Wages, productivity and profits
Link wage growth to inflation advantages, but allows employees to the economic benefit is also a key solution to the distribution of total productivity gains
EMILIO HUERTA Y VICENTE SALAS smoke
The English model of collective bargaining is under review. One of the issues under debate is whether to retain the reference to inflation for the agreements on wage increases, as has been done in the past, or accept the proposal coming from Europe, through the Covenant by the Euro, to reference the wage increases productivity growth. Open debate on whether wages should be more sensitive to the ability of firms to compete, it is pertinent to ask whether the productivity is the most appropriate variable to collect the heterogeneity of the production or, conversely, there are other alternatives, such as corporate profits, which are worth considering.
The implementation of this model requires a corporate governance more participatory and transparent
Although the difficulties of implementation are high it is worth trying
Link wage growth to inflation offers some advantages that trade unions to justify recall position in favor of maintaining it. First, a reference is measured, not manipulated and easily verifiable attributes that are helpful to assure compliance with the negotiators. Second, it ensures the maintenance of workers' purchasing power which helps to sustain demand, activity and employment. Third, the downward rigidity of real wage pressure on companies to improve their productivity and be innovative to stay competitive. Finally, wage indexation contributes to a lower dispersion of wages within each country and maintain social cohesion in the entire eurozone.
However, wage growth line with inflation has drawbacks. First, a single rule generally applicable to all workers, regardless of company or sector, ignores the heterogeneity of the business and inefficiencies. Second, in an open economy and employment activity depend not only domestic demand but also on the ability of firms to sell foreign and domestic markets in recent competing with imports. Finally, in the present situation, each firm takes the wage as given and decide on employment that maximizes its profit. The number of people employed will be the one for which the salary equals productivity of the last worker hired. If the salary is relatively high, the company choose a relatively low level of employment, by the properties of production technology of diminishing returns. In times of depression the economic cycle, the end result has been a low level of aggregate employment for the whole economy, rather than widespread and sustained innovation.
If you want to reform is to reduce the high unemployment in the English economy, collective bargaining should seek agreement on the level of employment and wages together, namely, negotiating salaries. On the other hand, if what you want is to increase employment while allowing workers to participate in more income for social progress, then the reference must be the productivity growth total factor productivity and participation of workers in its distribution. This means establishing two ways to spread the wealth created between the productive resources: the price and quantity sensitive to market conditions, and in the allocation of profits by increasing productivity. Desirable for the efficient allocation of resources is that the distribution of these gains to be performed by mechanisms that interfere as little as possible in price formation. Furthermore, the distribution of profits should be simple and easily understood by the bargaining agents. Given these considerations, allows employees to the economic benefit of enterprises as a solution arises operating the distribution of total productivity gains.
The economic benefit is equal to the difference between sales revenues minus opportunity costs charged to all the resources used in production, including capital, coinciding with the corporate performance measure known as "economic value added ( EVA). Although the economic benefit is not a regular part of public information companies, is more related to the usual indicators of total productivity, with very little diffusion between firms. The economic benefit differences between firms respond to differences in total productivity when prices Sales of goods and services produced are formed in relatively competitive markets. With market power, firms with low productivity can be high benefits. Therefore, the competition calls for the formation of market prices of resources must also demand for goods and services markets.
On the other hand, the economic benefit, as well as overall productivity, is not attributable to any specific production factor, except perhaps in part to the quality and diligence in entrepreneurial action. However, the modern corporation is changing to give more importance to teamwork, with people trained, participatory, capable of initiative and autonomy in their work. Just linking a portion of remuneration to the economic benefit, it creates an incentive for workers to be actively involved in improving efficiency. Increased employee engagement with business results, by the additional effect of motivation is to make them share in the profits, would be another added benefit of the new situation.
At this point the proposal to use economic profit in the negotiation should be put in their share of practical application. First, its feasibility and acceptance among those involved in the negotiations, requires transparency and credibility of the information the company offers on its economic performance. We must build confidence on the contents of the negotiations. Second, economic profit differs from accounting used in its calculation of opportunity costs for all productive resources, including capital, and not only explicit costs. The cost of capital is not a factor common in corporate financial accounting. When markets work well, the opportunity costs of resources in line with market prices, but the current prices of resources and goods and services can be distorted by the lack of competition. The implementation of the new model will require a period of adjustment and transition.
Third, this proposal workers, they depend a part of his compensation benefits, share the financial risk of the business itself because the outcome of it depends on factors not only controlled by them, but also is associated with external factors such as the evolution of demand or action by competitors. Therefore, it is necessary to have information on the situation of the company and participate in the decision making process more than what has been his commitment, if the wage received was fixed. The launch of this new model requires, therefore, corporate governance more participatory and transparent.
Changing the model of collective bargaining for the focal point of it is improving overall productivity and its allocation, provides opportunities to gain added benefits in the form of greater social concern about the existence of market competition and collaboration systems and more participatory and flexible management in enterprises . Although the difficulties of implementation are high it is worth trying.
Emilio Huerta is Professor of the Public University of Navarra. Vicente Salas smoke is a professor at the University of Zaragoza.
