The path out of the low wage trap is limited by fiscal austerity

During my postgraduate study years I read a 1954 article by American economist Clark Kerr entitled – The Balkanization of Labor Markets – which attacked the mainstream labour market views that there was mobility within labour markets such that poverty arising from low-pay was a function of workers’ preferences for low education and more leisure (that is, unemployment). As such, there was no reason for the government to intervene to improve wages or job security. Kerr’s thesis was that there was not a ‘single’ labour market accessible to all, where individual mobility would result from personal investment in education and skill development. Instead, he argued that the US labour market was “segmented” by institutional arrangements, which trapped some demographic cohorts into low-pay and insecure jobs. Poverty could arise from these traps. The idea morphed into the segmented labour market literature of the late 1960s and early 1970s. The applications were mostly Anglo because in non-Anglo countries there appeared to be more resistance to institutional arrangements that undermined the chance for workers to enjoy job security with decent pay. However, in recent years (decade) the trend towards precarious work where certain groups (women, youth, migrants) are trapped in low pay and frequent spells of unemployment has spread, with devastating consequences. The largest European economies – Germany and France – are now bedevilled with this issue and with a bias towards fiscal austerity, the path for workers out of the trap is limited.

As an aside, during the McCarthy era, Clark Kerr signed the so-called – University of California Loyality Oath – disavowing Communism.

Many staff members refused to sign and were sacked, only to be reinstated a few years later when they sued the University. They were the brave ones.

Kerr was critical of their dismissal but still signed.

Soon after, Clark Kerr moved into University administration and became chancellor at UC Berkeley.

He was also severely criticised by conservative UC bosses for refusing to expel radical students protesting as part of the Civil Rights and Vietnam movements.

For his liberal beliefs (Ronald Reagan called him a ‘dangerous liberal’ in his campaign for California governor), Kerr was on the FBI blacklist.

The FBI “campaigned to destroy” Kerr’s career. See –
Reagan, Hoover and the UC Red Scare – for more detail on the FBI and the purge of UC academics and other workers.

Among other things, Kerr was a Presidential nomination (LBJ) to the influential position of Secretary of Health, Education and Welfare but that invitation was withdrawn once the FBI (Hoover) intervened. Their allegations against him for “subversise views” were later shown to be false.

Kerr was ultimated dismissed from his position on the UC Board of Regents in 1967 “three weeks after Reagan took office” (Source).

Such is America.

Balkanisation of labour markets

Clark Kerr built on the work of the early institutionalist economists and industrial relations researchers in the US who argued that institutional arrangements were a permanent feature of economic life in contrast to the mainstream view that posited that they were just ‘imperfections’ that could be eliminated through deregulation to expose the true competitive nature of markets.

For example, in 1874, Irish economist John Elliot Cairnes had written (pp. 67-68):

No doubt the various ranks and classes fade into each other by imperceptible gradations, and individuals from all classes are constantly passing up or down; but while this is so, it is nevertheless true that the average workman, from whatever rank he be taken, finds his power of competition limited for practical purposes to a certain range of occupations, so that, however high the rates of remuneration in those which lie beyond may rise, he is excluded from sharing them. We are thus compelled to recognize the existence of non-competing industrial groups as a feature of our social economy.

[Reference: Cairnes, J.E. (1874) Political Economy, New York, Harper.]

Kerr noted that “Institutional rules put added structure into labor markets” and compared these arrangements with so-called “structuralist markets”, such as for agricultural harvest labour, which had been proffered by orthodox economists as the norm.

These markets were characterised by five elements:

1. “there are no unions with seniority and other rules”.

2. “the relation between employee and the employer is a transitory, impersonal one”.

3. “the workers around skilled”.

4. “payment is by unit of product”.

5. “little capital or machinery is employed”.

In these arrangements, workers are considered ‘homogeneous’ and employers select on who will accept the lowest wage. Anyone can get a job in these type of markets if labour demand is strong enough.

However these type of labour markets are the exception rather than the rule.

Kerr noted that even “without institutional rules”, “most jobs … belong to single workers or to small groups of workers” as a result of skill differences.

But overlying those obvious differences are ” institutional rules … [which] … add new rights and new preferences and strengthen the old ties”.

“Market forces … give way to personnel rules which may seem exceedingly impersonal when applied to specific workers”.

Such arrangements as “bureaucratic rules take the place of individual judgements”.

Kerr wrote that:

These rules accept or reject classes of people, instead of the single individuals who met or failed to meet the tests of judgement order prejudices a small employer or the foreman can. Workers have organised into unions would seek to establish sovereignty over a ‘job territory’. Within this job territory work the citizens who belong to this private government; outside are the non-citizens without rights. The demand of all citizens will be met before the petitions of the aliens are considered. The institutionalization of labor markets is one aspect of the general trend from the atomistic to the pluralistic, and from the largely open to the partially closed society.

