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Anna Kolesnichenko

How to prevent price-wage spiral. What about employee ownership?

Looking at the discussion on the inflation topic these days, I can’t stop wondering if people really believe that central banks can do much to cure the problem. Because this round of inflation is so clearly supply-driven, triggered by supply-chain bottlenecks after Covid pandemic and then hugely exacerbated by the energy and food price shocks due to the Russian war against Ukraine.


However, here I do not want to dwell too much on the causes of inflation, but would like rather to discuss one particular aspect, namely, the relation between inflation and wages. Over last couple of months, policy making community has become alarmist about the growing wages and the potential for wage-inflation spiral. For the US we read: “Federal Reserve officials fear that elevated inflation could become ‘entrenched’ in public expectations” (FT). The same alarm came from Andrew Bailey, the Governor of the Bank of England, last week, after BoE went for a 0.5pp interest rate increase. Indeed, the UK has been taken over by strikes this summer, with unions in all sorts of industries - rail, aviation, post, and telecommunications – demanding wage increases.


While the threat of the spiral is real, I would suggest taking a step back and seeing what issues are involved. First of all, wage inflation has so far been lagging price inflation. In the US, wages grew in the first two quarters of 2022 by 6.8%, below the 9,1% rate of inflation. In the EU, wages data is lagging, but ECB expects 4% wage growth in 2022, while June inflation was 8.6% yoy. According to May data, UK saw wages growth at 6.2% (and excluding bonuses 4.3%) vs 9.1% inflation. So, in real terms, wages are declining everywhere. This only confirms that wages have not been the driver of inflation.


Then we come to the question of fairness and social wellbeing. As Ajay Rajadhyaksha, global chair of research at Barclays, aptly notes, “Central bankers don’t like admitting it, but a primary goal of rate hikes is to cause enough job losses to ensure that wage growth slows down.” Of course, it is not only that, and other channels are at play as well, but to a large extent this is the way how monetary policy affects wages.


To extend on the topic, in its recent annual report, the BIS shows that over last decades trade union power has declined substantially, which helped decouple wage and price dynamics. But at what cost? Adam Tooze, a Columbia University professor, says in his tweet: “In recent decades it is not implausible to suggests that the rise of working-class support for nationalist populism is directly related to the decay of those collective institutions of labour organization.” Trade unions are not just a wage bargaining tool, they are also an important social institution of channelling and resolving grievances in an orderly way. Absent that, those grievances find their way elsewhere - in populist movements, in the best case.


Can we do better than squeezing wages and throwing masses of people into unemployment for the purpose of containing inflation? There are many elements to that. One idea that I want to air today is distributing shares of companies as a part of worker pay-outs. In a nutshell: in addition to moderate wage increases companies can propose workers shares in the capital of the company. Clearly, this needs to be a voluntary arrangement, and if workers prefer cash, they should have that option. Those at the very bottom of income distribution will most likely prefer cash, as they need it to cover their living expenses. But a large portion of people in the middle would probably accept the shareholding option.


Such a solution will contain price-wage inflation, as wages will increase only moderately. Company costs will be contained. But this solution goes much beyond price-wage story. It offers many other economic and societal benefits. One is better income and wealth distribution. We all know that most of wealth and income increase in the last decades went to capital (as opposed to labour). If we give workers a share in the capital, they will also be able to benefit from capital gains.


Companies are also getting substantial gains from employee ownership. Studies have found that employee ownership enhances company performance – both returns and sustainability. Employee-owned companies focus more on longer-term goals, as opposed to short-termism of listed companies. Related to that, employee-owned companies are more innovative and visionary. They are also more resilient at times of economic downturns. For a concise summary you can check the paper by Douglas Kruse: “Does employee ownership improve performance?” One important note to add: employee ownership must be accompanied by decision-making powers, otherwise it is only financial risk sharing and does not produce all those wonderful results.


Employee ownership is nothing new by itself. It has been around for a while and is quite widespread in the US, although much less so in the EU. Indeed, due to its beneficial effect on the wider economy, governments have been supportive of diverse employee ownership schemes.


What I am trying to show here is that employee ownership provides the kind of effects that we need in stimulating sustainable growth, while also relieving inflationary pressures. Now could be the time to reinvigorate the effort in support of such initiatives. Although not a monetary tool in itself, it can be effective in achieving monetary policy goals.

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