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Australia: Wages will inevitably fall in rich nations like Australia,

2014/05/30

Wages will inevitably fall in rich nations like Australia, the United States and United Kingdom as the world moves toward economic equilibrium, according to Nobel laureate, Professor James Mirrlees.

In a speech in Sydney on Thursday night, Professor Mirrlees said the flow of capital from rich nations to poorer nations could turn into a "flood" as capital sought out the lowest wages.

"Capital can increasingly leave the rich nations and so long as wages are higher there than in the poorer nations that seems the way it should go," he said.

He said that the shift to lower wages in developed nations would not distinguish between occupations.

"I should just emphasise that this theory says all wages will fall at any particular skill level – unskilled, skilled, professionals and chief executives."

In a speech to alumni from the Macquarie Graduate School of Management, Professor Mirrlees said that if wages did not fall in rich nations again unemployment would have to rise.

"The highest rates of return on capital are nowadays in low wage nations," he said

"People have described the movement of capital in the last few years to the to developing nations as some kind of strange speculative flow that is an offset to the financial crisis in the West.

"It seems to me additional reasonable to think that this is the beginnings of what could be a flood.

"Economic equilibrium is at the same time as everybody is content with how things are going, there is nobody out there trying to supply labor and not able to get a job.

"In the very large categories of labour and capital there is only going to be long-term economic equilibrium at the same time as the rates of return for capital investment are the same in all nations.

"It's not going to be authentic that each country has the same technological possibilities but there is no reason why it may not be additional or less authentic.

"Broadly, that the idea that the same technologies should be available everywhere seems to me very plausible."

Professor Mirrlees, who is emeritus professor of political economy at the University of Cambridge, said that economic equilibrium implied that "one of the majority basic propositions of economic theory" would prevail and that is that wage rates would be the same.

"If the wage rates can't be the same you can't have equilibrium.

"You may think this is absurd but it maximises national gain in each country.

"If you think that is ridiculous that you could maximise gain in each country while some have relatively low wage rates to what we are used to presently, you have to reflect that it is the capitalists, the people who own the capital, who are getting the gain.

"It's their capital that is being used in the majority fruitful way."

Professor Mirrless said that one of the implications of the move to economic equilibrium is that owners of capital will get additional and workers will get less.

"Certainly, if you are looking at this from the point of view of nations like Australia, USA, Hong Kong and Britain again that seems to be the way of it," he said.

"Of course, if it is right that wages will get equalised that would mean that wages in China and India will be higher.

"But it looks to me that they would be much lower in Australia, Britain and US than people are hoping."

He said there would be consequences if nations tried to resist the forces of world capital flows and economic equilibrium.

"If you try to hold it back, if you try to keep the wages high again that is going to be mean growing unemployment," he said."

Professor Mirrless said this would lead to structural unemployment and "we better get ready for it".

"Each economic problem has an answer and the possible solution here, it may be just a partial one, but could be completely an effective one, is the subsidy of low wage labour paid for by taxes on high wages and capital incomes."

Professor Mirrlees won the Nobel Memorial Prize in Economics in 1996. He is best known for his work on tax policy, the economics of uncertainty and development economics.

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