Segmentation of labour markets

Kerr’s work was a precursor to a burgeoning literature from the 1950s onwards, which described the manner in which labour markets are organised and adjust to economic cycles.

Central in this respect is so-called Segmented Labour Market (SLM) or dual labour market theory, which was developed by a range of economists, industrial relations practitioners, sociologists, and others to describe the relationship between employment, wages, poverty, discrimination, and social mobility.

Dual Labour Market theory – or Segmented Labour Market theory which was pioneered by Peter Doeringer and Michael Piore and others provided a reasonable description of the structure of labour markets in many countries.

The seminal text was Doeringer and Piore, Internal Labor Markets and Manpower Analysis (Lexington, MA:
D.C. Heath Co., 1971).

SLM theory argues that the labour market is segmented into two separate labour markets each with different processes for allocation and reward. These segments resist transitions from each others.

The most basic demarcation is between the Primary Labour Market (PLM) and the Secondary Labour Market (SLM). PLM workers are typically employed in a tight internal labour market structure which provides for career advancement and tend to search for jobs within the firm while already employed. The jobs are secure and relatively well-paid.

The SLM is characterised by low-paid, insecure ‘dead-end’ jobs which have high turnover rates. The jobs do not have well-defined career ladders and offer very little training for higher productivity

While the PLM worker searches for new ways in which to climb the career ladder, the SLM worker usually searches to avoid being sacked.

Given the lack of mobility between the ‘segments’, a SLM worker will typically not make the transition into the PLM. Workers thus become ‘trapped’ in poor jobs with spells of unemployment intervening periods of low paid work.

I have done a lot of work in this area in the past including during my postgraduate years.

One area of work I became interested in was the question of mobility. The mainstream economists tried to refute the SLM ideas by arguing that mobility impediments were largely due to human capital differences.

So via education, training and experience, a worker could move from low-skill jobs into well-paid jobs. The wage differences were due to productivity differences, inherent in the individual.

An aspect of this literature was the defense of the increased casualisation of labour markets. I wrote about this increasing trend in this blog (May 25, 2015) – The rise of non-standard work undermines growth and increases inequality.

Moreover, while the SLM theories applied to labour market structures in Anglo nations, European labour markets were less well described by the theories in the past. Spain was the first nation to really move to increased casualisation. However, that trend is now spreading – see below.

While segmentation is becoming more apparent in most labour markets, mainstream economists have tried to claim that individuals are not trapped in poor jobs but rather use them as a “stepping stone” to better work.

In Australia, for example, these economists use flawed data to make these claims. Their ‘mobility’ datasets usually do not exclude students who combine school/study and casual work.

This biases the results in favour of the stepping stone argument. Why? Because students who engage in casual work to support them while studying and then upon graduation enter a professional occupation are not representative examples.

In the case of students, the successful transition from casual work to full-time work has nothing to do with the casual work experience. The casual work has nothing much to do with the skills they subsequently garner in their professional capacity which requires only a university qualification for entry. Further, the casual employment undertaken typically bears no relationship to the industry or occupation that they enter after finishing their studies.

I have written about this in the past. Please read my blog – Casual work traps workers into low-pay and precarious jobs – for more discussion on this point.

The evidence is overwhelming. Casual work traps workers into a life of precarious employment with low-pay.

The progressive side of the debate also didn’t fully understand the SLM message.

Initially, it was argued that the solution to the segments and the poverty trap that arose from low-paid work was for the public sector to create jobs in the primary labour market and offer transitions to disadvantaged workers.

The problem is that they didn’t fully understand the ‘functional’ relationship between the two segments. The ability of workers in primary labour markets to earn higher wages in stable jobs was directly related to the fact that employers could push all the flux and uncertainty of aggregate spending shifts onto the secondary workers.

The latter could be easily dismissed when sales fell, which then gave the firms leeway to ‘carry’ primary workers in slow times.

The interesting aspect of all this is that in the Anglo countries, capital has increased lobbied governments to break down the sort of institutional protections that workers in primary labour markets enjoyed, which is another story again.

Meanwhile, in European labour markets, segmentation is on the rise.

Another aspect of the SLM theory was the role of migrants in reinforcing labour market structures.

Michael Piore’s – Birds of Passage: Migrant Labor and Industrial Societies – published in 1979 by Cambridge University Press, analysed immigration flows in terms of the dual or segmented labour market theory, which Piore had helped develop in the late 1960s and early 1970s.

He considered the impact of migration to advanced urban industrial nations from less developed rural societies.

His thesis was that in most economies there are jobs that the locals do not particularly want to do. These are secondary labour market jobs that pay poorly, are precarious and are typically boring, dangerous, dirty or in some other way, unattractive.

