Posts Tagged ‘Industrial Reserve Army’

CFM-wages

The so-called economics experts surveyed by the UK Centre for Macroeconomics—whose aim is to inform “the public about the views held by prominent economists based in Europe on important macroeconomic and public policy questions”—are in substantial agreement that “lower real wage growth was beneficial for employment levels during the Great Recession.” A clear majority (65 percent) either strongly agree or agree, which increases (to 70 percent) when the answers are weighted with self-reported confidence levels.

I would bet, based on their responses to other questions, the analogous group of “experts” in the United States—such as the mainstream economists who comprise the IGM Panel—hold the same view.

fredgraph

Here’s the problem: the correlation between wages and employment in the United States (measured in terms of percent change from one year ago in the chart above) does not tell us anything about causality. Mainstream economics experts presume (based on the assumptions embedded in their macroeconomic models) that causality runs from wages to employment. So, in their view, low wage growth is beneficial for employment levels.

What they don’t consider is the opposite relationship: that moderate employment growth (especially during and after a recession) leads to low wage growth.

The key is the Industrial Reserve Army, which is missing from the models used by the so-called experts. As I wrote back in 2015,

While mainstream economists congratulate themselves on a successful economic recovery, which has lowered the headline unemployment rate and requires now a return to “normal” monetary policy, they accept a situation in which a large Reserve Army of Unemployed, Underemployed, and Low-Wage Workers has both been created by and, in turn, fueled a recovery characterized by stagnant wages for most and growing profits and high incomes for a tiny minority at the very top.

In other words, all mainstream economists are doing is congratulating themselves for a job well done—in supporting an economic system that exists not to serve the needs of workers, but in which workers exist only to serve the needs of their employers.

As it turns out, that self-congratulatory stance is adopted by so-called economics experts on both sides of the Atlantic.

VanishingMiddleClass2

Both Peter Temin and I are concerned about the vanishing middle-class and the desperate plight of most American workers. We even use similar statistics, such as the growing gap between productivity and workers’ wages and the share of income captured by the top 1 percent.

productivity top1

And, as it turns out, both of us have invoked Arthur Lewis’s “dual economy” model to make sense of that growing gap. However, we present very different interpretations of the Lewis model and how it might help to shed light on what is wrong in the U.S. economy—with, of course, radically different policy implications.

It is ironic that both Temin and I have turned to the Lewis model, which was originally intended to make sense of “dual economies” in the Third World, in which peasant workers trapped by “disguised unemployment” and receiving a “subsistence” wage (equal to the average product of labor) in the “backward,” noncapitalist rural/agricultural sector could be induced via a higher “industrial” wage rate (equal to the marginal product of labor) to move to the “modern,” capitalist urban/manufacturing sector, which would absorb them as long as capital accumulation increased the demand for labor.

That’s clearly not what we’re talking about today, certainly not in the United States and other advanced economies where agriculture employs a tiny fraction of the work force—and where much of agriculture, like the manufacturing and service sectors, is organized along capitalist lines. But Lewis, like Adam Smith before him, did worry about the parasitical role of the landlord class and the way it might serve, via increasing rents, to drag down the rest of the economy—much as today we refer to finance and the above-normal profits captured by oligopolies.

So, our returning to Lewis may not be so far-fetched. But there the similarity ends.

Temin (in a 2015 paper, before his current book was published) divided the economy into two sectors: a high-wage finance, technology, and electronics sector, which includes about thirty percent of the population, and a low-wage sector, which contains the other seventy percent. In his view, the only link between the two sectors is education, which “provides a possible path that the children of low-wage workers can take to move into the FTE sector.”

The reinterpretation of the Lewis model I presented back in 2014 is quite different:

What I have in mind is redefining the subsistence wage as the federally mandated minimum wage, which regulates compensation to workers in the so-called service sector (especially retail and food services). That low wage-rate serves a couple of different functions: it’s a condition of high profitability in the service sector while keeping service-sector prices low, thereby cheapening both the value of labor power (for all workers who rely on the consumption of those goods and services) and making it possible for those at the top of the distribution of income to engage in conspicuous consumption (in the restaurants where they dine as well as in their homes). In turn, the higher average wage-rate of nonsupervisory workers is regulated in part by the minimum wage and in part by the Reserve Army of unemployed and underemployed workers. The threat to currently employed workers is that they might find themselves unemployed, underemployed, or working at a minimum-wage job.

In addition, the profits captured from both groups of workers are distributed to a wide variety of other activities, not just capital accumulation as presumed by Lewis. These include high CEO salaries, stock buybacks, idle cash, and financial-sector profits (with a declining share going to taxes). And, if the remaining portion that does flow into capital accumulation takes the form of labor-saving investments, we can have an economic recovery based on private investment and production with high unemployment, stagnant wages, and rising corporate profits.

For Temin, the goal of economic policy is to reduce the barriers (conditioned and created by an increasingly segregated educational system) so that low-wage workers can adopt to the forces of technological change and globalization, which can eventually “reunify the American economy.”

