Blame wages or greedflation?

When prices rise as suddenly and radically as they did last year, workers are in a particularly bad spot: consumers have no choice but to pay the prices asked for food and other essential products, while trade unions cannot just renegotiate the price of labour from one day to the next.

Over the last decade, Malta has seen a significant distributional conflict between labour and capital, similar to that in the European Union and the USA.  The soaring inflation of late 2022 and early 2023 has made the situation worse.  As a result, workers have suffered losses of purchasing power at the same time that businesses have ironically generated profits in the wake of the impact of COVID-19, inflation, and the war in Ukraine.

The situation is illustrated in the chart, which shows the shares of workers’ compensation, operating profits, and taxes on production and imports less subsidies in nominal GDP. 

Source: Eurostat

The left-hand side of the chart shows how the said shares have evolved in Malta in the decade to 2022, when the workers’ compensation rose by 0.9 percentage points.  The share of workers’ compensation decreased by 1.8 percentage points to 41.7 in 2017, at a time of rapid economic growth, but then recovered and grew by 2.7 percentage points to 44.4 per cent in 2022.  What is striking, however, is that the 2022 share is lower than the average share in the previous four years.

These figures contrast somewhat with what happened in the EU, where the share of workers compensation over the decade fell by 0.48 percentage points but has not fluctuated as much as it has in Malta. It is clear that, during the pandemic, workers in Malta were able to improve their share considerably as they benefited from government hand-outs and were mostly able to retain their employment.  But it is very much a moot point whether this will remain the case in 2023 and beyond.  In fact, in both the first and second quarter of this year, the workers’ compensation share declined, albeit slightly, from the previous year.

The changes in the share of gross operating surplus of companies in GDP were more marked than those in workers compensation.  Over the decade, company operating surpluses in the European Union rose by 1.1 percentage points while those in Malta increased by almost 5 percentage points. It is revealing that Maltese company profits increased their share of GDP slightly during the pandemic but significantly so subsequent to it.  It is unlikely that they will retain this high share, and the figures in the first quarter of this year might be a harbinger of the norm in previous year, with the share of company surpluses decreasing by 1.3 percentage points to 47.0 per cent.

The figures speak loudly

Overall, the figures speak loudly.  Workers’ compensation in the EU had been some 4 percentage points higher on average than that in Malta for many years.  The margin came down to an average 2 percentage points higher between 2020 and 2022. On the other hand, the share of company operating surpluses had been some 5.5 persentage points lower on average in the EU than in Malta and fell even lower, to 6.6 percentage points, between 2020 and 2022.    

What happens to both workers’ compensation and company surpluses will probably depend crucially on the level of taxes and on subsidies.  Pre-COVID, the share of taxes in GDP was some 12.1 per cent and that of subsidies was a mere 1.4 per cent.  Post-COVID, including in the first quarter of this year, taxes had a 10.7 per cent share and subsidies a 4.9 per cent share.   This means that the aggregate of both is currently around 5.7 per cent versus almost 11.0 per cent pre-Covid. 

Will there be a return to pre-COVID levels?  I would venture to say it is inevitable.  The Government is in rather a bind.  The rate of real GDP growth in the next few years is expected to go down from the pre-COVID level of 7.1 per cent to around 4.0 per cent.  The European Commission has been exerting pressure on Malta to rein in its budget deficit.  Although it is not expecting Malta to return to the pre-COVID surplus, it wants to see a 1.5 percentage point drop in the deficit, to 4.5 per cent in 2024.  Similarly, the pressure is on to return to the more healthy debt ratios pre-COVID, say around 45 per cent.  This isn’t going to happen overnight, but an 11 percentage point decrease is not a joke.

The way forward

The way I see it, the Government has done a brilliant job in avoiding too big a drop in the negative gap between the share of workers’ compensation and that of company operating surpluses, but we have failed to achieve a more acceptable balance between labour and capital.  One could also argue that this was a price to be paid to ensure a full-employment economy for most of the decade.  The next couple of years should be an even greater challenge.

As to the impact of inflation on wages, the situation in the EU is that workers lost an astonishing amount of purchasing power last year: real wages plunged by 4.0-5.0 per cent on average — an unprecedented loss — and are forecast to fall again by 0.7 per cent on average in the EU-27 this year.  In Malta real wages fell by 2.4 percent. In spite of the adjustment to cost-of-living mechanisms in place, nominal wages are expected to increase only moderately in 2023.

Profit inflation

The developments in 2022 and early 2023 have led some observers to call the situation one of profit inflation, or what is more popularly called “greedflation”.  When prices rise as suddenly and radically as they did last year, workers are in a particularly bad spot: consumers have no choice but to pay the prices asked for food and other essential products, while trade unions cannot just renegotiate the price of labour from one day to the next.

Europe’s economic situation has changed dramatically in the last three quarters: energy prices have fallen rapidly while supply-chain problems are being resolved.  Still, inflation remains persistent.  Why?  It is because companies have not simply adjusted to a changing price environment.  They have increased their prices much more than was necessary due to increased costs. While prices were initially driven upwards by higher import prices for fossil fuels, now increased corporate profits are making a significant contribution to the pressure.  That’s what greedflation is about.

The IMF itself has said that higher profits “account for almost half the increase” in the Eurozone’s inflation, whereas Christine Lagarde, the president of the European Central Bank, has occasionally expressed sympathy with the argument. The notion of “greedflation” is partly a reaction against another common explanation for inflation: that it is driven by fast-growing wages.  Of course, we all know that central bankers are terrified of a wage-price spiral. Last year Andrew Bailey, governor of the Bank of England, asked workers to “think and reflect” before asking for pay rises. The Malta Employers’ Association has recently done the same in Malta.

Ms Lagarde said that it would be “desirable” for profit margins in the euro zone to fall. She is right; such a decline would be disinflationary and would restore workers’ share of the economic pie. But does that mean that a crackdown on corporate greed is needed?  Some economists think not.  Instead, they say, monetary and fiscal policymakers need to continue to correct the error of excessive stimulus by raising interest rates and tightening fiscal policy.

Both may have a point, but the fact is that workers suffer most when policymakers let inflation run out of control; all the more reason to care about price stability in the first place. 

Photo credit: Nataliya Vaitkevich

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