How Pursuing “Competitiveness” Crushes Labor and Lowers Growth

Yves here. This post is from last month, but as you’ll see, remains very relevant, particularly since, as Nathan Tankus pointed out, Germany is obsessed with competitiveness.

By Matthew Watson, Professor of Political Economy in the Department of Politics and International Studies at the University of Warwick and an Economic and Social Research Council Professorial Fellow.. Originally published at Fools’ Gold.

The accusation comes across loud and clear whenever politicians or business people talk about ‘competitiveness’. Anyone who does not back their strategies threatens to damage the economy: forcing it to operate beneath its potential level of output leading to unnecessary pain and misery, as lower levels of production lead to higher joblessness. There is currently little political space beyond this particular equation of competitiveness and growth, where if you raise even a circumspect eyebrow in relation to the modern-day Competitiveness Agenda you are depicted as an economic devil, talking down your country’s growth opportunities.

Here at Fools’ Gold we have set ourselves the task of exploring what this alternative political space might look like. So it is necessary to tackle the question of the relationship between competitiveness — specifically, the Competitiveness Agenda — and growth. One way to do this is to run the argument through an analysis of assumptions about labour market competitiveness, which has been the subject of a previous Fools’ Gold blog post.

Today debates about labour market competitiveness are dominated – in the Anglo-Saxon economies in any case – by the search for institutional forms to help keep wage increases to a minimum. The relaxation of labour laws and the marginalisation of trade unions have seen real wages fall in many sectors of the economy over the last 40 years. This has led to lower overall production costs, and the opportunity for businesses and their owners to take more profit out of the economy. This enhanced profit-making is typically rewarded with a higher share price and a general feel-good factor surrounding the company. Pro-Competitiveness Agenda commentators will see only good news here.

Yet none of this yet gets near to answering the question of whether a strategy of repressing wage increases automatically delivers something that might be called competitiveness — and, even if it does, at what cost.

The prevailing Anglo-Saxon social settlement on jobs, employment, working hours, overtime, workplace protections, union rights, etc. is to make people work longer and harder and to stigmatise anyone who falls off the labour market ladder. This might be justified in relation to the Competitiveness Agenda, but regressive social settlements of this nature affect much more than ’competitiveness’ alone. It is also an issue of growth potentials, and here the evidence certainly isn’t pretty.
The relationship between competitiveness, very loosely defined, and growth might be rather different to the unequivocally positive correlation predicted by the sirens of the modern-day Competitiveness Agenda.

It may be that ‘competitiveness’ means lower growth.

This can be shown when looking at both supply-side and demand-side labour market factors.

The Supply Side

Will paying people less to do the same amount of work damage the productivity of the firm? Will paying fewer people the same wage but expecting them to get through more work each day have the same effect? The available evidence from the 1970s onwards is not entirely clear-cut on this question, because it is unlikely that firms will ‘downsize’, ‘right-size’ (or whatever the contemporary phrase of choice is) on its own. If they are intent on doing this then they may well go the whole hog in trying to extract as much extra profit at their workforce’s expense as possible.

Firms that set their sights on reducing unit labour costs have typically done so at the same time as enhancing workplace discipline so as to make people work harder. All sorts of electronic surveillance techniques are now used to monitor workplace performance at every point in the working day. As soon as this process starts, it very quickly becomes a one-way street. Expectations of what is possible only ever seem to change to demand more, never less.

Productivity can therefore be enhanced at the same time as labour standards go down, but even in the cases where this appears to be the outcome it is usually not directly because of workers being paid less or having some of their protections removed. It is more likely linked to the broader package of workplace reforms that are introduced at the same time as the attack on labour standards.

