It’s the power, stupid.

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Whether the European economy as a whole will become more social depends on whether the EU is willing to shift the relative power balance in the economy in favour of employees. There are signs that this might be happening.

EU ministers met in Paris today to discuss the European Commission’s ‘Social Economy Action Plan’, hoping to boost the EU’s rather narrow ‘Social Economy’ sector.

The sector, comprising cooperatives, associations, and other company forms that do not necessarily put profits first is still very small in the EU. Only 6.3% of employees work in the social economy, according to the EU Commission, in some EU countries less than 1%.

Even if the EU manages to boost the social economy considerably, it will stay a limited phenomenon for the foreseeable future.

The EU can, however, take some inspiration from the social economy to make the rest of the European economy more social as well.

In a recent interview with EURACTIV, France’s junior minister for the social economy, Olivia Grégoire, explained that a defining feature of the social economy was that power and the created value were more evenly distributed.

It is logical that the more even distribution of created value is a consequence of the more evenly distributed power. If, when determining the distribution of company profits the vote is based on a ‘one person, one vote’ principle, as in a cooperative, for example, the distribution will be more equal than if what counts is the number of shares one owns.

While the conventional economy won’t go towards a ‘one person, one vote’ principle anytime soon, relative power is also what shapes distributional outcomes in the conventional economy.

Companies are no charity institutions, they need pressure if they are to act for the sake of anything else than their bottom line.

The classic way in which workers can strengthen their power is by means of trade unions and collective bargaining. And the EU seems to take note.

For example, the directive for adequate minimum wages aims to significantly strengthen collective bargaining in the EU. It is currently being negotiated between the European Parliament and the member state governments.

However, trade unions and collective bargaining are not the only answer. Macroeconomic policies can also have a great influence on the power balance in an economy.

If expansionary monetary policy and fiscal policy let the economy run hot, companies scramble to get enough workers, creating opportunities and bargaining power for employees, who can choose among different employers and bargain up their wages.

The fast recovery in the US economy, for example, has led to impressive growth in nominal wages, especially for low-wage jobs.

If central banks and governments clamp down on the economy at the first sign of increasing inflation, they run the risk of constantly running the economy below its potential, which comes at the cost of high unemployment and low wages.

But here as well, many in the EU seem to have learnt from mistakes in the past. The European Central Bank is not yet panicking in the face of rising inflation and the European Commission has acknowledged the need to reform the fiscal rules to allow for more growth.

In contrast to the ‘Social Economy Action Plan’ that currently only touches 6.3% of European employees, these macroeconomic policies have consequences for the bargaining power of all Europeans.

Whether the EU achieves the goal of a more social Europe will thus not be primarily determined by the Commission’s action plan or by the results of today’s informal ministerial meeting in Paris. It will be decided by the economic policies that reallocate bargaining power in the economy.

Chart of the Week

EU companies and their owners had a great second and third quarter of 2021 as they were able to skim a larger part of gross value added in the EU economy than at any time since 2008.

The gross profit share of non-financial corporations shows how much of the gross value added in an economy is going towards gross profits and thus remunerates capital, instead of remunerating labour.

Data from Eurostat. Chart by Esther Snippe.

The figure shows that the recent spike in inflation might also be a story of increased corporate profits.

In the past months, companies and consumers have been complaining about rising prices connected to supply chain issues and gas prices. At the same time, many companies not only passed on the higher prices to their customers, but they also increased their profit margins, as the German Bundesbank stated in December 2021.

To a certain extent, this is a normal process, a result of much demand meeting limited supply. In a functional market, the higher profits will lure in more producers, which should then lower prices and profits again.

Nevertheless, this shift towards a larger profit share should be remembered, if and when employees are told that they should restrain their demands for wage increases to keep a check on inflation, as has recently been done by the governor of the Bank of England, Andrew Bailey.

If workers should temper their demands for higher wages, so should companies their thirst for profits.

Literature Corner

Tough Trade: The Hidden Costs of Economic Coercion: In this policy brief, the authors lay out some interesting ideas on how the EU should react to a more geopolitically charged trading environment.

Optimal Minimum Wages: The eternal question of minimum wages is how minimum wages should be set, so that they increase equity, but do not significantly decrease employment. The authors of this article try a new model and apply it to Germany.

IKEA’s Race for the Last of Europe’s Old-Growth Forest: We all like our cheap furniture from the Swedish giant. But what does IKEA’s thirst for wood mean for the environment, and old-growth forests in particular? This investigation looks at a less savoury part of the furniture supply chain, namely the violence and environmental devastation in Romania’s forests.

Latest economy articles on EURACTIV

[Edited by Zoran Radosavljevic]

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