On the IMF's global economy forum, they published an article that Japan needs to push for higher wages. They say what I have been saying for some time... And this story of low wages in Japan applies to the US and Europe too.
1. Wages and labor share in Japan have been suppressed. This is happening in the US and Europe too.
"So, labor’s share of national income has dwindled, from around 66 percent at the turn of the millennium to around 60 percent today. The average Japanese worker has been dipping into his savings to finance consumption growth. But there’s a limit to how far he can do this. The savings rate as a percent of disposable income has declined from around 5 percent a decade ago to close to zero today..."
"For many years, nominal basic wages have been declining despite generally tight labor-market conditions. Real wages too have fallen despite solid productivity growth."
2. Higher wages will support healthy inflation in Japan. Low inflation is a problem in the US and Europe too.
"So the message is clear: higher wages are needed tohelp to break the deflationary spiral and establish a virtuous growth cycle. Insofar wage increases are passed on to consumers by firms, higher nominal wages would allow the Bank of Japan to meet its inflation target more rapidly, without overburdening monetary policy."
3. Higher wages would increase investment by increasing aggregate demand, which is more correctly defined as effective demand.
"Insofar real wages increase, larger pay packets would also support aggregate demand and create favorable conditions for firms to raise their investment."
The IMF article goes on to talk about reasons why wages are suppressed in Japan and ways that wages could be raised. They talk about a higher minimum wage and "moral-suasion", which are subjects that Paul Krugman talked against when he wrote about the living wage.
"In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price--determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away." - Paul Krugman, 1998 (source)
Krugman's quote above has a serious flaw in the understanding of the labor market. He compares wages to apples and coal. He makes labor a commodity. He did not understand that wages are not properly determined by the market. Labor is not a commodity. There are institutional, social, psychological, economic and class factors that work against labor.
The person who first coined the term "living wage" was Beatriz Webb. She lived over a century ago, when the institutions that created wealth inequality were as prevalent as they are now. What did she say? (source paper by Bruce Kaufman)
"The Webbs (1897) ... claim, “the assumption of a mutual exchange of services among freely competing individual bargainers, is, from a practical point of view, entirely obsolete."
Seeing wages as a commodity price "fairly established" by the market was theoretically obsolete over a century ago. But economists, even as influential as Mr. Krugman, defend the amorality of the market place as something natural and therefore something to be accepted.
Beatriz Webb would get annoyed with Mr. Krugman. She called for legislative intervention in the labor market, as did Keynes later. Fortunately, Paul Krugman is now seeing that legislation and policy were likely responsible for the great economic growth of the past century. The IMF would like society, government and social institutions to push against the amorality of a free market for labor. Mr. Krugman should have done the same back in the 1990's, but "better late than never".
I certainly hope that Mr. Krugman sees the light and jumps on the IMF bandwagon to push for an increase in labor's share of national income not only in Japan, but also in the US and Europe.