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Creating jobs at the heart of economic policy

Insights and conclusions from the Employment debate

Annemarie  van de Vijsel | March 05, 2015

You can read it in the newspapers every day: national economies are not creating enough jobs and fewer quality jobs in the productive sectors. Globalization, automation and financialization of the economy have been identified as the drivers of current employment trends. To explore what policies are needed to create more and better jobs in a globalized world, The Broker launched an international debate in 2014. The debate showed that policies aimed at creating more and better jobs start with a change at the core of the financial markets

This article concludes The Broker’s Employment debate, which ran from March to November 2014. The debate was a follow-up to the conclusions in The Broker’s dossier on Employment, published in March 2014. The debate comprised 44 written contributions by international experts from academia, research institutes, the private sector, trade unions, NGOs, multilateral institutions, and EU institutions. The contributors were asked to focus on specific elements of employment and, in the debate, they distinguished economic globalization, trade liberalization, financialization and technological change as the main factors influencing employment. They also proposed answers to the main question of how more and better jobs can be generated within a globalized world and made policy recommendations, with Europe’s economic recovery as the starting point.

It is clear from the debate that a multi-angle approach is needed to create employment and better quality jobs. According to the participants in the debate, the current trend of low wages and faltering job creation in most advanced economies could be halted by increasing productive and greener investments. But achieving this first requires a change at the core of the financial markets led by investment banks and private equity funds. One important step is to decrease the tendency of financial institutions to overdebt companies. According to the participants in the debate, policy-makers in advanced economies like the US and the EU should therefore start by taking steps to discourage the high-risk use of debt by financial institutions. Limiting the tax deductibility of interest, for example, would make over-leveraging companies less attractive. Taxing interest, capital gain and dividend income for non-financial companies at higher rates than income generated from their core business will encourage them to refocus on productive investments and long-term sustainability that could in the end improve employment.

Ownership of capital

Taxing capital more and labour less is a commonly heard recommendation nowadays, also in The Broker’s debate. This is in line with the policy advice of leading French economist Thomas Piketty, author of the bestselling book “Capital in the Twenty-First Century”. However, the participants in the debate also identified focusing on redistributing wealth rather than taxing it as a suitable alternative. One way to achieve this is to allow employees to share in company profits, paid out not in cash but in shares. This would gradually give workers an increasing share of the equity of a firm. As employees become shareholders of their own company, the dividing line between employees and shareholders gradually fades. Crucial to the success of this strategy is that employees do not sell their shares, but accumulate them. The best way to achieve this is by depositing the shares in a fund collectively managed by the employees.

Another way to create jobs mentioned in the debate is higher real interest rates. Firstly, this would permit productivity rewards to be passed on to workers in the form of falling prices, driving up real wages, total demand and the rate of job creation. This is also known as good deflation. Secondly, it would help prevent large-scale financial crises by limiting excessive credit binges, as real interest rates rise to offset increasing productivity growth. Finally, slightly higher real interest rates would force companies to focus on productivity growth as a source of profits, as they would not be able to benefit from ultra-cheap financing and relatively lower exchange rates.

Other incentives that participants mentioned are focussing on policies that seek to enhance productivity growth by including support for R&D activities, education, training and human capital. The current coexistence of structural unemployment and skills scarcities in many sectors in Europe could be aggravated as the entire workforce shrinks. Therefore Europe must generate the skills supply that will be increasingly demanded by businesses all over the globalized world.

Ways of achieving this could include adequate social protection combined with efficient job activation policies and skill formation. The European Social Fund and the European Globalization Fund provide support to help workers adjust. Nevertheless, not all workers will have the ability to upgrade their skills to meet the requirements of the new knowledge- and technology-intensive activities, and will remain employed in jobs that are subject to international competition from countries with lower quality standards for employment. As participants in the debate mentioned, in such cases a minimum floor for job quality could be set by appropriately designed labour market institutions in close collaboration with social partners.

