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Cooking the Books: Hoping for Profits

Since the current crisis broke out in 2008 some commentators have been prepared to admit that Marx was right about globalisation and even about capitalism being an unstable economic system that swings between booms and slumps. It is rare, though, for them to admit to a conflict of interest between workers and capitalists over the share of the wealth the workers produce. But an article by Chris Dillow in the Investors Chronicle (7 March) did.

Dillow wrote that ‘high unemployment could see profits grow nicely.’ His argument was that ‘there are more people out of work than headline figures suggest’ and that this ‘could force down real wages even further in the next 12 months.’ He added gleefully, ‘for investors, however, there's an upside to this –lower real wages could mean a rising profit share and hence decent profit growth even if the economy grows only slowly.’ He explained:

‘There's a simple reason for this. In conventional economic terms, an excess supply of labour bids down its price, increasing consumer surplus for its purchasers. Or in Marxian terms, mass unemployment shifts bargaining power from workers to capitalists.’

It certainly does. Since wages are a price (of someone’s ability to do a particular job), increased unemployment is a sign that the supply of this commodity has exceeded the demand for it. In accordance with the law of supply and demand, and despite trade union resistance, its price will tend to fall and with it the workers’ standard of living.

As investors like to think that investing in the stock exchange is a science, Dillow provided a more detailed prediction for them:

‘History suggests this usually happens. Since the data on economic inactivity began in 1993, there has been a good correlation (0.51) between a wide measure of unemployment –the unemployed plus 'inactive' who want a job as a percentage of the working age population –and the non-oil profit share four quarters later. High rates of joblessness, such as in the early 1990s, led to high profit shares. And lower rates, in the mid-2000s, led to lower profit shares.’

We don’t know that the link between unemployment and the share of profits in GDP is that precise, but there clearly is one. Lower real wages (what they will buy) do not necessarily mean higher real profits, since in a slump GDP falls (that’s what a slump is). So, both real wages and real profits can fall at the same time. Which is what does happen at the start of a slump. Eventually, however, the lower wages will be one of the factors helping to restore profitability, a necessary condition for any recovery.

Dillow concluded: ‘I suspect this year might be a better one for corporate profits than for workers.’ This is based on assuming that GDP will grow in 2013. In which case, with lowered wages, both real profits and profits share would increase. But he could be wrong. There could be a triple dip or a flat-line in 2013. If this happens, then 2013 would be a bad year for profits as well as wages. But, either way, it is going to be a bad year for workers.