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Revaluing labour

Evert-jan Quak is now Research Officer for the K4D Programme at the Institute of Development Studies.

Governments see employment rates as an important measure of how successful their economic policy is. In election years politicians look with even more attention at the employment rates, as they can make or break political careers. Job creation is therefore an important priority for all governments. However, this does not mean that employment policy is always at the centre of economic development strategies. It is how employment can be created that is one of the most debated topics in economics and it changes over time depending on what economic views are dominant.

During the last three decades direct employment creation has been seen as a problem for well-functioning labour markets rather than a solution in economic development strategies. The focus of policy has been on well-established financial markets, technology and skill improvements, low inflation rates, and open deregulated markets. This should stimulate economic growth where more and better paid jobs are created. Job creation is a matter of letting markets work well. Only during periods of low conjuncture would the market be unable to create sufficient jobs. Such an economic slowdown should be temporary and only minor policy on the micro level allowed, like temporary measures to lower minimum wage or working hours.

Mainstream neoclassical economists also believe that the current economic and financial crisis is a temporary economic slowdown. For them, a growth strategy would be enough to trigger job creation again. However, things are changing in the economic debate. Although demographic trends in each country can explain some employment trends (see the article, ‘Fragile employment’ by Annemarie and Vanessa in the dossier), there is an increasing amount of evidence that some fundamental assumptions which could explain growth-related job creation are under pressure. Higher productivity nowadays, for example, does not increase wages. International competition among countries does not create better jobs for the majority. And financial globalization, which means free capital markets, are threatening job creation as profits are invested more in capital markets and less in labour, trade or productive sectors.

Pressure on the middle class

The increasing concern about work and employment creation can be illustrated with the decline of middle-class jobs in developed countries. This demographic is also referred to as the ‘squeezed middle’. What is happening is that the middle class must compete more with low-wage jobs. In Europe and the United States, manufacturing jobs have been outsourced to low-wage countries, like China, Thailand, as well to Eastern European countries. As Niels Beerepoot explains in his article in this dossier, the service sector, not the manufacturing sector, has become the main generator of jobs. However, not everyone can find well-paid professional jobs in the service sector. Lots of workers have started working in lower paid jobs in call centres, for instance. However, administrative and callcentre jobs are also being outsourced now, which is destroying a lot of jobs in developed countries. Furthermore, automation in the service sector and in – what remains of the manufacturing sector– is on the rise, resulting in even fewer jobs for the middle class.

Prior to the financial crisis in 2008, not many people were bothered by the increasing ‘squeeze’, as the financial sector could compensate it with cheap debt (based on speculative property values) and governments could compensate with providing benefits. However, the financial crisis was, among other things, caused by cheap debts and resulted in welfare cuts in the developed countries. This placed the spotlight on the fact that such forms of compensation cannot hide the structural problems behind work and employment creation anymore. These structural problems can be linked to globalization and advancing technology. The forecast also holds that emerging economies must expect to deal with the threat of continuing globalization and automation which will affect job creation in the near future for both low and middle income groups.

Trade liberalization

Any policy with the aim to create jobs, therefore, should be aware of four main forces that have a huge impact on labour– technology, trade liberalization, financial globalization and immigration. Trade liberalization opens up markets to increased global competition. The basic idea of competitive markets is that highly-productive sectors benefit the most via comparative advantage in open markets with few state interventions. Less productive markets that need state intervention to survive disrupt the market mechanism at the expense of the productive sectors. In an open market the labour force will move away from sectors that are not performing to healthy sectors that can compete on an international level. The winning sectors become the cornerstone of economic growth and the economy should thrive because of the increasing competitiveness, creating more jobs as well.

The shift of labour from one sector to another (employment reallocation) is assumed to go smoothly, perhaps with some disruptions for one generation. The focus is on the long-term benefit. Studies show that the picture may be somewhat different though. In many cases, job destruction is higher than job creation. For the United States studies show that since the 1980s,significant employment reallocation following the start of free trade and offshoring, resulted in a reduction of employment in manufacturing. The workers who left their manufacturing jobs to take service-sector jobs suffered from a wage decline of between 6 and 22%.

There is evidence from the US that workers in the auto industry are forced to accept lower wages when other auto plants relocate some of the operations abroad. This threat is less when affiliate activities are established in Europe where wages are more or less the same or even higher. However, most firm relocations are to developing countries and put a downward pressure on wages. This means that firms which find it easier to relocate to regions with lower labour costs gain a bargaining advantage with trade unions to lower wages for the remaining workers. In short, foreign competition has an impact on wage-setting practices.

