Relentlessly Progressive Political Economy

Travis Fast

Following the Lonely Economist’s nice little quick and dirty break down of CN profits and the lackluster growth of their workers wages over the last little while I have put up some graphs.

One of the fascinating aspects of relatively stagnant wages for workers over the past twenty years is the degree to which wage settlements among unionized workers has been repressed from the beginning of the 1980s to the present.

The chief benefactor of the repression of wages has been corporations in terms of healthy profit shares of output and low unit labour costs which are plotted in the next two graphs.

Unit labour costs

Lest their be any doubt the last graph plots various measures of the profit rate.

No doubt as the coming recession sets in we are going to hear the litany from corporate Canada: Wages are too high and that they can’t compete on unit labour costs. Two demands will flow: More tax cuts on capital and the right to weasle out of their pension obligations. Progressives would do well to start countering this nonesense starting now.

In an earlier post, Travis showed that labour is receiving a decreasing share of income in Canada. Look no further than the current labour dispute between CN and the United Transportation Union (TLU). Just to review, TLU is looking for a three year contract with a 4.5% raise in the first two years and 4% in the last. The mainstream media have been quick to cite CN’s stat that average wages were in the $75,000 range, with a quarter of them paid over $90,000.

But here’s a stat that CN has not been stressing during the labour dispute: over the last 4 years, the company’s annual net income has risen by an average of 27%, to just over $2 billion. Upon the most recent release of their financials, the company raised its quarterly cash dividend by 29%.

The company’s employees, on the other hand, experienced no such windfall. I took the company’s payments to labour through wages and benefits and divided it by the average number of employees in the year (2006 data not yet available). Average workers saw their wages rise annually by 1% from 2003 to 2005, or 5% if you include the “outlier” year of 2002. Yes, I admit it’s a crude measure, but it does show that capital is clearly the big winner here. A 4-4.5% wage increase won’t hurt CN, but it may force them to reduce dividend payment increases. Luckily for them, government is on their side: the Cons and Libs joined together last week to threaten to impose back to work legislation, a move that no doubt has led to TLU taking a worse deal.

Travis Fast

As per the discussion started by the Lonely Economist, notwithstanding the Con view, there is the real question of whether or not market based schemes are more effective than government regulation in curbing emissions. Over at Gristmill just this question is being asked.

In arguments over carbon trading, both sides often assume that past emission trading schemes have been notably successful. But in practice, trading schemes have lowered emissions more slowly than rule-based methods, and have discouraged rather than encouraged innovation. Even in the area where emissions trading shows some success — lowering gross compliance costs to industry — net costs are probably higher than rule-based alternatives.

SOX emissionsCompare the success of the often-touted sulfur dioxide trading system the U.S., instituted in 1990, with the speed and quantity of reductions under rule-based systems during the same period. U.S. SO2 emissions dropped by 31% between 1990 and 2001 [1]. Over the same period of time, under old fashioned rule-based regulation, Germany reduced its emissions by 87% [2], Italy by 62% [2], and Western Europe as a whole by 57% [2].

Lipow reports that the major conclusion of the Center for Progressive Reform report is:

emission trading has a record of producing slower results than conventional regulation, with at least one example of complete failure to meet a goal. But doesn’t the increased flexibility at least encourage innovation? The empirical record says no:

The current discussion on ways to tackle industrial emissions demonstrates the right’s hot and cold relationship with the market. The Harper government is looking to a series of environmental regulations that will place a cap on air pollutants and greenhouse gasses, and will introduce motor vehicle, fuel and energy efficiency standards. I’m not interested in criticizing the regulations themselves, except to say that they are weak and won’t achieve the level of industrial emission reductions necessary. What is far more interesting is the Conservative decision to go the regulatory route rather than adopting a market based approach.