Avoiding a race to the bottom

Although most participants were not keen to encourage trade protection as a solution, they advocated smarter trade agreements that propagate a gradual approach to liberalization. This would help spread reallocation costs over time and allow affected workers to adjust. Second, a race for global market share through trade liberalization and trade agreements should be conditional on parallel agreements on a minimum standard of job quality that is rigorously enforced internationally, for example in WTO agreements. This would avoid a ´race to the bottom´ in which workers around the globe compete against each other by accepting lower quality jobs.

The debate showed that automation and technological innovations should be seen not purely as a threat but as an opportunity that requires adequate policies to get the best out of it for society as a whole. Digital and additive manufacturing for example could provide new opportunities for customized, personalized and bespoke 'designer' products due to their low batch size efficiency. Open innovation trends fuelled by open source design and software coupled with cost reductions in machinery and the emergence of global networks sharing know-how and innovation capability will lower the barriers to entry to manufacturing. As was mentioned in the debate, this will help generate a much larger number of smaller manufacturing businesses based on innovation which could result in a greater number of manufacturing jobs.

At the same time, policy-makers must reject the dogma that governments cannot ‘pick winners’. Either directly, or indirectly through institutions such as publicly-owned banks, governments must ensure that sufficient investment spending is directed to socially useful activities. The participants in the debate therefore argued that employment generated by the public sector is still important. Particularly in the economically weaker regions of Europe public employment and publicly financed ‘private’ jobs are at the heart of the entire employment system. Economic adjustments based on public spending cuts therefore necessarily aggravate regional imbalances.

Taking these recommendations into account, the debate showed – like The Broker Employment dossier – that worsening working conditions and a lack of job creation are mainly due to structural problems. According to the contributors, this requires profound solutions and policy changes. This is elaborated in greater detail below.

Trade liberalization

As a result of globalization and the integration of the global economy, the labour market has also become global. This transition influences local labour markets. Trade and trade liberalization are drivers of this trend. Contributors to the debate on Employment expressed different views on the impact of trade and trade liberalization on employment. David Cheong of the International Labour Organization wrote that international trade can boost local productivity and employment through investments, while Teodora Tchipeva of the European Commission argued that free trade can do the same, as it increases market competition and thus stimulates economic growth.

However, Tchipeva and several other participants in the debate also argued that trade liberalization can have a negative impact on employment. In their contributions, both Íñigo Verduzco Gallo of the International Food Policy Research Institute and Noel Gaston of Curtin University argued that bringing down trade barriers not only makes the import and export of products easier and cheaper, but also increases the competition for local workers and for cheap labour, especially impacting on low-skilled labourers in the short and medium term. In Gaston’s words, “while the long-term effects benefits of freer trade seem indisputable, it is politically contestable over the short and medium run, more trade and product market competition produces winners and losers. For the majority of workers in developed countries’ import-sensitive industries and for less-skilled workers more generally, the trepidation about various facets of globalization has to do with the increased fear of job loss or lower real wages”. This impact is visible in developed, emerging and developing countries, both those that outsource production and in lower-cost countries.

To make trade freer, many countries around the world are signing trade agreements. As multilateral agreements prove difficult, most are negotiated bilaterally. One that has received much attention recently is the Transatlantic Trade and Investment Partnership (TTIP) that is currently being negotiated between the EU and the US. The TTIP evoked much concern among participants in the Employment debate. Although the proposed agreement has been presented as a great opportunity to create jobs, contributors to the debate were resolute that it will not lead to more employment. James Hoffa of the International Brotherhood of Teamsters wrote that “supporters of this US-EU trade pact parrot many of the same arguments made for all such deals – it will lead to more exports which will create more jobs at home. But US citizens have found themselves on the short end of the stick too many times to believe such tripe again. Any deal ultimately approved must include upward harmonization that ensures a better deal for all workers: when there is a difference how the US and the EU regulate something, the negotiations should err on the side of the higher standards, the better protections. Otherwise, it shouldn’t happen.”