My view is radically different: the “normal” operation of the contemporary version of the dual economy is precisely what is keeping workers’ wages low and profits high across the U.S. economy. The problem does not stem from the high educational barrier between the two sectors, as Temin would have it, but from the control exercised by the small group that appropriates and distributes the surplus within both sectors.

And the only way to solve that problem is by eliminating the barriers that prevent workers as a class—both black and white, in finance, technology, and electronics as well as retail and food services, regardless of educational level—from participating in the appropriation and distribution of the surplus they create.

serfs

Wage growth has been so slow in recent years even the International Monetary Fund has taken notice. They’ve even discovered the reason: the Reserve Army of the Unemployed and Underemployed.

fredgraph-2

Let me explain. Stephan Danninger, writing on IMF Direct, has noted that, while the U.S. labor market seems to have healed (with an official unemployment rate now below 5 percent), wage growth is “still disappointingly low.” (For example, in my chart of average hourly earnings of production and nonsupervisory workers, while wage growth had risen to 2.5 percent in August of this year, it was still almost 1.5 percentage points lower than in October 2008.)

And Danninger’s analysis?

Low wages are a vestige of the crisis. Almost eight years after the height of the crisis, laid-off workers continue to re-enter the labor force, which affects average wage growth. This so-called decomposition effect occurs when new employees are hired for less than the average wage rate. When a worker finds a new job after a long unemployment spell, his or her wages tend to be well below that of peers who remained employed. As a result, these new hires bring down the average hourly wage rate—that is, the rate across all workers.

Moreover,

wage growth for a broad segment of workers is also lower than a decade ago. For instance, wages of so-called job stayers—the vast majority of U.S. workers who remain at the same job—have risen 3.5 percent this year, a full percentage point lower than before the Great Recession. Similarly, earnings in the middle of the wage distribution—the 50th percentile—are also seeing less gains than in the past: they have risen by 3.2 this year compared to 4.1 percent during 2000–07.  The same is true for workers in services and other sectors.

In other words, the existence of the Reserve Army and the movement of workers out of the Reserve Army has had the effect of dampening the wage increases of both rehired workers and of workers who remained on the job. All workers have therefore been disciplined and punished by the Reserve Army of Unemployed and Underemployed workers that was created by the crash of 2007-08.

fredgraph

But, as it turns out, Danninger doesn’t have a long enough view. While wage increases in recent years have been less than workers saw before the crash (e.g., 2005-2007), workers’ wages have been growing at a relatively slow rate for decades now, beginning in 1986. Whereas wages grew at a rate of between 7 and 9 percent a year from 1969 to 1981, those increases have fallen dramatically since then, hovering between 1.5 and 4 percent a year.

The conclusion? American workers have been disciplined and punished not just since the crash, but for at least three decades. That’s why their employers’ profits have skyrocketed and why the working-class itself has fallen further and further behind the tiny group at the top of the U.S. economy.

automation

Jason Furman (pdf), Chairman of the U.S. Council of Economic Advisors, gave a speech a couple of weeks highlighting the potential for automation to displace many of today’s workers, even as he insists we need more investment in artificial intelligence.

What they did on the Council is take the numbers produced by Carl Benedikt Frey and Michael A. Osborne, who argue that 47 percent of U.S. jobs are at risk of being replaced by automation (a study I discussed here) and then rank them by wages. What they found is that

83 percent of jobs making less than $20 per hour would come under pressure from automation, as compared to 31 percent of jobs making between $20 and $40 per hour and 4 percent of jobs making above $40 per hour

In other words, automation—which, of course, is deployed by private employers to increase profits—threatens to destroy a massive number of jobs currently done by the American working-class. Displaced workers will be jettisoned from the labor force and join the Reserve Army of the Unemployed and Underemployed.

It is true, over the long run (as long as capitalism continues to grow), new jobs will be created, and some of the displaced workers (and their children) will be forced to have the freedom to take them. But only some of them. In the short run (and, remember, the long run is merely made up of a series of short-runs), as Furman argues, “the process of turnover. . .could lead to sustained periods of time with a large fraction of people not working.”

Within the existing economic institutions, automated technologies are therefore likely to decrease the labor force participation rate, expand the ranks of the unemployed and underemployed, and increase already-high levels of inequality (as workers’ wages continue to stagnate and technology-induced profits soar).

To be clear, that’s not an argument against artificial intelligence and automation. Under other circumstances we might welcome them. It is a caution about the effects of deploying new technologies within the current economy—in which workers and their wages are mostly dependent on private employers, who hire them if and only if it is profitable.

“Is this time different?” Not really, outside of the mythical long-run, full-employment equilibrium offered by mainstream economists. Now as in the past, existing workers—on farms and in factories and offices, especially those who make the average wage or less—are forced to endure the consequences of the decisions their employers take to adopt new technologies.

As even Furman admits,

I see little reason to believe that the economic impact of AI will be very different from previous technological advances. But unlike many of the optimists, I do not find that similarity fully comforting, as technological advances in recent decades have brought tremendous benefits but have also contributed to increasing inequality and falling labor force participation.

casselman-marchjobs2016-1 casselman-marchjobs2016-3

The new jobs report is out and, pretty much as expected, a bunch of new jobs (242,000, to be exact) were created in February and the official unemployment rate remained the same (at 4.9 percent). But workers’ wages actually declined.

