Deregulated Labour Markets and the New Economic Depression.
(I prepared these as speaking notes for a workshop. They cover a lot of ground covered on this blog but they may be of interest.)
The rapid descent of the global economy into what even the International Monetary Fund has begun to call a Depression will see very rapidly rising unemployment in Canada and around the world, likely to the double digit levels not seen since in Canada the recession of the early 1990s. Given that it takes economic growth of about 2% per year to offset annual increases of about 1% in the working age population and in productivity (output per hour worked), unemployment tends to rise rapidly in downturns, and to take a long period of time to fall even after a recovery begins.
This crisis is rooted in significant part in the deregulated or so-called flexible labour markets created by governments in thrall to neo liberal economic doctrines and employer interests, and the negative impact of the downturn upon Canadian workers will be greatly worsened by the deregulation of labour markets which has intensified since the last major downturn in the early 1990s. Moreover, the downturn is likely to be deep and long if the labour market is not re-regulated to a significant degree.
In short, the economic crisis demands a fundamental and critical re-examination of the kind of labour market we have in Canada.
The immediate causes of the global economic crisis lie in the deregulation of finance, especially in the US and the UK, and a massive regulatory failure to reign in rampant speculation and excessive risk-taking. As of early 2009, the International Monetary Fund estimated that total bad loans on the books of the global financial system flowing from the US financial crisis stood at over $2 trillion â€“ or $2,000 billion. Part of these toxic assets originated in the explosion of bank lending to finance so called sub prime mortgages in the US, that is, loans to high risk borrowers. US and UK banks also allowed many homeowners to use their houses as ATMs as a housing bubble developed out of cheap credit, further swelling the total volume of household debt to record levels.
The originators of high risk debt, mainly the big investment banks, sliced and diced their loans into complex mortgage and credit card backed securities which were in turn sold on to other investors such as banks and hedge funds and pension funds, often with (supposed) guarantees against default. When the housing bubble burst in the US, the UK and other countries such as Ireland and Spain, the whole house of cards collapsed, leaving most large US, UK and European banks saddled with huge amounts of bad debt which pushed them into or to the brink of insolvency. Even worse, the use of complex financial derivatives such as credit default swaps meant that no one was sure just who in the closely connected global financial system was ultimately on the hook for the bad debt. As a result, in 2008, banks were reluctant to do business with each other, and tightened up greatly on new lending, choking off the economy from its needed oxygen of credit.
The financial crisis was a regulatory failure in the sense that governments generally stood by while financial institutions dealt themselves into insolvency by making highly risky loans, often financed by borrowing huge amounts of other peopleâ€™s money, and by spreading the risks though new financial products which virtually no one understood. (Luckily, here in Canada, the federal government resisted calls from financial players to allow banks to merge and to reduce barriers to the entry of foreign banks, which kept our financial system relatively safe even though unexciting to those who wanted to take huge risks.) Many of the key players who fuelled the crisis such as hedge funds were not regulated at all, and more than a few were not so much reckless as out and out fraudulent. In the wake of the crisis, there have been many calls for, and indeed even some action to tighten up regulatory controls and make sure that it never happens again, even though financial crises caused by the unwinding of speculative bubbles seem to be an enduring feature of capitalist economies.
All that said, and as compelling as the story of the financial crisis is, the roots of the global economic crisis lie much deeper in the model of neo liberal or deregulated global capitalism as it developed since the last recession. The financial system not only drove speculative booms in real estate and shares (as in the dot com boom which crashed in 2000), it generally failed to finance real productive investments in the advanced capitalist countries. In Canada, as in the US and much of Europe, investment in productive capacity â€“ new plants, machinery and equipment and so on â€“ lagged despite record high corporate profits. Instead, real investment mainly took place in developing countries, especially China and developing Asia. This greatly added to the capacity of the world to produce, while subtracting from the ability of workers to share productivity gains and thus to add to the capacity of the world to consume.
One result of rapid Asian industrial development was the manufacturing crisis and downward pressures on wages in the advanced industrial countries, especially the US. The profits of transnational corporations rose to record levels as did the incomes of the top 1% of the workforce, including here in Canada, but the wages of the great majority rose only because families worked longer hours. Between 1992 and 2004, the incomes of the top 1% of earners rose by 60% in real or inflation-adjusted terms, while the median wage went up by only 9%. Household spending kept the economy growing, but this spending was driven by higher and higher levels of debt (averaging 130% of family income by the end of the boom), rather than higher wages driven by higher productivity, driven in turn by new investments in the real economy.