Other contributors, like Owen Tudor of TUC, expected the TTIP to create low quality and low paid jobs or even to destroy many jobs in the EU and the US – at least one million, according to a report commissioned by the EU by the Centre for Economic Policy Research (CEPR) in London. John Hillary of War on Want also expected it to threaten labour standards, as standards in the US and the EU will need to be equalized in the agreements, and may be set at the lowest standard to remain competitive. While trade agreements can be beneficial for large companies and those who benefit from the increased profits they generate, workers will not automatically benefit from them.

The participants in the debate did not argue that trade liberalization should be stopped, but called for rules to make sure that more people all over the world benefit and, in Tchipeva’s words, “correct or prevent the adverse outcomes” of globalization. Verduzco Gallo called for international conditions on minimum job quality in trade agreements for both developed and developing countries, adding that trade liberalization should happen gradually, as this would help spread reallocation costs over time and allow affected workers to adjust. Tchipeva, seeing the benefits and adverse outcomes of opening up markets, called for more fair and inclusive policies to make the impact more positive.

Financialization

Global economic integration and trade liberalization also allow capital to flow more freely across borders, in the same way that they make workers and companies more mobile. Companies seek higher profits in emerging economies and, if they consider the production costs too high, they can more easily relocate, or threaten to do so, because of increased capital mobility. According to Stephanie Seguino, the threat of relocation if costs are considered too high decreases the bargaining position of workers and increases that of companies. As Jayati Ghosh pointed out, the financial sector also has “massive lobbying power”, while the state becomes less powerful regarding financial matters at the expense of the financial sector. Consequently, states are less able to stand up for the workers. According to Ghosh, this is also caused by or coincides with “the revolving door between big business and state representation”.

As the financial sector becomes more powerful, companies and wealthy individuals seek ever higher, short-term profits. As a result profits are increasingly made through financial channels rather than through the real economy. They are also invested less in the real economy, where goods and services are produced and traded, and from which the labour market would benefit most. Rather, they are increasingly invested in property or in the financial sector itself, aiming at quickly making higher profits rather than at creating new jobs. This trend of financialization increases the share of capital income and reduces that of labour income in GDP. This is happening in both developed and developing countries. At the same time, in Europe and the US, corporate income taxes and taxes on assets and capital gains are declining while taxes on labour income are rising, increasing the profit share even more and a reducing the share of labour income.

Several participants therefore advocated increasing taxes on capital and interest and reducing them on labour income. Paul de Beer of the University of Amsterdam argued, however, that increasing taxation on wealth does not contribute much to a more democratic division of economic power and thus to greater workers’ influence on decisions affecting the direction of economic development as the most wealthy do not usually have most economic power. This lies in the financial sectors, in the hands of company managers and the portfolio managers of the wealthy. De Beer therefore proposed focusing more on ownership of capital. By allowing employees to share in company profits – paid for example in the form of shares, – they become owners, thereby decreasing the current concentration of capital ownership.

In the private sector in the US, more and more non-financial corporations are becoming profit-oriented, just like the large financial corporations. In his expert opinion, Ken-Hou Lin of the University of Texas at Austin wrote that these companies experience weaker employment growth. And when a larger part of the profits goes to shareholders, fewer resources remain available to create jobs. Lin therefore suggested that, within companies, capital should be taxed more and labour less. Like Eileen Appelbaum of the CEPR, Lin proposed eliminating or reducing the tax-deductibility of interest payments as a business expense.

In general, according to Eileen Appelbaum, too much pursuit of profit, speculation and cheap credits are risky. Takeovers of firms with high debts by private equity funds may also have a negative impact on employment in these firms. She therefore called on policy-makers to change the tax system, to introduce more regulations for financial institutions, and to increase monitoring of such takeovers.

Ghosh pointed out that this all depends on policy choices, saying “All too often, financialization and globalization are presented as inexorable and inevitable forces that cannot be reversed. But we know that they are the results of policy choices by governments, and therefore can be reined in or altered substantially. That this is not done reflects the political economy configurations prevailing in different countries”.

