Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I did a radio interview on the ABC Drive program this afternoon about different attitudes that Europeans and Americans have to dealing with recession, specifically in terms of the decision to offer shorter hours or use layoffs to trim the labour force as sales decline. While the solidaristic European model is preferred, both call into question what the national government should be doing.
The interview was motivated by an interesting discussion in the New York Times about these differences. The short story is that Europeans prefer to use shorter working weeks and forced days off to allow firms to adjust during a recession while firms in the US predominantly use layoffs.
The reasons advanced are: (a) cultural differences; (b) differences in welfare support; and (c) differences in views about the costs and benefits to firms of each strategy. What should we make of this?
The French have experimented with shorter-working weeks for a long time as a strategy to reduce their terrible unemployment record. The problem is that while it has improved the lives of many of those in employment it did virtually nothing for the unemployed. The research evidence suggests that many people in say Paris took advantage of the four day week to take “long weekends” in properties that they purchased within 100 kms or so of the city. New sports grew – golf, gymnasium activities etc and the housing market on the periphery of Paris boomed. But the unemployment rate hardly noticed it.
There are several arguments advanced in favour of using shorter hours. First, it allegedly allows the burden of recession to be shared instead of a small relative percentage of workers bearing the costs in the form of unemployment. However, given that recession does not impact evenly on sales and across firms (that is, some industries and therefore firms are more vulnerable) this “sharing” is not possible. Some firms cannot survive even with shorter hours while others do not need to cut hours at all.
Second, unemployment requires some workers to lose all their pay whereas sharing hours would proportionately reduce pay for all workers. While there is some merit to this argument, it doesn’t help those workers who are on the margin of solvency with respect to their nominal contractual commitments (for example, mortgage payments). Further, given that wage income is a significant component of final demand – a widespread cut in pay (via less hours) would see aggregate demand fall and unemployment worsen. Some proponents of short working weeks argue that the pay issue can be overcome if the government pays workers a portion (might be 100 per cent) of the difference they earn from the firm and what they would have earned by working a full week. This is of-course the solution that is followed, to some extent, in countries such as Germany (see below). However, it is problematic if there is significant casualisation in the workforce. What is the standard working week that the subsidy would be based on? This would be particularly difficult in Australia, where like the fools we are, we have allowed underemployment to skyrocket.
Other suggestions to the pay dilemma include the provision of tax credits to firms to cover paid time off. So a government subsidy in another guise. Whether this is the best use of government spending is moot given the opportunity that it provides private firms to abuse the system.
Third, some argue that sharing hours is good because it frees up more time for leisure and families. It does that by definition but while that might benefit some it may also disadvantage others, especially lower paid workers. Leisure and income tend to be complementary in this consumer age and a loss of pay may reduce the capacity to enjoy leisure.
Fourth, less congestion on roads makes for higher standards of living. Sure enough. Flexible hours would spread the traffic usage across a broader spectrum of available hours. But why not just petition for better public transport and improved bicycle paths? We don’t need schemes that cut workers pay to improve transport systems. What we need is a commitment by the Government to build high quality public infrastructure. If they saw the recession as an opportunity to accelerate the construction of public spaces (including bike paths and better transport) then a lot of the need to cut hours would disappear as the net government spending underwrote aggregate demand and jobs.
I like the statement by the German commentator Susan Neiman (in the NYT article) who said that Germans Have Rights, Not ‘Benefits’. This goes to the heart of what we think of citizenship and the obligations of government to preserve the rights associated with citizenship. In my latest book Full Employment Abandoned we argue that the neo-liberal era, especially in the English-speaking world, was associated with a decimation of our rights as citizens. Think David Hicks if you need the ultimate example of that.
In Germany, Nieman writes that:
The specter of unemployment creates special fears in Germany. They are not fears of mass homelessness or hunger: unemployed German workers can count on the state to pay their rent, health insurance and other basic living costs. Add a system where college education is virtually free, and you have a set of safety nets that any American worker must envy.
But moreover, the solidaristic nature of German society (and European societies in general) leads firms to prefer to shorten hours of work rather than sack their workers. This strategy is, in part, helped along by generous government payments to workers to prevent them lossing too much of their wage income. The firms benefit by maintaining a close bond to their workers and avoid having to train new workers when production levels rise again.
This solidaristic or collective approach to problems is sometimes called the All Saints approach. Collective will is important when a nation goes into recession because it provides the political justification for sharing the costs and benefits of economic activity more generally. In Germany, they claim to have a “social market economy” where workers and firms share a commitment to social goals as well as company profits.
But collective will to me is that we empower the sovereign government to use net spending (deficits) to ensure there are enough jobs available for all those who want to work. The European nations have not adopted this interpretation and have allowed high unemployment rates to persist for decades. Governments have an obligation to create work if the private market fails to create enough. To me that is the starting point of any progressive agenda – demand that the Government use its fiscal capacity to generate enough jobs! I conclude that a lot of the progressive rhetoric misses the market badly in this respect.
