Millionaires and Unemployment
A Fair Day's Pay for a Fair Day's Work?

The Rich are getting richer, the Poor are either stagnating financially or getting poorer. Gross and growing inequality of income has become a major issue, and a major source of social discontent. And statistics support popular instincts: as of 2019 the richest 1% of the world's population now owns 50% of its total wealth, according to a report by Credit Suisse.

Is inequality a problem? No, not if it is the result of hard work, of training and education, acceptance of responsibility and simple success at what you do. But inequality of remuneration and consequent living standards IS a problem when it is widely perceived that there is no just and fair relationship between work and reward.

"A fair day's pay for a fair day's work" - a fine-sounding slogan but hardly a reality today. The vast majority of working people slog away in factories and offices for the best part of their lives with nothing but a meager pension at the end of it - and even that may be in doubt. At the other end of the scale, the 'fat cats' walk away with millions for having done little but presiding over a company's demise – and placing the Banking System in jeopardy.

While this is causing growing, and justifiable resentment, the problem is very much deeper and more fundamental.

The absence of any defined relationship between work and reward may be widely perceived as a failure of social justice, but it has effects far beyond those immediately apparent. One such effect is that we will never, ever achieve full employment - real full employment in the sense that anyone and everyone who wants one can get a productive, rewarding and challenging job.

Money and Unemployment

Despite the negative human and economic effects of unemployment, and the desirability of full productive use of all economic resources, the ability to expand an economy to full capacity cannot presently be realized, for as the economy expands to near-full employment, the danger of inflation causes the Central Bank to put the brakes on.

The fundamental problem is that our money has no defined value. Sound impossible? Well, what IS a Pound Sterling worth? Or a Euro, a Dollar? How do you define its value?

The answer is that money has real meaning in terms of what you earn (wages), and what you can buy with what you earn (prices). But both wages and prices are open to continuing dispute, and lack any form of definition or stability. None of the world's currencies has any stable, clearly defined value, and all are subject to a continuing upward movement known as inflation.

Inflation is not the complex esoteric phenomenon economists would have us believe. It is simply a matter of human greed - our natural desire to get more reward for the same work.

Inflation is an increase in price without a corresponding increase in value. If the price goes up for an improved product that costs more to make, that is not inflation. But if a producer asks more tomorrow for the same product he sold for less yesterday, that is inflation.

Similarly with wages. More money for more or harder work is not inflation. Inflation is more money for doing exactly the same work.

In today's economies, the level of economic activity directly affects inflation.

When the economy is sluggish, producers and retailers find difficulty in moving their goods; they respond by introducing price reductions, incentives and special offers. But as the economy expands and consumer demand expands, prices can be increased without losing sales.

Similarly with wages. Employees are naturally reluctant to demand more money, or threaten strike action, in a time of high unemployment with a lineup of job applicants outside the door. But when the economy approaches near-full employment and staff are hard to find, now's the time to demand that raise you've been wanting!

Wages, prices and inflation increase as the economy expands and unemployment is reduced. This is the dominant feature of a free market economy, and balancing the two highly desirable but conflicting goals of full employment, and zero inflation or stable money is the key to national economic management today.

The economy is slack and inflation is low. So the Government and/or the Central Bank expands the economy by lowering interest rates. But when near-capacity is reached in the more prosperous regions, inflation begins to rise, and the Central Bank attempts to control inflation by slowing down the economy with increased interest rates, thereby maintaining a level of permanent unemployment.

Recession or inflation? Our economic managers have two choices. Expand the economy to full employment and we get inflation. Or reduce inflation by slowing down economic activity, creating unemployment and recession. The 'art' of economic management as currently practiced lies in attempting to compromise between the two.

Apart from fiscal dishonesty and irresponsibility (printing money to gold-plate the presidential palace, or "quantitive easing" in the current economically correct jargon), inflation is not a monetary, but a social factor. It's simple human nature. In hard times people behave themselves. But when things get easier, producers put prices up for the same product or service, and employees demand more money for the same amount of work.

The underlying economic factor which makes this situation possible is that pay and prices are settled by a form of disputation. The price is as much as the producer can get, or as little as the consumer is willing to pay. Similarly, the wage is as much as the employee can get, or as little as the employer can get away with.

This process, commonly known as free collective bargaining, is inherently unstable and subject to continuous inflationary pressure fuelled by the simple human desire for more.

More seriously, inflation as a permanent feature of our financial system renders money useless as a savings medium, forcing a reliance on property as an investment for old age and driving house prices to now-unaffordable heights for first-time buyers.

While the desire for more wealth and prosperity both personally and nationally is a very reasonable one, an economy and its participants should seek to increase their personal and collective prosperity by becoming more productive, by producing more and better goods with less labour, not by demanding more money for the same work or the same product.

The process of establishing pay, profits and prices by disputation results in friction, industrial disputes, loss of productivity, inflation, and permanent under-employment. It represents a facet of anarchy, in that it is a process of settling differences by unregulated dispute rather than by a system of debated and agreed guidelines and regulation. And most importantly, it is the key factor which prevents expansion to full employment. What, if any, are the alternative options?