What’s going on?

What’s going on is a key feature of capitalism: the reserve army of labor.

As Ben Casselman explains,

There is one downside to a growing labor force: If more people start looking for work there will be more competition for available jobs, holding down wages. Average hourly earnings fell by three cents in February, and the year-over-year rate of growth dropped to 2.2 percent, the slowest pace since last summer.

The fact is, the Second Great Depression created a large pool of potential workers who haven’t formally been part of the labor force but who would be willing to work—to take a job or search for a job—under the right circumstances. In the meantime, while they’re not part of the official labor force, these people do lots of things: they work at home, they work with and for their friends and neighbors, and they engage in a variety of other activities (both legal and illegal). They form part of capitalism’s relative surplus population.

Their existence—as potential members of the official labor force, first-time members of the labor force, or as reentrants to the labor force—puts downward pressure on all workers’ wages.

That’s how the reserve army of labor works: even as the labor force participation rate rises, workers’ wages continue to stagnate and their employers’ profits continue to grow.

employment gap

Mainstream economists have, it seems, rediscovered what we’ve known since at least the middle of the nineteenth century: capitalism produces a relative surplus population of unemployed and unemployed workers. And that surplus of labor puts downward pressure on workers’ wages.

Back then it was called the “industrial reserve army.” I have referred to it since 2010 as the “reserve army of the underemployed.” David G. Blanchflower and Andrew T. Levin now point to the same phenomenon in terms of the “employment gap,” that is, the combination of conventional unemployment (individuals who did have a job, are now not working at all, and are actively searching for a job), underemployment (that is, people working part time who want a full-time job), and hidden unemployment (people who are not actively searching but who would rejoin the workforce if the job market were stronger).

What Blanchflower and Levin find is instructive.

First, the conventional unemployment rate has not served as an accurate reflection of the evolution of labor market slack.

it is evident that the U.S. economic recovery remains far from complete in spite of apparently reassuring recent signals from the conventional unemployment rate. Indeed, while the unemployment gap has become quite small, the incidence of underemployment remains elevated and the size of the labor force remains well below CBO’s assessment of its potential. In particular, the employment gap currently stands at 1.9 percent, suggesting that the “true” unemployment rate (including underemployment and hidden unemployment) should be viewed as around 71⁄2 percent. Gauged in human terms, the current magnitude of the employment shortfall is equivalent to about 3.3 million full-time jobs.

Second, in recent years, wage growth has been pushed down by a combination of the unemployment rate, the nonparticipation rate, and the underemployment rate. In particular,

we suspect that the wage curve is relatively flat at elevated levels of labor market slack, i.e., a decline in slack does not generate any significant wage pressures as long as the level of slack remains large. As noted above, our benchmark analysis indicates that the true unemployment rate is currently around 71⁄2 percent—a notable decline from its peak of more than 10 percent but still well above its longer-run normal level of around 5 percent. Thus, the shape of the wage curve can explain why nominal wage growth has remained stagnant at around 2 percent over the past few years even as the employment gap has diminished substantially. Moreover, our interpretation suggests that nominal wages will not begin to accelerate until labor market slack diminishes substantially further and and the true unemployment rate approaches its longer-run normal level of around 5 percent.

In other words, what Blanchflower and Levin have discovered is that there is a large relative surplus population of workers and that the existence of such a reserve army has a dampening effect on workers’ wages.

Now, all they need to do is discover a third component of what we’ve known since the Mohr wrote back in 1867: “The labouring population therefore produces, along with the accumulation of capital produced by it, the means by which it itself is made relatively superfluous, is turned into a relative surplus population; and it does this to an always increasing extent. This is a law of population peculiar to the capitalist mode of production”

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Production, productivity, and corporate profits are up, the official unemployment rate is down, and yet still workers can’t get a break: employers just won’t increase their wages.

This just doesn’t make any sense to mainstream economists, whose model of the labor market means that workers get in the form of wages what they contribute to production. According to those economists (and their friends in the media, like Robert Samuelson), wages should be rising. And they’re not.*

payscale

So, they’re fishing around for alternative explanations—like delayed pay cuts and a decline in labor market fluidity.

Other economists are on firmer ground, since they’re looking at things like shadow unemployment and a general weakening of workers’ bargaining power.

What it comes down to, as I’ve argued many times on this blog, is a growth in the Reserve Army of the Unemployed and Underemployed.

It’s not, as in the mainstream model, that wages determine the level of unemployment. It’s exactly the opposite: the existence of a large number of unemployed and underemployed workers regulates the level of wages.

Add to that a whole host of other factors (that are themselves in part the result of the Reserve Army)—the decline in unionization rates, the falling value of the minimum wage, new technologies that make outsourcing easier and displace domestic jobs, and so on—and what we’re seeing is the Great Wage Stagnation that characterizes the current economic recovery.

 

*Workers’ wages have actually declined—and more or less stayed there. According to Payscale, nominal wages have risen 7.5 percent overall in the United States since 2006. But when you factor in inflation, “real wages” have actually fallen 7.5 percent.