Labour rights from the point of view of a fetishist

Part of the virtual assembly “Labour rights in a neoliberal and post-socialist Macedonia” Author: Branimir Jovanovic

For a minute, I’ll pretend to be a narrow-minded macroeconomist, who cares only for GDP. A GDP fetishist, as Joseph Stiglitz would put it. Why should I care for labour rights then?

Labour rights affect the bargaining process between employees and employers. Lower rights raise the bargaining power of the employers. This means that bigger share of the new income will end up in their hands. How will this affect GDP afterwards depends on the multiplier effect, which itself depends on the marginal propensity to spend, i.e. on the share of the new income that is spent. If marginal propensity to spend is higher, so will be GDP growth. Economists usually think that the propensity to spend decreases as income grows (simply put, there are fewer things to spend the money on). Employers usually have higher income than workers. Therefore, lower labour rights may hamper GDP growth, because they make more money end up in the hands of the employers (capital owners), who tend to spend less and save more.

This refers to the short run only. There may be other, longer-term effects, too. For instance, through income inequality. Since lower labour rights redistribute income from workers to capital owners, and since the latter tend to be richer, lower labour rights increase income inequality. Higher inequality is believed to reduce growth in the medium to long run.

What does the Macedonian evidence say about this? Since 2005, there is a downward trend in labour rights in Macedonia. According to the Economic Freedom of the World report, the labour market regulation index in Macedonia rose from 5.9 in 2005 (same as Austria) to 7.6 in 2012 (same as Singapore). This is a significant worsening in the regulation, i.e. labour rights. In accord with the redistribution argument, during this period there is a notable increase in the income of the rich and only minor increase in the income of the others – real income of the top 1% income earners rose nearly threefold between 2005 and 2010, while income of the remaining 99% increased only 11%. In accordance with the argument about the low marginal propensity to spend of the rich, this period is marked with increased savings, but also with an increase in the “passive money”, i.e. money which end up in central bank bills instead of in credits. The stock of central bank bills in 2005 was around 3% of GDP (9 billion denars), while in 2012 it reached 6% of GDP (26 billion denars). Income inequality rose during this period, too – the top 1% income share was around 5% in 2005, to reach 12% in 2010. Finally, all these developments are associated with a slowdown in the GDP growth – real GDP per capita grew by 4.4% per annum during 2003-2007 (when the labour regulations index was 6.1 on average) and only 1.7% per annum during 2008-2013 (when the labour regulations index was 7.8 on average). Findings remain unchanged even when growth is observed in relation to the world GDP, or 2009 is excluded (because of the crisis), or 2007 is included in the second sub-period. Needless to say, these are just stylised facts, based on simple correlations, but in my opinion, they are indicative enough.

But, if I leave the role of a GDP fetishist and return to my true self, the answer to the above question would be much simpler – labour rights are important because they prevent serfdom.


* The views expressed here are those of the author and do not have to represent the views of the institutions with which he is affiliated.



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