The neo-liberals hate collective will. Remember Margaret Thatcher’s famous epithet while being interviewed by Women’s Own Magazine on October 31, 1987 (reproduced in full just so you see how bad it is!):
I think we’ve been through a period where too many people have been given to understand that if they have a problem, it’s the government’s job to cope with it. ‘I have a problem, I’ll get a grant.’ ‘I’m homeless, the government must house me.’ They’re casting their problem on society. And, you know, there is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people, and people must look to themselves first. It’s our duty to look after ourselves and then, also to look after our neighbour. People have got the entitlements too much in mind, without the obligations. There’s no such thing as entitlement, unless someone has first met an obligation.
So neo-liberals hate the German system and have been trying to dismantle it with some success (for example, the pernicious Hartz reforms). But they cannot deny that the third largest economy in the world is still a manufacturing powerhouse and still manages to pay its workers decent pay and the government still manages to support the population more generally with a strong social wage.
The strong safety net in Europe is in contradistinction with the lack of such in the US. The universality of health care in Europe is one important component of the social wage that sets it apart from the US and makes unemployment less devastating for the individual and their families.
US firms appear to prefer layoffs because they save them money by eliminating the fixed costs (per worker costs) of employment. Work-sharing also reduces everyone’s income. The difference between the US and Europe in this respect is the generosity of the welfare system in the latter.
Employers also do not want to be thought of as capricious and therefore do not want to “cut wages” when times get tough. They know that in the good times, if they build a reputation for caprice, then they will find it hard to attract labour and will be hit for higher wages as a consequence. So using layoffs is preferred because it “hurts” fewer workers overall and largely maintains the bond between the firm and its workforce which is beneficial in good and bad times.
However, firms are also reluctant to layoff skilled labour who they have invested training costs in. In that context, the pendulum may swing towards “hoarding” skilled labour (cutting their hours in this context).
But it remains that if the US tried widespread hours-sharing arrangements, the lack of a wider social safety net would see poverty levels rise alarmingly.
In a future blog I will argue how the natural extension of collective will leads one to advocate employment guarantees instead of all these other adjustment methods (hours sharing or layoffs). But suffice to say that if the economy maintains a buffer stock of jobs – which I call the Job Guarantee – then workers who lose their jobs would immediately be able to access a government job at minimum pay and be supported by a generous range of social wage initiatives (child care, health care, excellent public shools and transport etc).
This would avoid the problems of cutting working hours noted above which negate it as a solution to full employment. The sovereign government has the capacity to maintain full employment if it wants! We shouldn’t have to advocate cutting hours of work and pay as a solution to coping with recession.
Digression: Retail Sales and Home Approvals
Today’s ABS figures show, not surprisingly that retail sales in Australia dropped by 2 per cent in February which is the largest monthly fall since July 2000. The data also revised January’s figures upward by 0.5 per cent. While many are expressing surprise about the data, I am not.
First, the national accounts showed a huge increase in the household saving ratio – financed by the federal budget deficit – which reflects the scramble by households to restructure their balance sheets to insulate themselves as best they can from any recession impacts. It is clear that consumers are now reining in the consumption and credit binge that dominated the last decade. Whether it reflects declining confidence or a more sensible approach to their budgeting is moot. Probably a bit of both.
But the areas most affected are retail sales, cafes and restaurants which are among the high risk industries in our Employment Vulnerability Index. So I expect to see significant job losses in these industries unless further stimulii is provided by the federal government.
Second, the sudden jump in December and the January revision suggests that the $10.4 billion December federal stimulus package has now done its work and the impact is gone. That was always to be expected. What it shows is that the government can introduce “once-off” injections or more “on-going” injections in its efforts to combat the economic downturn. Some of the conservative (budget deficit antagonists) reluctantly acknowledged that there was a need for stimulus but encouraged the Government to introduce packages that were not permanent in nature. Hence, the cash handouts. But I would prefer more on-going injections with the introduction of a Job Guarantee being my favoured package. This would underwrite jobs while demand was weak in the private sector and then as the economy improved again, private employers would begin employing workers from the Job Guarantee pool (rather from the unemployed as they do now) and the automatic stabilisers (more tax revenue and less welfare support spending) would see the budget deficit reduced to the level that supported the desires of the private sector to save.
The other indicator of economic activity that came out today from the ABS concerned monthly building approvals. The ABS figures show that monthly building approvals gained 7.8 per cent in February although they revised the January results down by 4 per cent. So February was the first time in 8 months that there has been positive growth in approvals.
When I first saw the ABS headline I thought – first home buyers scheme is having some impact. But closer examination of the data shows that the main driver was private apartments while private home approvals were flat. The apartment building game is notoriously “discontinuous” (meaning there is no smooth trend month to month in the data). So it doesn’t appear that the first home buyers scheme is providing a significant boost to new home construction. Construction is another high risk industry that drives our Employment Vulnerability Index.
Digression: No surf!
On several mornings a week at what we call “shark o’oclock” (because the sharks feed at that time, that is, very early) I head to the beach to have a surf. This week the huge storms that are battering the East Coast of Australia has made the sea unnavigable on any craft let alone a 9’1″ longboard with me trying to stand on it! But the huge swells are bringing a rare treat to surfers in Sydney. Yes, the ocean swells are so big that they are getting into the normally “flat” Sydney Harbour and generating a rideable wave. These pictures were taken by Eugene Tan and appeared in the Sydney Morning Herald.