This does not only happen in developed countries. In a study of the South African economy, economist Dani Rodrik, from the Institute for Advanced Study at Princeton University, notes that South Africa’s unemployment rate, which is between 24 and 40%,is one of the highest in the world. Rodrik finds that the root cause of high unemployment in South Africa is not the unions who demand excessively high wages. Rather, the cause is the shrinkage of the manufacturing sector, which has been happening since the early 1990s. According to Rodrik, the weak performance of the manufacturing sector was mainly due to trade liberalization, because increases in cheap import goods have deprived South Africa of low-skilled job creation.

Most literature focuses on the success of China and Vietnam to create new jobs due to export-oriented trade, but that was possible due to import restrictions. However, countries that exposed themselves to cheap imports and could simultaneously attract manufacturing and export goods and services in new sectors, could absorb displaced workers in those most competitive industries. For example, trade opening in Uruguay and Brazil resulted in higher job destruction than job creation. Displaced workers moved into non-trading sectors or out of formal employment and not to the most competitive new industries. Particularly in Latin America, southeast Asia and India, the wages of unskilled labourers are not increasing, as low-skilled workers are not moving from non-productive sectors to the ‘booming’ productive sectors. So why is the logic of increasing the workforces in companies in the growing sectors not working? And why are the workers who could move to the competitive firms also getting higher wages, while most workers who cannot switch their jobs to these firms see their wages declining?

Skills and technology

Employment creation within the context of globalization therefore largely depends on how easily the workforce can switch to and find work in new competitive sectors. Factors that can disturb this include the skills that are demanded in new sectors, spatial constraints to moving to other parts of the country, and cultural and social restrictions that can exclude parts of society. However, the increase of the average productivity and use of technology in these sectors can also be blamed to a large extent.

The combination of trade liberalization and technological innovation used to be seen as mutual friends that stimulate economies to specialize more every time in higher-skilled labour exports. While technological innovation kills some jobs, it also creates new and better ones. As a more productive society becomes richer, its wealthier inhabitants demand more goods and services. For the mainstream economists it was simple. It was just a matter of taking advantage of education and skills as they could create the jobs that the new technology demanded. But this theory of skill-biased technological change is now under fire as technology is so advanced that it directly competes with jobs and does not create new ones anymore.

This notion is clear in the book, The Second Machine Age by Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology. They point out that the second machine age was also the first digital age in which automation was disastrous for job creation. They base their evidence on an increasing amount of economic studies that show that technology is becoming a direct threat for job creation. In other technological revolutions where most workers could find jobs in expanding new sectors, there is no other sector now that can absorb them thus resulting in less employment opportunities.

And this is a global phenomenon. Open markets in developing countries also instigate a simultaneous process of technological modernization in manufacturing and in agriculture (e.g. plants and plantations), depressing the demand for especially low-skilled workers. Due to the development of new sectors and increase of foreign investors as a result of the outsourcing processes somewhere else, there is an increase in skilled labour. But unskilled or low-skilled workers are losing out and remain dependent on the informal economy for their income. A policy to only increase skills and education therefore will not automatically help to create more and better-paid jobs. Higher education and better skills do not result in the same opportunities now as they did three decades ago, and this affects people with low and middle incomes around the world. The big rewards simply go to those with the assets and networks inherited from parents.

Financial globalization

In the post-war era large companies shared their benefits from growth among employers and labourers. However, this changed rapidly when power shifted to investors (investment banks, hedge funds, shareholders) and other financial actors as a result of trade liberalization, which propagated free capital flows. Capital became more mobile and investors in open markets could more easily move their capital abroad. At the same time financial markets became the cornerstone of economic growth in many countries worldwide. This shift is also called the ‘financialization of the economy’.

However, financialization shifts profit-making away from production of goods and services and trade (the real economy), and emphasizes profits through financial channels thereby increasing the domination of global financial markets. In other words, it no longer matters what a company produces, or how. Under the new financial imperatives, including the power shift to financial markets, firms have essentially become a bundle of assets to be deployed or redeployed depending on the short-run return that can be earned. Hence, as Rolph van der Hoeven emphasizes in his article in this dossier, the share of national income going to labour, rather than capital, is in sharp and probably terminal decline. And as labour becomes less important for economic growth, something called ‘jobless growth’ begins to emerge. And this is happening all over the world.

