Grexit is not a fix for low wages and low labor productivity in Greece

by Jehu

I came across this post on the Lenin’s Tomb blog today. See if you can tell why I am tearing out my hair.

Syriza’s mauling at the EU negotiations:

“Syriza has been defeated in the first round of negotiations.

After a period of enjoyable defiance, during which they won the backing of the overwhelming majority of the Greek people – 80% according to a poll taken before the latest deal, published in today’s Avgi – they have come back with small change.  Pushed to the point where they were at risk of a collapse of the banking system, and unprepared for a Grexit (and thus unable to use it as a bargaining chip), they accepted the most comprehensive drubbing.”

Yes, Grexit — a ridiculous term meant only to show how revolutionary one is. I cannot understand how people see Grexit as a bargaining chip or a threat to use in negotiations. I really don’t get that.

The only people who think Grexit is150105_Open_Europe_Blog_Greece_exit a good idea also think the problem in a crisis is that currency is over-valued. From that point of view — of Krugman and Keynesians generally — the euro as a currency is over-valued in terms of the productivity of labor in Greece.

The solution of these people is to exit from the euro, replace it with a currency the Greece government controls and allow that new currency to depreciate against the euro. If this neo-Drachma were allowed to depreciate in purchasing power by 50%, they argue, Greece goods would become relatively cheaper exports would rise, while imports from the euro-zone would fall as goods produced in the rump eurozone became increasingly expensive in drachma-terms. The net result is the expansion of the export sector at the expense of imports.

According to modern money advocates, like Warren Mosler and Bill Mitchell, another channel through which Grexit might work is by placing control of currency in the hands of the SYRIZA government. With this control over its currency, the government could directly employ workers in public jobs for whatever purpose it chose, at some given wage. The two channels — depreciation and a jobs guarantee — work in tandem, because the creation of currency out of nothing to employ the workers would also accelerate the  depreciation of the currency relative to all other currencies.

The problem is that while Grexit depreciates the purchasing power of currency, it also inflates the prices of goods for sale. Thus, many writers warn, with Grexit the working class would be hit by wave after wave of commodity price inflation carried throughout the economy. The depreciation of the currency would not just hit imported goods, it would also affect the prices of domestically produced goods.

Also, mind you, this does not include the impact of the wages of the newly employed workers on wage goods caused by the creating currency out of nothing. Assuming the newly employed workers are not productively employed and, therefore, do not simply shift existing employment to the public sector, they will produce nothing and are being paid to produce nothing.

However, despite producing nothing (and even if they have no jobs at all, as in a basic income scheme), these workers must eat, clothe themselves, find homes, medical care etc. While adding nothing to the “economy” in terms of what commodities are available in the market, they nevertheless also consume some portion of the wage goods that are available. This problem is not at all about money, but about the real wage and the real material subsistence of the working class.

Moreover, once in  circulation, there is no way to tell if a drachma was paid for productive labor or labor that produced nothing. All drachmas look alike in circulation and thus printing out currency for unproductive labor (or in place of a wage) only increases the demand for wage goods. The value these wages implies no additional output, but added costs. Thus the costs of production increase with no corresponding increase in output. The working class will experience this in the form of an inflationary shock for wage goods; perhaps even a hyperinflation.

Once locally available output will now be exported for euros, while consumption of the working class will be further subdivided among  a larger number of workers. The net result is that wages will be severely devalued and the rate of profit increased.


Given this, it is no surprise that German Finance Minister Schaeuble has called on Greece to leave the euro. Leaving the euro has the overall effect of forcibly devaluing Greece workers’ wages and raising the profitability of Greece industry. It addresses what is, from the bourgeois point of view, the most important problem of Greece and the euro: in euro currency terms Greece labor power is over-valued; or, more accurately, the rate of profit in Greece is too low to attract new investment.

The problem for SYRIZA, however remains: how to reduce labor costs in Greece — and this is a really touchy subject on the Left. Who in their right mind doesn’t look at the term, “reduce labor costs”, and not see behind it the long history of devastated communities, layoffs and poverty? “Reducing labor costs” has never been anything more than a euphemism for unemployment and millions surviving on food stamp socialism.

Nevertheless, the problem is that “labor costs” in Greece are too high and must be reduced in a way that is compatible with the improvement of the condition of the working class. While reducing labor costs is often conflated with laying off millions of workers, this is only because it is the capitalists who are driving the agenda. In reality reducing labor costs need not mean rising unemployment and poverty.

To put this in the simplest possible terms: Labor costs are too high, because labor power is already undervalued. Attempting to cut labor costs by reducing wages has been shown to have the perverse impact of increasing labor costs in production. This is the surprising (for bourgeois economists) conclusion look at employment recovery since 2008:

“In a 2012 paper Bill Martin and Robert Rowthorn argued that falling real wages are the critical detail—the key to unlocking this puzzle. They suggest that wage moderation led directly to the labour-intensive nature of the British recovery in three ways. First, it kept firm income higher than it would have been, preventing some firms from going out of business. Second, it made labour hoarding more attractive. And third, at some margin, it led to some substitution of labour for capital in production, or some displacement of production from capital-intensive firms by labour-intensive firms.”

The impact of low wages on decreasing labor productivity may be surprising to bourgeois simpletons, but it is just what Marx’s labor theory predict.

Whenever we speak of “labor costs”, we are talking first of all about the actual employment of living labor in production, not wages. What makes all the difference in whether labor is employed in production or replaced by a machine, is the relative costs of the two. If the price of labor power (wages) fall too low, the capitalists have an incentive to employ living labor in production rather than machines. The result is that the more labor costs are reduced by cutting wages, the more living labor is favored over automation of production.

A communistic approach to the problem of high labor costs, therefore, begins with drastically increasing labor costs, not reducing them. By forcibly increasing labor costs, the aim is to make labor so expensive, the capitalists are forced by constantly rising labor costs to replace living labor with machines.

And the logic of this is obvious once you realize that living labor competes with machines in terms of costs of inputs. Thus, counter-intuitively, to force down the employment of living labor in production (i.e., to increase productivity), as Greece needs to do,  you have to suddenly and severely increase the costs to the capitalists of employing living labor rather than machines in production.

Which is to say, you have to deliberately force wages through the fucking roof.


There are two things that make labor power cheap in Greece:

  1. it is in plentiful supply owing to very high unemployment; and,
  2. the minimum wage is low

A communistic solution to low productivity and high labor costs in Greece would begin by changing both of these. First, Greece has one of the longest work weeks in Europe; this should be cut at least in half. Cutting the work week in half would force the capitalist to drastically reduce their employment of living labor in production by making it physically unavailable for employment.

Second. on top of a reduction of hours of labor and as added incentive to reduce living labor in industry, but also to address real problems of poverty, the minimum wage should be set well above the highest in Europe: preferably at least 25 to 35 euros.

Both of these measures can be progressively phased in over a two to three year period without causing undue dislocations in the economy. These measures are far superior to Grexit and have the additional benefit of requiring no state spending for cash-strapped Greece at all.

The Eurogroup is calling for labor restructuring, which means nothing except the reduction of labor costs in the economy. The simplest way to reduce labor costs in actual production is to severely increase the cost of living labor, i.e., labor power. SYRIZA can keep its commitment to the workers who voted for it and to reform of the economy by these two simple measures.

Workers need to keep in mind that there is a real tradeoff between wages and productivity: The higher you push wages and reduce the availability of labor power, the more monetary and material incentives the capitalists will have to replace living labor with machines.