But even if we were to accept that this happens, then further questions arise. In particular, enhancing the oversight of workers’ on-the-clock activities through additional disciplining techniques might lead to temporary productivity increases. However, this is only ever likely to be a short-term palliative, because workers who are routinely subjected to disciplining effects should be expected to very quickly become demoralised. Increases in labour standards are generally good for worker morale, but when those standards are rolled back workers are less likely to contribute to productivity advances than when they are well treated and well rewarded for their efforts.

So, there is good reason to think that dismantling existing regimes of labour protection is likely to lead to lower productivity amongst those workers, which in turn will lead to lower growth because of supply-side factors. However excited the prophets of ‘competitiveness’ might get about undermining existing labour standards, growth could very well turn out to be a casualty of their strategies.

The Demand Side

The same equation is also likely to arise on the back of changes to demand-side factors. If you pay someone less to do the same job, then they will have reduced personal disposable income. Equally, if you pay fewer people to produce the same level of output at existing wage rates, there will still be reduced personal disposable income in the economy as a whole.

If less money is spent on goods and services, then other firms will see a reduction in demand for their products. This is the multiplier effect described by Richard Kahn in the 1930s, where each pound in circulation in the economy is spent many times over: but in this instance it operates in reverse. Every firm that tries to gain a competitive advantage by downsizing its workers’ remuneration package to gain a cost-cutting edge may become a part of an overall death spiral, as they eat into the ability of all other firms to sell their products.

This is indeed the lesson from austerity over the last few years, in Britain as in many countries. The recession might not have led to as much job shedding as we might have expected, despite its double-dipping and even treble-dipping properties. However, all the reports from the economic front-line suggest that firms that avoided cutting the workforce to the bone also managed to extract agreements to reduce real wage increases in return. The compensating compression of wages in what were already low-wage sectors has led to people being able to spend less in a manner captured perfectly by reverse multiplier effects. Potential new sources of growth have been obliterated on the demand side, in part through ‘competitive’ wage policies, before there was even a chance that they might appear. To take just one example, the British economy has bumped along, with politicians calling for cuts in social spending and business leaders calling for cuts in wages, where all the while these supposed ‘solutions’ have been making things worse for the economy as a whole.

Both Sides Point in the Same Direction

The interesting proposition to arise from all of this is whether we need to recalibrate the usual debate so that we can ponder the implications of ’competitiveness’ and growth being in direct opposition to one another.

This is certainly a shift that all of us at Fools’ Gold endorse, because it is in this way that new, more progressive political spaces can be opened up.

Whenever we turn on our televisions or open our newspapers to find politicians and business leaders giving voice to the modern-day Competitiveness Agenda, we find them saying that labour standards are dispensable in the interests of both competitiveness and growth. The foregoing, though, suggests that this equation will not hold up under scrutiny. It shows that what is good for the owners of individual firms and their share price will often turn out to be bad for the growth of the economy as a whole. And this is true for both supply-side and demand-side reasons.

This would seem to change the debate really rather fundamentally.

And if ’competitiveness’ does mean lower growth, then one would have to wonder what the point would be of allowing oneself to be seduced by the Competitiveness Agenda in the first place.

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40 comments

  1. DJG

    Something else going on is how pursuit of cost-competitiveness is crushing innovation. Publishers are sending back-office tasks to India, and then everyone runs around monitoring the Indian supplier. The Indians, for various reasons, don’t know U.S. protocols. But they work for two dollars an hour! This is regarded as an innovation, and if the back office has to move to Cambodia, well, that’s another great innovation. People who work for fifty cents an hour.

    The U.S. economy hasn’t been all that innovative in years. I’m wondering how much of it is due to cost competitiveness, proletarianization of all jobs, and wage stagnation. As the article points out, low wages wreck demand. The U.S. economy has excelled at distribution schemes like Amazon, Airbnb, and Uber, each of which has destroyed whatever workforce you can claim that they have. The only major innovation I’m seeing on the horizon these days in more Pumpkin Spice Latte. I doubt that coffee drinks will save this empire.

