By MEDECCI LINEIL
Prime Minister Tun Mahathir, in many occasions, has been arguing that a wealthy country is one where its people have high purchasing power, not just high wages.
According to him, any salary increase will not be any good if the cost of living continues to soar.
On this, he accurately observed “…a salary increase without increase in productivity, the money we get does not have any meaning at all.”
This is not in fact what we desire at all.
Of course, wages rise is great. But these are nominal (actually, employment costs, so including the costs of benefits like healthcare, social security and insurance) wage rises.
But nominal wages, as the prime minister pointed out, are not what we are truly interested in at all.
Because it’s standard of living you can buy with what you are being paid that is the true rate of pay.
This is what seems to be in the thinking of Tun Mahathir:
“It is the purchasing power of their wealth that is important – not just the amount of money they get. Higher income with higher cost of living does not benefit the wage earner very much.”
Yes, that is real wage.
To grasp this, we need to be able to understand the concept of real wages. Not a terribly difficult one, to be sure, but one that seems to puzzle all too many.
Leave aside money, inflation, all those complicating matters. The real wage is what you can get for your labour.
Say that your money wage goes up but prices rise further? Your real wage has fallen.
Say that your wage falls but prices fall more? Then, your real wage has just gone up.
So wages rise alone doesn’t tell the whole story.
Venezuela has had very large rise in nominal wages but no one at all thinks that the country is an economic success.
We would like real wages to be rising consistently over time, after inflation, for that’s the point of our having this economy thing in the first place, that people become better off.
Firstly though, a little bit of defining. Economists spend a lot of time discussing prices and wages and we often use money as proxies for things.
Why? Because the economy is not something that can be measured in its entirety and this is currently the best way to measure things.
Therefore when we talk about money, what we really mean is the money’s purchasing power.
People don’t want a greater amount of money in their bank accounts so much as they want greater purchasing power in their possession.
Money is not what matters. What matters is how many goods and services that can be exchanged for money to satisfy your wants.
Our only interest here is the amount of use a person gets from the consumption of a resource.
In other words, our well-being.
When money is treated as a means rather than an end, then the focus tends to shift more towards the consumption and trade side that wealth is created when people trade things of lesser value for things of higher value.
Just like any goods in the market, the price of money is determined by supply and demand.
If there is less money, its exchange value will increase.
For example, I trade my money with the supermarket to get as much goods in order to consume.
Unfortunately, much popular conversation surrounding the issue has this exactly backward which the exchange value will fall when there is more money.
Who in the world prefer to give up more than they get?
This would be akin to saying the person who is a “successful” shopper is the one who spends the most at the supermarket and gets the least in return.
The “successful” shopper spurns all bargains, sales, discounts, and specials and would be the one who demands he pay higher prices.
He laughs at all the other shoppers who are buying food in bulk, buying what’s on sale, buying specials.
He laughs at the shopper who, by taking advantage of low prices, buy a month’s worth of food for a week’s salary while he buys a week’s worth of food for a month’s salary.
It is easy to imagine, probably common, this unfortunate way of thinking that there is “not enough money” in daily transaction and production, in my view, is wrong because it usually is accompanied by policies that the government can make people better off by laying out what they think a month’s work should be able to buy.
That is what they think a reasonable lifestyle for poor people would be.
Which is nice of them, by the way.
And then they insist that that should be what minimum wages are across the country ̶ which our economy simply isn’t producing enough value added for that to happen.
No government tricks can make it possible to require workers to be paid an amount greater than the value of what they produce unless we want them to be out of work.
Plus, not all jobs are of the same value, therefore not all jobs should pay the same amount.
There’s more to it as well. Costs of living vary across the country.
Therefore a standardised wage isn’t going to provide the same standard of living to the people doing the same job in different areas.
So, obviously enough, there will be difficulty in offering the same nominal wages in places where money is worth less.
Let’s not do that.
If real wages, what people actually do get to consume as a result of having gone out to work is improved, then this will put downward pressure on cost of living.
If we want things to be cheaper, we should produce more of it.
If not, then prices just go up. For example, think about those special vintage Star Wars toys from the 70s which can be worth a lot of money.
No one is making any more of those models.
So if everyone gets more money to spend, it won’t mean that more people can afford to buy them.
The sellers will just put the price up.
The only way to raise the ability to consume more is to raise the ability to produce more by getting the government out of the way, as we do that, we will get more active and creative entrepreneurship.
If consumer prices are falling generally, even if our wages remain the same, we consume more and the wealthier we are.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the New Sarawak Tribune.