Technological change and the skills mismatch

Automation, digitization and other technological changes in recent decades have influenced employment in many ways. The participants in the Employment debate had different opinions on whether these changes have been mainly positive or negative for employment and wages. Many people fear that robots will take over their jobs.

The negative impact of technological change is particularly due to a mismatch between the supply side (technology, skills) and the demand side (need for certain work, workers and products). Many experts drew attention to this mismatch. According to Jo Michell of the University of West England the gap between skilled new technology jobs and low-skilled labour, which is under pressure, leads to rising inequality. He counters the common argument among economists that automation in itself increases inequality. In his view, economists too easily blame “impersonal – and largely irresistible – economic forces”, taking away the responsibility to change these trends.

According to Julie Madigan (The Manufacturing Institute) and Robert D. Atkinson (Information Technology and Innovation Foundation), automation will not take over all jobs. As Madigan wrote, “[t]he next phases of growth in the digital arena will have far-reaching effects on white collar, professionally-based service industries within the next few decades. Nevertheless, current high volume manufacturing will not be replaced in the near future by digital manufacturing and in particular additive manufacturing. … Based on current technologies and research, it is highly unlikely that additive manufacturing will be cost effective for volume manufacturing within the next 10 years”. In addition, Atkinson expected that with automation, “the savings from increased productivity are recycled into the economy in the form of higher wages, higher profits, and/or reduced prices to create new demand that in turn spurs the creation of other jobs”.

Many participants (Wilton, Andrés, Muliro, Verick, Bjorsted, Oliver, Peschner) in the debate mentioned education as an important solution in keeping up with changing economic and technological developments, for productivity growth, and in closing the skills gap and allowing more people to find suitable jobs. Education needs to be reformed too to make it fit better with practise and the new skills that are required. Jörg Peschner of the European Commission wrote that Europe needs structural reforms, saying “The strategy to cope with demographic ageing must therefore begin now with structural skills-oriented labour market reforms in order to reduce mismatches and provide for a higher employment rate”. Some participants considered entrepreneurship crucial in generating employment and therefore wanted education to focus more on entrepreneurship. One question that emerged in the debate is whether the negative impact of technological change on especially low-skilled jobs can be solved by learning new skills.

Falling wages

Competition for cheaper wages and relatively high labour income taxation (compared to taxes on wealth) also mean that labour income falls. Fewer wealthy people, depending on wages for their income, have less money to spend on consumption, which in turn lowers demand and therefore the creation of jobs. In the end, as Stephanie Seguino noted, falling demand may also make companies cut wages even more. At the same time, a wealthy minority of people can accumulate more and more wealth due to financialization and decreasing taxation on wealth. A bias towards capital may therefore also increase inequality, as Stewart Lansley (Bristol University) and Jo Michell (University of the West of England) wrote in their opinion articles. Thomas Aubrey (Credit Capital Advisory) noted that workers who have lost their jobs due to increased competition usually find new jobs at a lower wage level.

Lansley pointed out that the focus on profit also has consequences for the larger economy, saying “[T]he surpluses created have been spent in ways that have destabilized economies, distorting incentives and fuelling a boom in financial engineering that has enriched the few while undermining the productive economy. … Today’s dominant economic model, with its continued bias towards capital, seems only able to trigger growth through asset bubbles. Creating a more equal distribution of the cake is an economic imperative”.

Automating tasks that were previously done by people can make a company more productive without employing more people, and can thus increase corporate profits. According to Robert D. Atkinson, a rise in productivity could in principle bring down the prices of products and/or increase wages, thereby fostering demand, and then the growth of employment. However, as Aubrey noted, rising profits from productivity improvements do not seem to benefit workers, as wages do not increase along with labour productivity. Therefore, he argued, “monetary policy should permit the rewards of productivity growth to be passed on to workers in the form of falling prices”. This will lead to higher real wages, thereby stimulating demand and creating more jobs. This may be fostered by “marginally higher” real interest rates, which would also “force companies to focus on productivity growth as a source of profits, given that firms would not be able to benefit from ultra-cheap financing and relatively lower exchange rates,”.