The theories behind the Phillips curve point to the inflationary costs of lowering the unemployment rate. The assumption is that as unemployment rates fall and the economy approached full employment, the inflation rate would rise. But this theory also says that there is no single unemployment number that one can point to as the ‘full-employment’ rate. Instead, there is a trade-off between unemployment and inflation. For example, a government might choose to attain a lower unemployment rate but would pay for it with higher inflation rates.

The Keynesian economists emphasized the full employment approach. The answer was an active role of governments to intervene within labour markets. The aim was to reach full employment in a definition of zero percent unemployment with job guarantees and employment schemes. Those who were unable to find work in the private sector were employed (temporarily) by the government. A stimulus programme to increase the demand side of the economy was also implemented, with infrastructure and house-building programmes administrated by governments. (Following the successes of the Keynesian New Deal policies of the 1930s the idea of a New Green Deal to tackle economic recession and climate change nowadays can be linked to Keynesian economics as the markets are not changing into green economics themselves and need a push from government. The idea is that this will increase employment in new sectors (green jobs)).

Job guarantees

What are the solutions if unemployment remains high and real wages continue to decrease? Some post-Keynesian economists (i.e. Minsky, Mitchell, Watts, Wray, Papadimitriou, Forstater, Fullwiler and Kaboub) are calling for policies that put work creation on the agenda as one of the main tasks for governments’ economic policy instead policies which only ‘please the market’ They have developed different kinds of ideas about full employment, such as employment of last resort, job guarantees, public service employment, and buffer-stock employment.

Policies based on job guarantees are not copies of previous policies that were initiated all around the world after the second World War and which lasted until the1970s.Rather, the so-called Keynesian model of full employment (see box 1), would increase government debt on the short-term to enable growth out of a recession. In this aspect the post-Keynesian economists promoting job guarantee schemes, such as William Mitchell and Joan Muysken in their book Full Employment Abandoned, draw a new line to achieve full employment. They do not propose raising the total demand for final goods and services in the economy through governmental interventions. Instead, they suggest that governments initiate a policy to offer jobs at a basic compensation rate to all who are ready and willing to work. Mitchell describes it as to ‘hire off the bottom’. Such a policy should not seek to employ any specific number of workers nor specific skillsets. It should also not chase wages upwards, because it can never compete with higher and rising private-sector wage offers. With this, full employment can be achieved through job guarantee without setting off inflation or automatically increasing public spending. Full employment is sustainable over time as it generates a buffer stock for employable labour.

Some voluntary jobs could be transformed into paid jobs. For example, organizing and managing a community garden to provide food for the poor could be a paid job, but outside the market and paid by government. The same can apply to a surfer who might be required to conduct water safety awareness for school children. In such ways, the concept of productive work is redefined more socially, extending well beyond the realms of ‘gainful work’, which specifically relates to activities that generate private profits.

The wage rate for the job guarantee should not be set by the private sector’s capacity to pay, but should be “the aspiration of the society of the lowest-acceptable standard of living”. However, critics from the mainstream economic schools of thought indicate that it will frustrate low-wage and low-skilled markets, especially in the service sector in developed countries. And this is exactly what the protagonists of job guarantees, buffer-stock employment or employment of last resort are aiming for. Indeed, it is highly likely that the introduction of such policies will place pressure on private-sector employers to restructure their workplaces to overcome the discontent that their underemployed workers feel, particularly in the low-skill service sectors. In the end, such policies can help stop the race to the bottom. The assumption is that policies, like job guarantees, will incentivize the market to be more competitive and offer decent work conditions.

  1. “In the first scenario, finance wins on both accounts: financial regulation will be minimal and international capital markets will remain wide open. Governments will be constrained by their lack of additional funding, making any attempt at reorienting the growth process towards new, more sustainable sources difficult if not impossible. In this scenario, job volatility will remain high and employment growth may recover to earlier rates, but with the heightened risk of new periods of financial instability and crashes.

  2. In a second scenario, finance dominates the regulatory process, but sources of growth will be sought domestically. This may happen when protectionist reactions take over during the recovery phase. World trade will not return to earlier rates of expansion and global growth may remain below pre-crisis rates. In this scenario, employment may lose out on two grounds: economic dynamics will be lower and – due to the financial markets’ dominance domestically – jobs volatility will remain high.