Perversely, capital flowed not from the rich countries to the poor countries, but from the poor countries to the rich countries, notably the US. The huge trade surplus of China (and Japan and oil producers) with the US was recycled into Chinese and other developing country central bank purchases of US financial assets, keeping the lop- sided relationship between the two countries going. Japan and, to a lesser extent, Germany benefited by selling enough sophisticated machinery and equipment and production inputs to the developing low wage countries to keep their manufacturing trade roughly in balance, and the resource boom helped offset the crisis in Canadian manufacturing. Meanwhile, the US ran a huge and continuing trade deficit of about 5% of its national income over the past decade, keeping the global economy going at the price of ever rising national debt, much of it held by US households.
So-called free trade and liberalization of investment flows, as noted, put downward pressures on the bargaining power of workers and of trade unions. Adding to this, following the prescriptions of the Organization of Economic Co-operation and Development Jobs Study of the early 1990s and most mainstream economists, many advanced country governments consciously tried to make their labour markets more flexible and less inflation prone by weakening the bargaining power of labour. Trade union rights came under attack. Once relatively insulated parts of the job market such as public services and regulated industries like the airlines and trucking were opened up to lower wage competition through privatization and deregulation. Minimum wages were not increased in line with inflation. Income support programs such as unemployment insurance were scaled back, increasing the pressure on unemployed workers to take pay cuts when offered a new job.
Here in Canada, the employment rate rose to very high levels in the economic expansion of the past decade, and unemployment fell to very low levels. However, the proportion of the workforce in the most insecure forms of employment remained steady at about one in five workers. (In 2007, 10% of men and 12% of women were in temporary jobs, and 12% of men and 8% of women were in the most insecure form of self-employment, so-called own account jobs which are often disguised jobs which offer no security and low pay.) The proportion of workers in low wage jobs (one quarter of adult women and one in ten adult men) has remained virtually constant at a level second only to the US in the advanced industrial world. High levels of precarious employment and low pay â€“ especially for women and racialized workers â€“ explain why poverty has not fallen significantly in the supposed good times. Indeed the proportion of adult workers who are in working poor families has risen. Despite low unemployment, many working Canadians were far from secure.
In late 2008, Canada entered a recession â€“ more likely a Depression â€“ not only with a higher proportion of precarious employed workers than in the 1980s, but also with much weaker private sector unions. Minimum wages were raised in some provinces at the end of the expansion period, but remain well below the level of the 1980s when adjusted for inflation. Social assistance benefits were slashed deeply in the 1990s in two provinces, Ontario and Alberta, and have not been raised in line with inflation elsewhere. Social assistance benefits fall well below the poverty line for almost all family types in all provinces, and can usually only be accessed by exhausting almost all financial assets. And, unlike previous recessions, any increase in provincial social assistance caseloads will have to be paid for by provincial taxpayers, since federal shared cost sharing was eliminated in 1994.
The Employment Insurance system, the first line of defence for workers losing their jobs, was â€œreformedâ€ in the mid 1990s. Maximum benefits in 2009 are $447 per week, down from more than $600 per week in todayâ€™s dollars before the cuts. The average benefit is much less, just over $300 per week. Access to the system and the length of benefits vary on the basis of a complex grid based on the local area unemployment rate. Less than half of all unemployed workers â€“ and just one third of unemployed women â€“ qualify for benefits. To get in, a worker has to have essentially worked six months at full time hours in the recent past (the 910 hour hurdle which has to be jumped by new entrants to the workforce such as youth, recent immigrants, and women returning to work after an extended leave), and as many as 710 hours in the period immediately before a claim. The entrance requirement disqualifies many precariously employed workers, including half of all part timers. Once qualified, benefits last for as few as 19 weeks and as many as 50 weeks, with the maximum being generally applicable only to those who lost full time permanent jobs in a higher unemployment region.
The key point is that Canada has entered a period of high unemployment with many more insecurely employed workers than in previous recessions, with a weakened labour movement, and with a significantly reduced social safety net. The prospect is for the economic crisis to lead to a rapid increase in poverty, and widespread economic insecurity. The prospect is also for workers to be forced into intense competition for the jobs which continue to exist, putting much more intense downward pressures on wages and working conditions.
There are economic and not just social dangers ahead. Economists rightly fear the prospect of deflation, an extended period of falling prices. Since interest rates cannot fall below zero, deflation can mean high real interest rates, reducing the willingness of households and businesses to borrow. And consumers will hold off spending on big ticket items like cars if they know they can buy them for less in the future, particularly if they fear they may lose their jobs.