Full Employment. Zero Inflation. And a Fair Day's Pay.

A potential solution to this problem already exists, and needs only to be applied on a standardized national scale in order to bring stability - and social justice, that essential pre-condition of stability - to the economy.

For many years, government agencies and corporations large and small, have been using a system of job evaluation to evaluate the work contributed by each employee. Each job is analyzed, and its essential characteristics and demands, such as training, responsibility, working conditions and physical/mental effort involved, are measured on a series of common scales. The job “value” is then directly related to remuneration. In this way, pay is fair, both in relation to the work done, and in relation to the pay and the work of others.

Formal job evaluation began in the United States with the Civil Service Commission in 1871. The first 'point system' was developed in the 1920s. During World War II, the National War Labor Board encouraged the expansion of job evaluation as a method of reducing wage inequities. As organizations became larger and more bureaucratized the need for a rational system of paying employees became evident. Wage structures became more complex and needed some way to bring order to the chaos perpetuated by supervisors setting pay rates for their employees on their own. Job evaluation became a major part of the answer.

Currently there are several such systems in use, well tried and working successfully. All we need do is analyze and compare their different features to establish a single standard. This would become in effect a national standard of value for measuring the work element contained in a product or service, so that pay becomes a true reflection of the work required of a job. Society already measures apples and milk; it could hardly get along otherwise. Yet of all the commodities traded every day, work is the most important, and work is the one commodity we don't measure.

A national standard would provide a point of reference, of justice indeed. Everyone would know how much they should get for the work they do, without hassle or argument or strike.

Labour evaluation can ensure remuneration stabilization. This process can be carried through to price stabilization.

A factory's, or a business's total costs consist of three elements. First, the cost of bought-in raw materials and components; second, the direct labour added in the factory; and third, the costs of capital write-off, overheads and finance. These are the costs of making a product, of supplying a service. From these costs a Unit Production Cost can be calculated for each product or service supplied. If this Unit Production Cost then becomes the Selling Price, there would be a direct and fair relationship between cost and price, and therefore between pay and purchasing power.

But the Unit Production Cost is not normally equated with the Selling Price. The difference between the two is commonly referred to as the net profit. How is the net profit currently disposed of?

The prior destination for profits has traditionally been the investors, or shareholders, who provide the necessary investment. The other major destination for the disposal of company profit is re-investment, either in research and equipment or increased working capital. The advantage is that in-house or self-generated investment comes without future servicing cost or commitment to repay.

There is however, one more much-neglected claimant to a share in the profits, and that is the customer. Profits have to come from somewhere - or someone. In fact it is the customer who pays the price and generates the profit; thus a justified claim on profits would come from the consumer, demanding lower prices.

Much as a national standard of work evaluation would provide a point of reference for remunerations, so the establishment of public policy for profit distribution would ensure both fair and stable prices. This could take the practical form, first, of an overall profit ceiling. Of the profit made, broad percentage bands could be established and gradually stabilized, distributing profit according to a pre-set formula as between investors, consumers, and the internal needs of capital for reserves and re-investment.

It should be noted that price stabilization effected in this way, through annual account regulation, would permit the same degree of latitude in pricing 'deals' and special offers. But the profit ceiling would ensure an ultimate price stability.

Pay, profit and price evaluation and stabilization would provide guidelines ensuring fair exchange between employer and employee, as well as between producer and consumer, without the need to argue or strike, and would stabilize pay and prices even in times of economic expansion.

It would then be possible to expand the economy steadily to full employment and hold it there indefinitely without fear of inflation.

The results would be seen in full employment, monetary stability, and a high level of productive efficiency and thus prosperity.

Deflation - a Rich Reward

Inflation is a permanent feature of every world currency today, and though economists and politicians seem quite comfortable with its existence, inflation is a manifestation of gross monetary mismanagement, for it is a denial of one of the two basic purposes of money: that it should serve as a store of value.

The longterm result of productivity maximization, combined with the stability of a labour-based monetary system, is negative inflation. Your money buys more each year, not less. As productivity increases, the labour-content decreases, and it becomes possible for goods and services to be produced and offered at lower prices, thus progressively lowering the cost of living.

This in turn means that as we get older we can look forward to increased purchasing power for our savings. A wild dream? No. This is as it should be, the normal course of events. We should be increasing productivity, producing more and better at less cost. And with a stable monetary unit, increased productivity involving less labour is reflected in lower prices.

Ultimately the idea of living in a society where the cost of living goes down slowly, year by year instead of up, where your savings are not only safe but increase in value, where your domestically produced goods get progressively better and cheaper, where a fair day's pay for a fair day's work in decent conditions is an accepted norm rather than an on-going battle... it may all seem utopian.

But it's possible. And perhaps one day we'll get around to it.

Development Banking can spread growth across the nation, creating jobs and providing the wherewithal for existing companies to increase their competitiveness and productivity.

Productivity in Government Government takes half the nation's income. It needs to maximize its own productivity.

The Art of Good Government