    1. vlade

      The best book I ever read on the Industrial revolution claims that it happened in the UK because the labour was too expensive here, and this was compensated by capital spending (on innovative machinery). This didn’t work in Asia, or even continental Europe, because the labour there was (until late 19th century) so much cheaper than in the UK.

    2. MyLessThanPrimeBeef

      One is more likely to be creative (and thus innovative) when one is playing.

      Perhaps a year off to play, paid, for every worker can make the economy more innovative.

      Guarantee income (for at least one year) by joining the Fun and Play Corps.

  2. Tom Ford

    Your mention of Germany’s obsession with ‘competitiveness’ (with an emphasis on repressing wage increases) reminds me of two items:
    1. Germany is ranked 3rd globally in industrial robot density (number of industrial robots per 10,000 persons employed in the manufacturing or automotive industries).
    2. Daimler’s Self-Driving Freightliner truck is the world´s first licensed autonomous heavy-duty truck allowed to use public roads and is currently being tested in Nevada.
    Honk if you love progress!

    1. Alejandro

      Always worth asking is, “progress” towards what? Where do “we” want our efforts to take “us”?

      Does this global “ranking” mean increased “productivity”…if so, is the increased “productivity” used to compensate for past sacrifices?

      By “autonomous”, do you mean maintenance-free, change its’ own flat tires, load/unload its own payload, brake for dogs etc.? Will the potential “gains” be used to “re-invent” the affected truck drivers? Or will they be subject to nl rule #2?

      1. Tom Ford

        I was being sarcastic in using the word progress.
        While automation isn’t inherently bad, when you replace enough auto workers or long-haul drivers with ‘robots,’ who will be left to buy the cars or the goods delivered by the trucks?

        1. Alejandro

          Apologies, my sarc-sensor needs re-charging.

          While I tend to agree that automation isn’t inherently bad, it’s when its potential is viewed and presented as replacing and displacing, as opposed to converging with and extending the productive capacity of members of society, i.e., people that work…the potential to improve the standard of living and quality of life as opposed to extract more “efficiently”…if shared efforts is followed by shared sacrifice then should also share in the benefits.

        2. fajensen

          Robots – of course. You have one set of robots producing goods and services, another “consuming” them. Financing is not a problem – we already Robo-signing.

          Philip K. Dick (I belive it was) wrote a story of a future where everything is made in “Autofacs” – underground, fully autonomous factories – and shipped to consumers proportionally how wealthy they were, the twist being that the wealthy, being privileged and all, got to consume less stuff and have smaller homes.

    2. susan the other

      Nevada. Where you can drive for a hundred miles and never pass a single car. They should test it out in Germany.

  3. washunate

    I enjoyed the read and the topic overall. However, there is a key premise that is flawed:

    the search for institutional forms to help keep wage increases to a minimum

    That is not accurate. The search is for institutional forms that help entrench and expand inequality of wages. Inequality is the story, not a blanket search for minimum wages. If everybody was making $10 an hour, that would be a fine wage to earn. That is the thing about numbers. They are just mathematical concepts in our head. What matters in wages is their relationship to each other, not the absolute value.

    1. jrs

      Or their relationship to capital, if everyone working for a living earned $10 an hour but a few rich owners who do NOT earn any wage but merely profits on their money, still bought out everything and of course controlled the government, it would be no better.

      1. washunate

        But the source of ‘their money’ is past wages. Capital is not some separate entity; it is what is left over from the wages of labor after taxes and consumption are subtracted.

        What allows great fortunes to be amassed over time is the combination of high wage inequality and low taxation.

        1. Ulysses

          “Capital is not some separate entity; it is what is left over from the wages of labor after taxes and consumption are subtracted.”