Some participants in the debate called explicitly for more productivity growth as a way to increase employment. “Productivity growth is the source of increased economic welfare”, said Atkinson. “And it is even more important for working people because, unlike the 1% who can thrive by rent-seeking and other extractive behaviours, the only real source of improved living standards for the other 99% is higher productivity.” According to Peschner, productivity growth is also needed because of demographic ageing in Europe.

Javier Andrés of the University of Valencia called for more wage flexibility to counter “high rates of structural unemployment” in Southern Europe. He argued that it can help people to get a first job more easily and can move capital to dynamic industries. Nevertheless, he acknowledged that, in the short term, such measures can increase income inequality.

Terms of employment and job insecurity

As many participants in the debate noted, global competition, financialization and technological change have had an impact not only on employment and employment creation, but also on working conditions and job security. In her opinion article, Kate Meagher of the London School of Economics wrote that the globalization of production and labour are the causes of deteriorating working conditions and job security in developed and developing countries. Michell pointed to the negative consequences of flexibilization in developed countries, leading to insecure working conditions. According to Michell, flexibilization and the “rolling back of progressive taxation regimes” by governments is the most important reason for declining wages and job security. Governments must therefore “recognize the damaging effects of the emphasis on labour market flexibility and instead focus on protecting the rights of workers”.

Teodora Tchipeva was less negative about flexibility, and proposed flexicurity policies – a combination of flexibility and security– to mitigate the adverse effects of globalization on the labour market. She argued that “labour market institutions and policies should be strengthened along flexicurity principles so as to strengthen the upward mobility of the most vulnerable workers”. She alluded to social protection, activation policies, skill formation and “removal of obstacles to intra-EU labour mobility”. Tchipeva also proposed a minimum floor for job quality, as “not all workers will have the ability to upgrade their skills to meet the requirements of the new knowledge-intensive activities”.

Herman Knudsen of Aalborg University claimed that international regulations can make a difference. He argued that employers should adhere to ILO’s Decent Work agenda, as current market policies see unemployment as necessary for growth and therefore counterproductive to the creation of more and better work. 

Finally, many participants in the debate addressed the declining bargaining power of employees. The decrease of trade union membership is one factor in this trend and can be related to globalization. According to Seguino, bargaining power is unequal between workers and employers, a problem that has to be addressed. According to John Grahl of the Middlesex University Business School, employee power is also declining because of the dissolution of the employment relationship, which allows employees to exercise control over their terms of employment. He therefore suggested that “enforcing worker rights... can be made the responsibility of all the employers in a given sector”. In addition, companies should take responsibility for the “decent treatment of supply-chain workers” that they use. The state also has an important role in creating jobs and making sure they are decent.

Employment at the heart of policy

The debate highlighted the need for a radical policy shift to solve the structural problems related to unemployment and low wages. Innovation policies must focus on job-intensive sectors. Governments must curb free capital flows with more regulation and encourage financial institutions to invest in productive sectors and employment opportunities. The current trade and investment regime must be reshaped. Taxes on labour need to be dramatically reduced to compensate for low wages. And a rebalancing of the ownership of capital can trigger a new era of financialization that is based on long-term commitments and investments in employment rather than seeing labour purely as a cost.

In the short term, higher minimum wages can keep a fully-employed worker and his or her family out of poverty. Otherwise, tax credit and cash transfer schemes are needed to help families who are losing out and face squeezed wages. Such a mechanism for redistributing the benefits of growth cannot be a long-term solution and should not give governments a pretext to carry on as usual, increasing employment problems, and using GDP growth to compensate for shortcomings. However, while long-term and structural solutions are being negotiated, such a policy can offer relief to workers and their families in the short term.

Photo credit main picture: Santiago en Skate / ifoto.cl via Flickr