If and when wages start to fall, a country can enter a deflationary spiral. That is what happened in the Great Depression of the 1930s. Bank lending and business investment came to a halt. Facing falling sales and falling prices, businesses tried to slash costs, including labour costs, The spiral came to an end only when governments began to invest, and only when the labour market found a floor. The fair wage legislation of the New Deal plus the rise of industrial unions like the autoworkers and steelworkers set the stage for the recovery. Ultimately, unions helped resolve the crisis by ensuring that wages would rise in line with productivity growth, driving consumer spending and then new business investment to meet higher demand.
As of early 2009, Canadian governments did not seem very concerned about the prospect of wage deflation. To the contrary, the federal Budget imposed a limit of just 1.5% on federal wage settlements, and government Ministers were calling on the CAW to cut auto sector wages. The common sense of much of the media was that workers should tighten their belts in a recession, and accept wage cuts if demanded by employers.
The federal Budget also failed to make significant improvements to the Employment Insurance system (beyond extending benefits by up to five weeks) and instead doubled the Working Income Tax Benefit which tops up very low earnings. This cushions the working poor against the impact of a downturn to some degree, but also allows employers to pay very low wages. Labour organizations have generally called for supplements to very low wages to be twinned to higher minimum wages.
In the context of a deep economic downturn, the focus has to be on stabilizing the job market by reversing a slide into mass unemployment, and also by setting a floor to the job market. This would be best done by raising minimum wages; dramatically improving access to EI benefits as well as the level and duration of benefits, and encouraging unionization, particularly among lower-paid workers (as my yet happen under President Obama.)
In short, labour market issues are highly relevant to understanding the unfolding economic crisis, in terms of its causes, consequences and solutions.
I think the main issue with the credit crisis was people putting money into “unknown” risks. If there were more transparency about the actual risks, investors would have been able to make more sensible decisions about whether to invest in subprime mortgages, with a knock-on effect on whether those mortgages would even have been provided. The bewildering repackaging of BB bonds into AAA bonds, and the bond rating agencies playing along, is more a scandal of risk measurement, transparency, and conflict-of-interest.
There have been a dozen plus different types of right-wing politics taking hold since the early nineties. But I think the underlying causes of the recession/depression are best traced back to arrogant and intoxicated bad banking that has a weak correlation with left/right politics. You would have to make the case that far-right millionare triumphalists are more likely to do something barbarossa-ish with their money, and I think that’s a stretch.
thanks Andrew, this is a very helpful explanation.
“But I think the underlying causes of the recession/depression are best traced back to arrogant and intoxicated bad banking that has a weak correlation with left/right politics.”
The arrogant and intoxicated bad bankers wanted higher profits so helped put into power those people whose ideologies and sentiments either helped them do it or at least wouldn’t stop them effectively.
The “Rotten Apple Theory” provides cover for much systemic evil.
“You would have to make the case that far-right millionare triumphalists are more likely to do something barbarossa-ish with their money”
Good God, you have no concept of society or social relations, do you? We’ve got to prove your little conspiracy theories or else you’re not interested?
I wasn’t peddling the rotten apple theory – I too think it was a systemic failure. I just don’t think we can stretch the consensus left view on the major policy items into an “I told you so” on banking regulation. I’ve been following the progressive debate about finance, and I assure you that it was very hard to get more than 1% of left-wingers to talk about financial reserves, risk measurement, or down payment requirements, until now. People are poring over things they said before August 07 on these topics, and we’re down to maybe a half dozen progressives who had it right all along. Meanwhile, there are scores of presumably republican analysts in New York who had plenty to say about subprime mortgages. You can’t point to the people who had it right and say they’re all in the same club as us, and that they share our values on public health care or worker insurance systems.
Assume stuff, it really is such a complicated story but you have done well to break it down into good sized bites.
working on an all nighter so I thought I would pop in and do some editing.
“as my yet happen under President Obama.”
I would mention that despite running a surplus the EI fund was rebooted or restarted. Which that surplus should have been in place for such calamities that we are facing. Imagine if we had that $50 billion, some extensive measures could have been put in place. Shows how the worker’s interests are quite easily thrown into the closet. It sure didn;t take long for our bankers to get accomodated, yet here we are, in some sector’s the fire has been blazing for a year and more yet no relief for the weary.
