the cost to the capitalist economy of employing the workforce (wages and benefits) as a percentage of the new value created each year. I calculated the percentage change in that share since it peaked at or during the crisis (the peak for each country in wage share was mainly in 2009, although there were exceptions).
I found that every capitalist economy had managed to reduce labour’s share of the new value created since 2009. Labour has been paying for this crisis everywhere.
Not surprisingly, it has been the workers of the Baltic states and the distressed Eurozone states of Greece, Ireland, Cyprus, Spain and Portugal who have taken the biggest hit to wage share in GDP. In these countries, real wages have fallen, unemployment has rocketed and hundreds of thousands have left their homeland to look for work somewhere else. That has enabled companies in those countries to sharply increase the rate of exploitation of their reduced workforce, although so far that has not been enough to restore profitability to levels before the Great Recession and thus sustain sufficiently high new investment to get unemployment down and these economies onto a sustained path of growth – now after five years and in some cases seven.
The major economies of Japan and the US have also achieved a ‘moderate’ reduction in wage share, which is helping to restore profitability. What is worrying for the capitalists of Italy or France is the failure to raise the rate of exploitation much at all. This failure is slowing the pace of return to profitability – no wonder Italy’s economy continues to grind down and France is stagnant. And clearly Slovenian capitalism needs to do more to reduce wage share there if it is to recover profitability – at least as much as Portugal, Ireland or Romania.
In all these countries, governments are preparing an agenda of ‘labour market reform’, spending cuts and privatisations designed to hit labour’s share in the national output – there is more misery to come. Italy’s new Blairite leader, Matteo Renzi is pledged to such neoliberal measures. France’s Francoise Hollande has had a Damascene conversion to a neo-liberal agenda and Slovenia’s ‘social democrat’ coalition is preparing similar measures.
But it is not just the politicians of austerity that have driven or aim to drive down labour’s share. Government policy based on the Keynesian ‘alternative’ of debt restructuring and devaluation of the currency has led to the same result. Iceland’s supposedly Keynesian policies have produced a larger fall in labour’s share than in austerity Spain or Portugal (see my post, https://thenextrecession.wordpress.com/2013/03/27/profitability-the-euro-crisis-and-icelandic-myths/).
One of the striking contributions to the fall in labour’s share of new value has been from emigration. I have reported before on this important factor in turning things round for the smaller capitalist economies in the Baltic states and Ireland (https://thenextrecession.wordpress.com/2012/09/30/can-austerity-work/). But now it has become an important contribution to reducing costs for the capitalist sector in the larger economies like Spain. Before the crisis, Spain was the largest recipient of immigrants to its workforce: from Latin America, Portugal and North Africa. Now that has been completely reversed.
Hundreds of thousands of migrants are heading back home every year, and the country’s overall population is falling for the first time since records began. Spain’s population jumped from 40m in 1999 to more than 47m in 2010, one of the most pronounced demographic shifts experienced by a European country in modern times. The surge was almost entirely the result of migrants from countries such as Ecuador, Bolivia, Romania and Morocco. The number of foreigners living in Spain increased eightfold in just over a decade, while their share of the population soared from less than 2 per cent in 1999 to more than 12 per cent in 2009.
Now, increasingly, they are leaving Spain altogether. In 2008, one year after the start of the crisis, Spain still recorded 310,000 more migrant arrivals than departures. That number fell to just 13,000 the following year before turning negative in 2010. In 2012 there were more than 140,000 more departures than arrivals, and the pace of the exodus is picking up fast. According to the national statistics office, the foreign-born population now stands at 6.6m, down from more than 7m just two years ago.
This net emigration acts a safety valve for Spanish capitalism – unemployment would be even higher without it. It helps the capitalist sector get down labour costs without provoking a social explosion. However, over the longer term, this spells deep trouble for capitalist expansion in Spain. There remains a huge overhang of unfilled real estate from the property boom that triggered the crisis in Spain. A falling population means that this form of unproductive capital will continue to weigh down Spain’s recovery. And with a public sector debt to GDP ratio hitting 100%, there will be fewer workers to extract value to service that debt.
Unless the productivity of the smaller labour force can be raised, Spain’s growth rate will be limited. German capitalism has succeeded to some extent in coping with a falling population (see my post, https://thenextrecession.wordpress.com/2013/09/22/german-capitalism-a-success-story/). Spanish capitalism will be less able. After all, most of the people emigrating are the skilled and more productive parts of the workforce. They are going to Germany, France, the US, even Latin America. Maybe they will return as many did in the Baltic states or Ireland after past recessions ended. But given the length of this Long Depression, this time could be different.