Link wage growth to inflation advantages, but allows employees to the economic benefit is also a key solution to the distribution of total productivity gains
EMILIO HUERTA Y VICENTE SALAS smoke
The English model of collective bargaining is under review. One of the issues under debate is whether to retain the reference to inflation for the agreements on wage increases, as has been done in the past, or accept the proposal coming from Europe, through the Covenant by the Euro, to reference the wage increases productivity growth. Open debate on whether wages should be more sensitive to the ability of firms to compete, it is pertinent to ask whether the productivity is the most appropriate variable to collect the heterogeneity of the production or, conversely, there are other alternatives, such as corporate profits, which are worth considering.
The implementation of this model requires a corporate governance more participatory and transparent
Although the difficulties of implementation are high it is worth trying
Link wage growth to inflation offers some advantages that trade unions to justify recall position in favor of maintaining it. First, a reference is measured, not manipulated and easily verifiable attributes that are helpful to assure compliance with the negotiators. Second, it ensures the maintenance of workers' purchasing power which helps to sustain demand, activity and employment. Third, the downward rigidity of real wage pressure on companies to improve their productivity and be innovative to stay competitive. Finally, wage indexation contributes to a lower dispersion of wages within each country and maintain social cohesion in the entire eurozone.
However, wage growth line with inflation has drawbacks. First, a single rule generally applicable to all workers, regardless of company or sector, ignores the heterogeneity of the business and inefficiencies. Second, in an open economy and employment activity depend not only domestic demand but also on the ability of firms to sell foreign and domestic markets in recent competing with imports. Finally, in the present situation, each firm takes the wage as given and decide on employment that maximizes its profit. The number of people employed will be the one for which the salary equals productivity of the last worker hired. If the salary is relatively high, the company choose a relatively low level of employment, by the properties of production technology of diminishing returns. In times of depression the economic cycle, the end result has been a low level of aggregate employment for the whole economy, rather than widespread and sustained innovation.
If you want to reform is to reduce the high unemployment in the English economy, collective bargaining should seek agreement on the level of employment and wages together, namely, negotiating salaries. On the other hand, if what you want is to increase employment while allowing workers to participate in more income for social progress, then the reference must be the productivity growth total factor productivity and participation of workers in its distribution. This means establishing two ways to spread the wealth created between the productive resources: the price and quantity sensitive to market conditions, and in the allocation of profits by increasing productivity. Desirable for the efficient allocation of resources is that the distribution of these gains to be performed by mechanisms that interfere as little as possible in price formation. Furthermore, the distribution of profits should be simple and easily understood by the bargaining agents. Given these considerations, allows employees to the economic benefit of enterprises as a solution arises operating the distribution of total productivity gains.
The economic benefit is equal to the difference between sales revenues minus opportunity costs charged to all the resources used in production, including capital, coinciding with the corporate performance measure known as "economic value added ( EVA). Although the economic benefit is not a regular part of public information companies, is more related to the usual indicators of total productivity, with very little diffusion between firms. The economic benefit differences between firms respond to differences in total productivity when prices Sales of goods and services produced are formed in relatively competitive markets. With market power, firms with low productivity can be high benefits. Therefore, the competition calls for the formation of market prices of resources must also demand for goods and services markets.
On the other hand, the economic benefit, as well as overall productivity, is not attributable to any specific production factor, except perhaps in part to the quality and diligence in entrepreneurial action. However, the modern corporation is changing to give more importance to teamwork, with people trained, participatory, capable of initiative and autonomy in their work. Just linking a portion of remuneration to the economic benefit, it creates an incentive for workers to be actively involved in improving efficiency. Increased employee engagement with business results, by the additional effect of motivation is to make them share in the profits, would be another added benefit of the new situation.
At this point the proposal to use economic profit in the negotiation should be put in their share of practical application. First, its feasibility and acceptance among those involved in the negotiations, requires transparency and credibility of the information the company offers on its economic performance. We must build confidence on the contents of the negotiations. Second, economic profit differs from accounting used in its calculation of opportunity costs for all productive resources, including capital, and not only explicit costs. The cost of capital is not a factor common in corporate financial accounting. When markets work well, the opportunity costs of resources in line with market prices, but the current prices of resources and goods and services can be distorted by the lack of competition. The implementation of the new model will require a period of adjustment and transition.
Third, this proposal workers, they depend a part of his compensation benefits, share the financial risk of the business itself because the outcome of it depends on factors not only controlled by them, but also is associated with external factors such as the evolution of demand or action by competitors. Therefore, it is necessary to have information on the situation of the company and participate in the decision making process more than what has been his commitment, if the wage received was fixed. The launch of this new model requires, therefore, corporate governance more participatory and transparent.
Changing the model of collective bargaining for the focal point of it is improving overall productivity and its allocation, provides opportunities to gain added benefits in the form of greater social concern about the existence of market competition and collaboration systems and more participatory and flexible management in enterprises . Although the difficulties of implementation are high it is worth trying.
Emilio Huerta is Professor of the Public University of Navarra. Vicente Salas smoke is a professor at the University of Zaragoza.
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