Election Economic Misconceptions (2) Wage Restraint

The business people who support government policies that keep wages and salaries down like these policies, because they make it easier for them to keep their businesses profitable. However, they forget something important.

Their employees are their customers, or the customers of other businesses. So, when the wages and salaries of employees are screwed down, they have less to spend on the products and services that businesses produce. So tightening wages and salaries might temporarily increase their profit margin, but it tends to reduce their sales, which makes it hard to make a profit,

But worse still, when businesses are finding it hard to make sales, they tend to stop spending too. This can be good for them, but it makes it harder for the businesses that they buy things from, because they will find it harder to make sales. A few struggling businesses will need to put off staff too. They have to cut back their spending, so it becomes even harder for businesses to make sales.

The overall consequence is that the economy spirals down as everyone stops buying to save money, which means that every business finds it hard to sell their products.

Most politicians and many business people don’t understand that the economy is circular. Spending goes round and round from business to business, household to business and so on. Spending on wages and salaries goes round too, from employees to businesses to businesses to employees, and so on. One business’s spending is another business’s sales. The wages and salaries that businesses pay to employees are the income that they use to buy products from other businesses.

Money flows round the economy, and if one part is squeezed, the squeeze spreads out to other parts of the economy. An economy cannot be grown by cuts and squeezes.