  3. A third outcome might be that financial market regulation stiffens substantially, but that international market openness continues. Such financial regulation could follow today’s best practice countries (e.g. Canada), and banks might be required to hold higher reserve margins or to participate in a country-wide stabilization fund. Markets for goods and (financial) services would remain open, but the more restricted financial sector activity at home and the domestic quest for new sectors of growth will improve the bargaining power of workers and create new opportunities for employment. Destruction of jobs in declining industry may remain high, but so will job creation in new sectors. In this scenario, transitory job and worker flows are likely to be large and governments will need to make sure that they put policies in place to help the process.

  4. A final scenario might be that governments manage to impose a search for new domestic growth drivers. World trade is gradually being scales down both as the result of a more restrictive international financial regime and due to – possibly environmentally related – tariff barriers. Bargaining power would shift back to labour, employment creation would intensify and profits would be shared more directly between firms and their workforces, instead of being distributed to financial investors.”

*Note: All text has been directly quoted from Ernst, Ekkehard (2010) ‘The end of an era: What comes after financialization and what will be the consequences for labour?’ in Don’t Waste the Crisis, Critical Perspectives for a New Economic Model. ILO

Towards a comprehensive employment strategy

Something has to change. That is also the message from a growing group of mainstream economists, including within the World Bank and IMF, and as illustrated in critical publications on inequality and technological change by The Economist. The emerging idea among these economists is an expansion of tax credit schemes and cash transfers to subsidies using public money to compensate the low wages of the markets, which is in line with earlier World Bank reports. They want to avoid a sharp increase in the minimum wage, because that would threaten capitalist investors to turn even faster to technology. The benefits of technological progress should be better distributed and can be paid from economic growth. In this way there is a redistribution of wealth, paid through taxes. However, such policies are not changing the causes and structural problems the labour market is facing. Tax credits and cash transfers are still based on a growth strategy.

A comprehensive employment strategy will not only put labour at the heart of economic development again, but it will also integrate all policies necessary for a revaluation of employment. Employment policy should therefore take into account the financial sector. It is about the regulation of financial markets and stricter rules for banks, including requirements for them to hold larger stocks of regulatory capital or to pay additional taxes to fund a government-sponsored financial safety net, for example. It also entails a curb in international capital flows especially regarding short-term speculation. However, governments are increasingly constrained by the financial markets in their quests for new financial sources to fund their rising public debt.

The constraint of financialization can conceal the need to invest heavily into the real economy, such as in small-medium size enterprises and productive employment, which add value for the whole society. Instituting taxation systems that stimulate investments in labour instead of capital and anticipating on new and valuable sectors to develop for the future, such as in green sector, add value for all of society. A shift away from financialization is necessary and governments should be aware of how they are going to shape this (See box 2.).Governments must focus more than on rectifying international capital flows and taxation on capital instead of on labour. They must also examine the whole trade system and how it interacts with technological improvement.

The World Bank already made a step in this direction in their 2013 World Development Report They pledge to move away from their own ‘propagated growth emphasizing agenda’ towards a more comprehensive development strategy where “putting jobs at the centre of development” is more important. It is not a ‘one size fits all’ solution, but country-specific quantitative and qualitative analysis is required to identify constraints to job creation, productivity and mobility, and to ensure that the people are able to participate in more and better job opportunities. The call for inclusive-growth models in which everyone can participate and gain is also a step in this direction. All these trends in economic thinking, and in particular on job creation, are opening the path forward and away from the narrow (microeconomic) labour market debates, towards a renewed macroeconomic view on job creation.

Niels Beerepoot, Lecturer and Researcher, Amsterdam Institute for Social Science Research, University of Amsterdam, the Netherlands

Arjan de Haan, Programme Leader, Supporting Inclusive Growth programme, International Development Research Centre (IDRC), Canada

Rolph van der Hoeven, Professor on Employment and Development Economics, International Institute of Social Studies (ISS), The Hague, the Netherlands

Wiemer Salverda, Special Chair of Labour Market and Inequality, Amsterdam Centre for Inequality Studies, University of Amsterdam, the Netherlands

Author: Evert-jan Quak

About the author

Evert-jan Quak is now Research Officer for the K4D Programme at the Institute of Development Studies.

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