Firms might struggle to attract local labour and in that regard, “migration seems to be an almost perfect solution … The migrants want the jobs; national workers do not. What makes such migration a perfect solution, however, is its temporary character, and migrations of this kind virtually never remain temporary”.

Piore’s analysis, although in the context of pull-factors (employers seeking workers) rather than push-factors (refugees fleeing unviable situations), was prescient.

He said that:

Many migrants stay longer than originally intended, develop permanent attachments, have children, or bring their families. Once permanent communities develop, the mi-grants are no longer satisfied with the jobs for whicb they were originally recruited. They instead aspire to the same kinds of employment opportunities as nationals, but there is nothing in the process that assures that there will be enough of these other employment opportunities to go around. In fact, history suggests that second-generation migrant communities have difficulty meeting their aspirations, eitber because the jobs to which they aspire are limited or because the workers are not trained to move into them.

Some years ago, I read a report – The Labour Market Integration of Immigrants in Germany – written by Thomas Liebig and traced the fortunes of migrants in the German labour market.

[Reference: Liebig, T. (2007) ‘The Labour Market Integration of Immigrants in Germany’, OECD Social, Employment and Migration Working Papers, No. 47, OECD Publishing, Paris].

Germany has a tradition since the 1950s of large-scale net immigration. Immigration into Germany was initially concentrated on “low-skilled foreign labour” and many “of these ‘guest worker’ immigrants settled and were joined by their foreign spouses, which has given rise to a second generation of persons with an immigrant background”.

Subsequently (from late 1980s), “Germany received massive immigration flows of ethnic Germans from Eastern Europe”, partly due to reunification.

Data from the German federal statistics office (DeStatis) for Migration from the 1950s was used to produce this graph, which shows the annual flows of net migration and the cumulative effect of those flows up until 2016.

The humanitarian flows are considerably less

The Report found that, even though these workers had “low educational attainment … the the labour market integration of immigrant men is relatively favourable in international comparison. However, immigrant women, and particularly those of Turkish origin, have very low employment rates”.

But the problems emerge when the “second generation” of these workers are considered. They children of the first generation migrants are found to have:

… very low educational outcomes. This hampers their access to vocational training, which appears to have an even stronger impact on their employment prospects than on those of natives. The low educational attainment of the second generation seems to be at least partly attributable to structural features in the German education system, such as the early streaming which puts migrants’ children in a lower track. Especially problematic is the relatively late starting age for kindergarten and the prevalence of half-day education in kindergarten and school, which limits exposure to the German language at a crucial age. Immigrants’ access to self- employment is hampered by legal obstacles and a lack of information and subsequent access to financial credits.

The Report found that when German was not spoken at home, the second-generation were more disadvantaged – “it seems that the language spoken at home has a much stronger impact on the second generation’s educational outcomes than in other countries.”

The overall conclusion is that “the second generation does not reach the same attainment as natives, not even as those with a similar socio-economic background, contrary to what is observed in other OECD countries.”

The neo-liberal apologists claim the minijobs satisfy the preferences of workers for flexible casual work. But the reality is different.

This ‘preference’ argument is used universally by mainstream economists to make it seem like the outcomes from the labour market are the choice of the workers.

But the reality is that these disadvantaged jobs are just another rationing device when aggregate spending is too low and lead to rising inequality and diminished investment in human capital.

Segmented labour markets in France

All of this came to mind as I was reading a recent Banque de France research report (December 19, 2017) – The duality of the French labour market – by researcher Clémence Berson.

She documents the classic SLM structure for France, where:

… flexibility in the labour market relies mainly on fixed-term and temporary workers. These workers are less well paid, receive less training and find it difficult to obtain permanent employment.

The problems that arise are that secondary workers, with low, insecure pay and no entitlements such as superannuation are at constant risk of poverty and disadvantage.

Their capacity to plan for the future is minimal if non-existent.

The Banque de France study documents how the share in temporary and short-term contracts in total employment has risen substantially in recent years (more than doubled since 1982), replicating trends that Anglo countries have endured for several decades.

The study shows that:

… fixed-term contracts (CDD) and temporary contracts account for a small proportion of existing contracts but represent the majority of hires

The secondary jobs account for around 12 per cent of the total but around 85 to 87 per cent of total hirings, a phenomenon that transcends small and large firms.

Further, these secondary jobs have an increasing “turnover rate … the average length of a fixed-term contract being of 14 days in 2014”.

Which means that the vast burden of adjustment in the French labour market is being borne by these “fixed-term and temporary workers”.

This increases inequality trends and institutionalises poverty.

Apropos of my introduction above, the two interesting results of the study related to the ‘stepping stone’ hypothesis and the role of migrants.

First, the study finds that “Fixed-term and temporary jobs … lead more often to unemployment than to a permanent job for this population”.

