The announcement of provisional data showing a resumption of economic growth in Europe (including the UK) has been hailed by more militant capitalists and their monetarist allies in financial circles and the economics profession as signs that austerity …

Jan Toporowski.

The announcement of provisional data showing a resumption of economic growth in Europe (including the UK) has been hailed by more militant capitalists and their monetarist allies in financial circles and the economics profession as signs that austerity policies really are working. They are encouraged by data showing increases in employment in the UK and elsewhere. Here at last is evidence that holding down inflation and earnings may create a stronger business environment in which enterprise will flourish and bring us to full employment.


However, the evidence and the economic growth has been weak and within the bounds of the usual seasonal improvement, when tourism and agriculture pick up. And behind it all are changes in labour productivity, that is the output per worker hour in the economy, that show that not all is going well in the business sector that is supposed to rebound with confidence in response to the ‘good housekeeping’ of the public sector. Changes in labour productivity are crucial because they determine the extent to which market demand elicits changes in employment. If demand in the economy grows faster than labour productivity then employment will increase. If, however, labour productivity increases faster than demand in the economy, then employment will fall. The margin between economic growth and the growth of labour productivity represents the proportion of the labour force that will be employed, or laid off, as a result of the growth in the economy being more or less than the growth in labour productivity.


The relationship between growth in total demand in an economy and the growth of labour productivity is therefore the crucial determinant of whether economic activity and employment are expanding, or whether we have a ‘growth recession’ in which slow growth is combined rising unemployment. This is why militant capitalists and their monetarist allies point to the UK as an example of what austerity can do when combined with labour market reforms designed to make workers docile and anxious to serve, because their unemployment benefits have been reduced below the cost of living. Britain, after all the pain of George Osborne’s austerity, is expected to experience economic growth of 3 per cent in 2014, according to the latest forecast from the National Institute for Economic and Social Research. With labour productivity falling in the UK, this means at last substantial increases in employment. At his last press conference before going on his summer holidays, on the 7 August, the President of the European Central Bank implicitly endorsed the UK strategy, blaming the weakness of the European economic recovery on the absence of labour market reforms.


But the labour productivity figures tell us something different. UK labour productivity has been falling since the economic crisis started in 2008, and it has not resulted in increasing work, but a growth of poorly paid (or even unpaid) part-time employment in many cases subsidised by the government through its tax credit system. The overall income effect of pushing more and more workers into such low income employment is to suppress the growth of demand in the economy because of falling real wages and the proliferation of debt. At the same time, employers are discouraged from investment by the availability of almost free labour, and the indebtedness of small and medium-sized businesses. Britain’s labour market ‘reforms’ are therefore allocating labour to activities where productivity is low and falling, rather than to where there is rising productivity.


By contrast, in continental Europe, and even in Italy (the target of Mr. Draghi’s admiring remarks about labour market ‘reforms’), labour productivity continues to rise. This is because companies in Europe are continuing to invest in productive capacity on a greater scale than in the UK, and a better-equipped worker will always be more productive than a worse-equipped one. Investment also increases demand in the economy. Unfortunately European investment has not been on a scale sufficient to make up for the squeeze on public sector expenditure, let alone the scale needed to secure increases in labour productivity such as were recorded before the 2008 crisis. It is therefore investment, rather than the efforts and submissiveness of labour, that determines the growth prospects and employment capacity of an economy.

Boot camp for workers is bad for capitalism. It comforts bad employers who cannot or will not engage in the capital accumulation that keeps capitalism going and is the true wealth-creator in capitalism. The favouring of labour market ‘reform’ by the political elite emanates from the desire of capitalists to use the state to reinforce their position in industrial relations, rather than from any heartfelt desire to increase employment.

Jan Toporowski is author of Michał Kalecki An Intellectual Biography Volume 1 Rendezvous in Cambridge 1899-1939 (Palgrave 2013)

This work is licensed under a Creative Commons Attribution-NonCommercial License.
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Jan Toporowski

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