Decreasing Labor-Labor Exchange Rate
The LCSR staff prepared a review of Andranik Tangian`s lecture «Decreasing Labor-Labor Exchange Rate as a Cause of Inequality Growth», which was presented on the Sixth LCSR International Workshop.
In his lecture Professor Andranik Tangian (Institute of Economic and Social Research in the Hans-Böckler-Stiftung and Karlsruhe Institute of Technology) attempts to explain the dynamics of inequality in G7 countries and Denmark. His study focuses on the decline of the labor-labor exchange rates. The author extends the well-known Marx’s formula “Commodities-Money-Commodities” by including labor. His new interpretation “Labor-Commodities-Money-Commodities-Labor” suggests that commodities are produced by the means of labor, and labor, being embodied in commodities, is rewarded by money.
Professor Tangian defines “labor-labor” exchange rates as the returns from one’s labor in the form of others’ labor. In the context of the formula “Labor-Commodities-Money-Commodities-Labor,” this definition means that the amount of earnings paid for a worker’s labor defines the purchase of others’ labor in the form of commodities (goods or services). Therefore, one can express the labor-labor rate as the ratio of one’s production units to others’ production units since labor is expressed in production units.
To illustrate how the labor-labor rates change, Professor Tangian gives the following example. At time t1 a worker produces N units per hour and can afford to buy K units (given that these units are identical to his own production units, in other words, they have the same retail price and require the same amount of labor) for his hourly earnings. In this case the status-quo labor-labor exchange rate is N:K. At time t2, the worker produces 2N units per hour, and the number of affordable production units for his hourly earnings has doubled, evidenced by the unchanged status-quo exchange rates (N:K). However, the comparison between the second time point and the third one demonstrates that the labor-labor exchange rate has decreased. The worker goes on producing 2N units per hour but the number of affordable identical production units for his hourly earnings has decreased to 1.5K. Professor Tangian explains the decreasing labor-labor exchange rate with remuneration. Ceteris paribus, a decrease in the labor-labor exchange rate reflects insufficient reciprocal labor compensation measured by a non-paid percentage of working time. Using OECD statistical data for G7 countries and Denmark, the author demonstrates that the labor-labor exchange rate is decreasing. The increase in productivity allows employers to compensate employees with a lower labor equivalent. Despite significant underpayments an increasing purchasing power maintains the impression of fair pay.
The author further tests the relationship between inequality and the degree of labor devaluation on the OECD data for G7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) and Denmark, known as a country with the lowest inequality from 1990-2014. The author uses two indicators as a measure of inequality: net Gini coefficient for market income without taxes and transfers, and a Gini coefficient for disposable income post taxes and transfers. GDP per hour worked in constant prices is selected as a productivity measure (the source is OECD.Stat database). The productivity growth is calculated for each year compared to the reference year 1990 (100%). The labor-labor exchange rate is expressed as a ratio of the dynamics of hourly earnings to the dynamics of productivity. The index reflecting the extent to which the hourly earnings change with respect to 1990 is calculated as (1) a ratio of the dynamics of hourly earnings to the dynamics of consumer prices in percentages and (2) the dynamics of hourly earnings to the dynamics of housing prices in percentages. The correlation between the productivity growth and the inequality measures is not statistically significant. However, the inequality and the labor devaluation variables are significantly correlated. Interestingly, the correlations between the labor-labor exchange rates and the Gini coefficient for disposable income post taxes and transfers are also significant. Moreover, high taxes maintain the labor-labor exchange rates. This effect is two-fold. On the one hand, high taxes limit purchasing power and moderate the incentives to increase capital gains. On the other hand, high taxes are accompanied by generous income redistribution. Supporting vulnerable social groups tends to increase solvent demand. Last but not least, high taxes maintain the labor-labor exchange rates and mitigate income inequality.
Professor Tangian provides an innovative perspective on the complex relationship between income inequality and labor-labor exchange rates. He makes significant theoretical and policy contributions by suggesting how to manipulate labor exchange rate by means of tax policy.