One of the things that was going around during that time was a chart of the changes in wages over time. It was a histogram of the percentage change within bands, and the lesson was that the vast majority of wage changes during the immediate aftermath of the crisis was stuck at zero. It seemed that the prices of labor were sticky in a nominal sense. No one was really taking wage cuts. Jobs were eliminated or stuck at zero increase. There was legislation in place for states to incentivize job sharing like was more broadly seen in Germany but to my knowledge there was little take up of this structure. If you were employed, you had extraordinarily little power and you were happy to have a job since most people knew people who had lost jobs or housing or both.
Were I better at Google, I might be able to find the exact chart I am thinking of, but I cannot. Instead, below is a proxy that shows in aggregate just how close to the floor wage changes were for years after the crisis.
Playing with the different time series on FRED will show you different looks at this change, and if you overlay various inflation measures you can see that there was not much move in real wages either during this time.
One of the reasons I heard during this time was that policy makers were laying off the gas on both monetary and fiscal policy tools was that they were afraid of inflation. Many of people who were in the position to be of influence on economic matters had been in graduate school or were young scholars during the inflationary period that coincided with the Vietnam War and Nixon’s closing of the gold window signaling the end of the Bretton Woods system and the full introduction of free floating fiat currency. We know of the story of the Volcker shock and the recessions of the early 80s as breaking the back of inflation, but what we do not talk about often is how the political move of breaking unions was not just a signal that labor was waning, it also had monetary policy effects. The neoliberal project of favoring business was aided on both sides of the Atlantic. Thatcher went after the miners, and Reagan sacked the striking PATCO Air Traffic Controllers union were signals that it was open season on unions. With the decline in union density we see that there was a parallel decline in inflation. This gets us to the point where economists are calling the period the “Great moderation” and claiming to have ended the business cycle.
The thing about economic history is that we are often fighting the last fight. Worried about inflation so we do not use proactive policy to make sure everyday citizens do not withstand the worst of the crisis. We bail out all the banks and pat ourselves on the back that the bailouts eventually returned 1% on invested assets while people lost homes and livelihoods and we started talking about secular stagnation and worried about hysteresis and threw around terms like “the new normal” instead of asking if there were more we could do. And hopefully we will learn from this crisis to be better prepared for the next one. The problem is that you cannot run back time or make experiments on the results of macro policy. So, when things go bad you must either say we could have done better or convincer yourself that there was no alternative.
But there were alternatives to the great inflation.
The Keynesian economist James Tobin was arguing in 1984 that “Inflation control is a public good” (53), noting that it does impose a genuine cost on society. This is hard to believe for someone of my generation, where the highest the Fed funds rate has been about five percent, and the CPI has been quiescent. Tobin, in his article “A Social Compact for Restraint” argues for just that, a “mutually assured disinflation” (54). What Tobin lacks in his argument is a realistic theory of change, hoping for a nation consensus through presidential leadership to self-impose wage policies to keep inflation down. While I am hopeful for coming together in a kumbaya moment between labor and capital, we saw how history actually played out, where the power of capital overwhelmed labor to the point where labor in its organized form is a very week countervailing power.
To make Tobin’s idealized world in 1984 a possibility, we really need to look at how power exists and is wielded in the economy. You must create the incentives to make that change you see in your mind’s eye, incentives for both sides of the labor / capital divide. The English Marxist David Purdy speaks of just such a balance in his review of the history of the 70s, “The Wages of Militancy”. Purdy advocates for just the same sort of social compact that Tobin hopes for, in the accelerating inflation period of the 70s to be a time for “the labor movement to bid for hegemony by offering to accept voluntary pay restraint in exchange for structural reforms aimed at democratizing the economy” (1). Purdy’s’ work contains a lot of the “inside baseball” history of the ideological infighting within the English Left in the 70s but there are some nuggets that we can take from him. One is that he points out that the denialism of the trade unionists to accept that their continued wage increases had macroeconomic effects (9) so that the denialism led them to not see that they could play a role in containing them. Purdy also emphasizes the social problem of high inflation, even for a labor government, in that high and unpredictable inflation decreased business confidence and bringing inflation under control to prevent social unrest (12). The problem with bringing inflation under control from the top down is that the way we do it is by creating unemployment or trying to use wage and price controls. The mechanisms used did not work, so the conservative government ended up using the first choice, an event he calls a “bloodless civil war” (15).
For Purdy, there was a real alternative in having a strong labor movement that would have been willing to accept lower or frozen wages in exchange for “workers’ participation in decision-making from the shop floor to the company boardroom, via a system of elected worker directors” (15-6). What we see Purdy outline is a missed opportunity since the real history is one where labor lost power in over a decade of Conservative rule in England. Unfortunately, we cannot run time back and break the inflation through worker power as Purdy suggests. This has knock-on effects in that Labor was weakened and had no voice in the aftermath of the next crisis. What I think it does, however, is raise an interesting question of what it means for worker power overall. Purdy focuses on wage bargaining being a driver of inflation, where “it is hard to imagine a clearer example of individual rationality leading to a social pathology” (14), so that when we talk about worker power we should keep the big picture in mind. But what it also suggest to me is that there are many angles to the call in the Manifesto of the Communist Party, the famous closing lines that the workers of all lands need to unite because there is nothing to lose but our chains. The call is for revolution, but what Purdy outlines is revolution by another manner, in that labor becomes capital, or at least their concerns are equal and parallel in terms of management of firms. There is more than one meaning of worker control of the means of production, I guess.
Cited
David Purdy, “The Wages of Militancy: Incomes Policy, Hegemony and the Decline of the British Left,” http://david.purdy1@btopenworld.com, July 7, 2006
James Tobin, “A Social Compact for Restraint,” Challenge, March-April, 1984
U.S. Bureau of Labor Statistics, Average Hourly Earnings of All Employees: Total Private [CES0500000003], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CES0500000003, February 17, 2020.
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