You might want to reword this portion on deflation. It is a bit unclear how it all relates to the worker, which I find is a real problem when not connected to declining prices. It is the causation that is problematic in this case the loss of credit brings on consumption shocks, which leads to layoffs and wage cuts which leads to price cuts to chase the declining consumption and move product, which spirals with the payroll declines and layoffs adn eventually gets out of control which we are most likely starting to experience. The auto sector is the example, however we are now seeing it surface in the public sector as well, the leakage coming in the form of budgetary pressures. Of course I am not an expert on deflation, thankfully not many people are as we have not had to experience much of it.
“There are economic and not just social dangers ahead. Economists rightly fear the prospect of deflation, an extended period of falling prices. Since interest rates cannot fall below zero, deflation can mean high real interest rates, reducing the willingness of households and businesses to borrow.”
your late night editing economic junkie.
awesome stuff that should have started, perhaps a Freudian slip!
I agree that many on the left missed the significance of financialization and that there were some prescient critics on the right. However, Andrew Glyn got the main lines of the story right in his 2006 book Capitalism Unleashed which synthesized left criticisms of neo liberal globalization. He placed particular emphasis in the finance chapter on finanial dominance of real production and the resulting drive for short term profit maximization, but also noted the pronounced shift to growth led by a large accumulation of household debt. Stanford got part of the emerging story in Paper Boom. And we shoul not forget that a lot of the really exotic toxic stuff is a very recent story.
I will have to get a copy of Glyn’s book, as I haven’t read it yet. I also agree Stanford covered a lot of this, but it was a while ago. His general gist that finance is becoming disconnected from reality is well done and relevant to the current crisis.
If I could offer suggestions, I would say a major right-wing culprit is the distorted view that everyone should become a home owner. I am guessing that was really at the root of the deregulation on down payments and the duration of mortgages.
There was some research over a decade ago that said that higher home ownership constrains the economy because people are geographically immobile, both in terms of what city to live in, and where in a city you can move to. Sorry, I don’t remember the author.
Anyway, progressives have been steadily calling for public funds for affordable housing. There’s a progressive co-op movement, plus there’s the subsidized housing. Maybe a case can be made that the abandonment of housing policies was rooted in an attempt to convince everyone to buy their own homes. Hence the housing boom and the deregulation. The progressive rebuttal would be that we should have always had a housing program, we need to protect a rental housing stock for mobile workers, and that we shouldn’t be favouring asset accumulation through home ownership at the expense of having a productive economy with a higher quality of life.
Stuart Murray said:
“I wasnâ€™t peddling the rotten apple theory – I too think it was a systemic failure.”
A bit hard to see, given what you said about arrogance and “millionaire triumphalists”.
“I just donâ€™t think we can stretch the consensus left view on the major policy items into an â€œI told you soâ€ on banking regulation.”
Wait a minute: how does this analysis of Andrew’s turn into a wagging finger on banking regulation? If anything, he points out that Canadian banks were more or better regulated that the US ones that got into complex financial packages.
“Iâ€™ve been following the progressive debate about finance, and I assure you that it was very hard to get more than 1% of left-wingers to talk about financial reserves, risk measurement, or down payment requirements, until now.”
I can believe it; my understanding is that lots of people have little to no understanding of this very technical end of finance capitalism.
But where’s this finger-wagging?
“People are poring over things they said before August 07 on these topics, and weâ€™re down to maybe a half dozen progressives who had it right all along. Meanwhile, there are scores of presumably republican analysts in New York who had plenty to say about subprime mortgages.”
OK, but are they coming at the problem from the same direction as we are? It’s been my (albeit limited) experience that mainstream or “Right” economists really don’t concentrate on systemic explanations for what happens in capitalism. They tend to be more accepting of concepts that are more “individual” in their basis ie this happened because people were too greedy or a few “bad apples” did this.
If “republican” analysts are approaching what happened from that sort of starting point, don’t you think they’re barking up the wrong tree? And “we” aren’t?
“You canâ€™t point to the people who had it right and say theyâ€™re all in the same club as us, and that they share our values on public health care or worker insurance systems.”
Maybe; maybe not. But who’s doing the pointing and saying this? Andrew sure doesn’t seem to be.
“I would say a major right-wing culprit is the distorted view that everyone should become a home owner.”
Hardly a right-wing thought. Call it rather a middle-class one (or at least part of “middle-class ideology”). The Left has this idea, too, but I don’t think we come at it from the same POV as the Right, who tend to see it as a matter of having the freedom to buy and sell commodities to your heart’s content (and devil take the hindmost) instead of a (sentimental?) matter of having the right to a place to live that can’t be taken away from you.