In other words, the French labour market experience rejects the “stepping stone” claim by mainstream economists.

The Banque de France study concludes:

… the rate of transition to a permanent contract is relatively low …

This shows that the French labour market is segmented: workers on fixed-term and temporary contracts tend to continue on these types of contracts for several years and find it difficult to obtain permanent employment.

Who are these workers?

1. “women and people from an immigrant background”.

2. “The average age of these workers is relatively young”.

3. “Blue-collar workers represent 34% of fixed-term and temporary contracts compared with 23% of permanent contracts, low-skilled white-collar workers represent 36% versus 32% in CDI while the proportion of intermediate and managerial occupations is 7 points higher in CDI than in fixed-term or temporary contracts.” CDI stands for “Contrat à durée indéterminée” or a permanent contract.

How uncertain is the workers’ experience?

The study finds that:

1. “Workers employed under fixed-term and temporary contracts are also more vulnerable to the economic conditions than other workers”.

2. “people employed under fixed-term or temporary contracts are less likely to be trained during their employment”.

3. “fixed-term or temporary contract reduces wages earned by 5%, all other characteristics being equal.”

Is this a problem?

The lack of mobility means that these workers are locked into a low-wage, precarious future. The diminished opportunity to receive training and the lack of incentive to invest private funds in education means that poverty is always staring these workers in the face.

Further, with increasing social trends towards single-parent families and the over-representation of women in these secondary jobs means that family disadvantage becomes entrenched.

The children from these families inherit the disadvantage of their parent(s).

Further, the over-representation of younger workers who have low skill and little prospect for advancement means that the problems will intensify as they age and require state support into their retirement years.

The Banque de France study notes also that:

Firstly, the people who obtain only fixed-term or temporary employment experience frequent periods of unemployment. Secondly, the consequences can be felt in other markets due, for example, to difficulties in obtaining housing or credit.

What can be done?

See also – What policy to reduce labour market segmentation? – which is co-authored by the author of the Banque de France study I cited above.

The Banque de France study suggests that:

First, “reducing the protection gap between the two types of contract would be one way of reducing labour market segmentation”.

However, these are likely to be rejected by permanent workers especially in times of economic downturn. This goes back to the point I made earlier about the functional relationship between the segments.

If you reduce the protection of the permanent workers then a ‘race to the bottom’ begins. And while unions are in decline everywhere, there would still be massive social unrest as a result of the increased job insecurity for the majority of workers.

Similarly, if you increase the protection of the contract workers in the secondary jobs then you undermine their ‘function’ – to absorb the flux and uncertainty of aggregate spending movements.

In that case, the employers would seek to undermine the general conditions enjoyed by the permanent workers.

The clue is to reduce the overall variations in aggregate spending, which is a role that fiscal policy (government spending and taxation) should play within a full employment objective.

Second, “Incentive schemes have also been examined to increase hires under permanent contracts and encourage the transformation of fixed-term and temporary contracts into permanent ones.”

These are ‘market-based’ attempts to make it profitable for firms to reduce segmentation.

One proposal is to ‘tax’ the firms who offer insecure work or taxing “dismissals”.

The author(s) realises that “By financially penalising hiring on fixed-term contracts, the reform reduces the flexibility of the labour market”, which once again goes to the functionality of these jobs in reducing profit uncertainty.

That is the problem.

The policy response should not be biased towards reducing profit uncertainty but rather advancing the well-being of workers.

The government can always ensure that the workers it hires receive secure jobs with socially-acceptable pay levels and enjoy other entitlements such as provision for superannuation, sick and holiday pay and other benefits.

The government labour market, which includes the introduction of a Job Guarantee, should set the benchmark that the non-government labour market has to match.

Various attempts by the government to water down the conditions in its own domain – such as outsourcing, privatisation, casualisation, etc – have only given incentives to non-government employers to do further erode conditions for their own workforces.

Most of the retreat in public employment has come about because of flawed notions of fiscal responsibility.

The goal of government is not to reduce the fiscal deficit or produce any particular fiscal balance. That balance should ebb and flow with the conditions in the non-government sector such that full employment can always be maintained.

In that environment, faced with increased scarcity of workers, the incentive to undermine workers conditions and offer low pay is reduced.

And firms would have a better understanding that the policy environment was biased towards maintaining economic activity rather than undermining it.

Conclusion

The segmentation of labour markets has long been a problem that Anglo nations have been dealing with. The solution is not easy in a capitalist world where profit prioritised above the interests of people.

But, now these trends are being entrenched in Europe, which had historically offered more secure employment to more workers than the Anglo nations.

The austerity bias in Europe exacerbates those trends.

The Weekend Quiz – the last for 2017 – will be back tomorrow.

On Monday, I am travelling a lot and the blog will go into holiday mode again until Tuesday.

Happy New Year to all.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.