          Yet the connection between present day capital and work for wages is often very remote, in historical terms. Some of my Dutch and English ancestors undoubtedly used some surplus wages to buy what was then relatively cheap farmland in Manhattan, the Bronx, and further upstate along the Hudson valley. Yet when their descendants sold off most of that land, a few generations ago, they received huge infusions of capital entirely unrelated to their own “labors.” My great grandfather, who became an M.D. with a practice on the Upper West Side, gained a reputation as an uncommonly generous doctor, who often treated people for little or no money. Yet his generosity didn’t represent much of a sacrifice for him– because the income from his practice represented only a tiny fraction of the monies he had available to him.

          The current Prime Minister of England, for example, still benefits handsomely from the capital amassed by his ancestors in the slave trade two centuries ago!

  4. Eric Patton

    This is how market economies necessarily operate.

    Yet none of this yet gets near to answering the question of whether a strategy of repressing wage increases automatically delivers something that might be called competitiveness — and, even if it does, at what cost.

    But who pays the cost? Workers, the poor, and so on. The rich do not pay these costs, therefore they do not care about them. As Chomsky once noted, “free enterprise” is a system of socialized risks and privatized profits.

    And if ’competitiveness’ does mean lower growth, then one would have to wonder what the point would be of allowing oneself to be seduced by the Competitiveness Agenda in the first place.

    As Robert Mugabe (I believe) once noted, the key to maintaining control over society is to keep the people poor, hungry, and pregnant. (I wish I had time to find this quote again.)

    Any society has big people, whose number one priority is control. End of story.

  5. two beers

    Too bad there wasn’t someone like Karl Marx to clearly and explicitly explain all of this in detail to us 150 years ago…

  6. Ignacio

    What I miss about this essay is that the competitiveness agenda is usually implemented at the country level while it is a global thing. I guess that if the UK was to question competitivitiveness vs growth someone would argue that while growth was not spectacular in the UK, it was so somewhere else. Then, they will conclude that the reason the UK does not grow so much is because it is not competitive enough.

    1. jrs

      Or it is necessary to reduce wages to compete globally. So that even if it leads to less productive workers (the old debate on whether “happy cows give more milk” Moo … that’s all we are to them) or local demand it was necessary to compete globally with global low wages. So maybe it’s really about trade policy.

    2. susan the other

      I was thinking that too. The argument that the supply-side downside to competitiveness & growth was that workers got disgruntled and kinda sabotaged the company just doesn’t hold water in a ruthless global race to the bottom. Actually, the supply-side downside is more that companies slaughter each other and their own countries just to make a few dollars more and the result is fewer, poorer, more expensive goods because monopolies are the only thing that survives.

    3. fajensen

      Then, they will conclude that the reason the UK does not grow so much is because it is not competitive enough.
      Someone should then argue that: If wages, life expectancies and general quality of life must be reduced to 3’rd world levels to “compete”, then, what would be the point of the UK? It’s *all* just Overhead!

      The European “left” totally lost the plot many, many, years ago and they’ll never come back, I think!

  7. pathman

    Still banging on the “infinite growth” drum? This is physically impossible and the sooner we accept that the better.

    1. susan the other

      Competitiveness should be based on which companies can restore the environment better, not profit for no other reason than… profit.

    2. Carlos

      We can grow reduce, reuse and recycle.

      We can expand human to human services to the max without hardly consuming one single extra resource.

      You only think of growth in material consumption.

      1. pathman

        Do you really believe that’s going to happen? Have you read the “Limits to growth?” It’s time to stop believing in fantasies.

    3. craazyman

      if lots and lots of people got paid to bang drums and the price per bang kept going up and up, you could have infinite growth!

      what would stop it?

  8. craazyman

    what does it mean to get competitive for an economy that runs on bars and bakeries?

    does it mean making more beer and donuts for the same hourly wage? and who eats and drinks them? Is that person, also, supposed to get competitive? that seems a contradiction.

    you’d think there would be a point where one person gets too thin and sober and the other person gets too fat and drunk.

    that’s a deep thought. then the whole economy collapses.

    what good are Hans and Franz who want to Pump You Up so youre not a Girly Man Economy when there’s a drunk man on the sofa with a belly full of donuts and another sober thin man who can’t even bench press 44 pounds because he’s so tired from working all the time?

