Sunday, May 02, 2010

Getting wages indexed to a labour index

There are several amazing things about the great recession:

a) Margins remained strong throughout, and will now go through previous cycle peak. Companies have squeezed labour costs hard.

b) Commodity prices have zoomed right back, even in commodities like oil which have near-term oversupply dynamics.

Traders in commodity pits have turned out to be the saviours of commodity exporting nations. Had it not been for their speculation, it is entirely possible that commodity prices would have been lower, and commodity consumers benefited at the expense of commodity producers. In case of commodities like oil, one can argue that traders are looking through near-term supply-demand imbalance and looking 3 years out.

What I have been wondering is - suppose labor costs were similarly linked to some wage index on the exchanges. Wouldn't the wage costs also have jumped - which is the right thing to have happened if corporate profits are booming? Now there will be political issues with such a construct. In a downturn, wage costs might also fall below what is considered acceptable. But maybe, leftists should just think about this idea.