  9. Carlos

    I’m pretty sure competitiveness is all relative, so unless you are at the top or bottom you are worse or better than some other poor dope.

    It is the perpetual stick with which to beat your sorry ass. The stick that keeps giving.

    Replace it with the term social utility and the problem is solved. The stick wielding, lardy assed, gobshites can whip their own sorry asses.

  10. Synoia

    Competitiveness = Cheap.Production costs aka Cheap Labor aka Working Poor.

    With no attention paid to Demand for the products, environmental, labor, or other standards, etc.

    Management wants the cheapest production costs without understanding that their employees need to be able to afford to buy their products.

    Henry Ford paid his worker well to enable them to buy Ford cars.

    And the OECD is winging on about world Groaf – with talking about “fee trade” depressing wages and cutting Groaf. Perhaps the OECD should understand there are significant costs to “free trade” and that is “Demand Gap.”

    The early adopters of cutting production costs benefited, because buying power still remained in the developed countries. But, as the rot spreads, it must result in loss of Groaf, a ever increasing “Demand Gap.” and thus declining revenues. As Walmart has experienced over the last few years..

    When all workers are paid the square root of fuck all, where will the demand come from? The Aristos? That worked well in the 16th, 17th and 18th centuries. Right? Booming economies abounded.

    Just read Dickens, he describes it well.

    Neo-Liberalism describes parasitism well.

  11. nothing but the truth

    competitiveness is by definition an attempt to reduce labour’s share of distribution.

    the savings are to be feasted on by the rent seekers.

    by definition.

    capitalism turns in rentierism and eats its children

  12. participant-observer-observed

    Clear and elegant presentation, but unlikely to reach the audiences with leverage to change, until carrots and sticks for those enabling this situation are clearly and persistently communicated to them.

    Indeed, subtracting from both sides of the equation is creating smaller and smaller pies for everyone: even if 90% is going to owners and execs, it is still 90% of less and less. We might call this a “race to the vanishing middle” instead of “race to the bottom.”

    The next step for this thesis is to look at the rare operations that shun the race to the vanishing middle. I don’t know what is in the UK, but Costco, for example, is known to pay its workers a living wage with associated dignity, and seems to have been able to compete with the Walmarts et al on the miserly austerity model. Look at Costco, the worker-owned co-ops, Mondragan, etc., and come back with the data.

    As long as execs and owners get their inflated incomes, they won’t care about shrinking pie for all because they will always tell themselves they will be around until the last slice and live off of stock buy-back bubbles.

    Clarify and communicate the costs to the owner-execs, and find scalable models for worker co-ops to use. That would provide prescriptive, normative pragmatism!

  13. linda anselmi

    I’m a little confused. Why would we continue to use “growth” as a measure of success? Growth isn’t sustainable, it is extractive. Using “growth” as a “economic” goal means you buy into the competitive model. It is the measure of the gap. To get “growth” in an area there has to be a corresponding area of “shrinkage.” The more growth, the more areas of shrinkage…

    Competitiveness is hugely counterproductive for a whole host of reasons — creativity, innovation, maximizing resources, building social cohesion… Not the least of which it really doesn’t exist. Not in the foot race to the finish kind of way when global corporations and billionaires bring rockets to the race. And is only used to build bigger hurdles for the non-rocketeers especially those extractees they need to build and maintain their rockets. That Nation article about Kumar’s exploitation of his maid was particularly telling.

  14. LAS

    If wages affect competitiveness, let’s test that theory among the most heavily paid, not those paid least.

    1. MyLessThanPrimeBeef

      Among the very rich, it’s cooperativeness they pride themselves on.

      Cooperation in dividing up the world…mine and your spheres of influence.

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