Under the neo-classical framework, environmental problems like climate change and smog are viewed as market failures. Simply put, no market exists for pollution because property rights are not assigned to the air we breath. I couldn’t sell my allocation of clean air to the car driving neighbour next door, because there would be no reason for her to buy it – polluting is effectively free. The policy solution leading from this framework, of course, is to create a market where one doesn’t exist. Under this solution, the cost of pollution on all “economic agents” is estimated, and a tax is set such that the marginal benefit of pollution (i.e., industrial production) equals the marginal cost of production plus the marginal costs of pollution (i.e., environmental impact of smog). In plain language, demand equals (adjusted) supply.

For all intents and purposes, Kyoto does exactly this, but uses a slightly different market instrument (tradeable permits). In other words, the Harper government has dismissed the market policy approach in favour of what the Conservative Party would normally describe as “heavy handed regulation”. But it’s clear that market friendly environmental policies aren’t market friendly — this isn’t a case of Harper forgetting everything he learned in econ grad school — he’s concerned about the impact on his friends in Alberta’s oil patch. So, I guess the market is wonderful… when it’s profitable. This point isn’t exactly a stunning revelation – more like an amusing observation.

The academic papers section has been updated.

Travis Fast

Thanks to the Lonely Economist for kicking off the discussion here at Relentlessly Progressive Political Economy. Lucky for me he served up a nice point of entry into my primary area of interest: neoliberal restructuring. One of the distinctive features of neoliberalism is the degree to which labour, in the advanced capitalist zone, has been pushed back on its heels; an extent to which has not been seen since before the Second World War. There are any number of metrics which could be marshalled to illustrate this shift in the balance of bargaining power between workers and employers.

One of the most straightforward metrics however is to track labour income as a share of GDP and contrast that with gross surplus as a share of GDP. In the graph (click on the thumbnail below) I have done just this for the years 1926 through to 2005. Besides providing a general periodisation for the shift from what political economists refer to as the Keynesian welfare state to the neoliberal consolidation, the graph nicely captures the changing fortunes of owners of capital and owners of human capital (note in the old economy we called these individuals workers whereas today economists refer to them as consumers who accumulate—or not—human capital; however regardless of what economists call them political economists and Revenue Canada still call them workers or employees).

It is true that I have gilded the Lilly somewhat by including the metric of gross surplus as a percent of GDP because by definition gross surplus is the residual after labour income is deducted from GDP. Yet, I included this measure to help illustrate the point: from WWII onwards, Canadian workers managed to capture an increasing share of what they produced. This trend peaked in the late 1970s from which it has been trending downward ever since and in earnest since the recession of the early 1990s reaching levels not seen since the early 1950s.

To provide and even more dramatic illustration of the nature of the neoliberal era I have plotted the metric of profits as a share (%) of labour income (click on the thumbnail below) and before tax profits as a share of GDP. Clearly the current profit boom is in good part being funded by repressing the share of output that labour receives.

Notice that profits as share of labour income increases faster than profits as a share of GDP from the beginning of the 1990s which among other things lends support to the observation that the macroeconomic logic of neoliberalism is based on the repression of worker’s capacity to get their “fair share” of the output they produce. Indeed, profits by both metrics and worker’s share of output have not been at such levels since the profiteering of WWII. The difference between then and now being primarily the trend in labours’ share of income: in the latter period it was trending up and in the present period it has been trending down. Moreover, another interesting observation that can be made from this graph is that from the early 1950s to the early 1970s labour’s increasing share of GDP does not appear to have been purchased at the expense of a declining rate of profit. This suggests that worker’s gains were paid for largely out of productivity increases.

However, from the late 1970s onwards it appears that increased profits have not only come from capitals ability to appropriate most of the productivity gains for itself but also by clawing back part of labours share. From the POV of labour, therefore, neoliberalism and all its rhetorical trappings –flexibility, positive sum gains, high road competitiveness and the like— is in reality a zero sum game in which workers are forced to take what is offered. This reality contrasts nicely with the official fiction derived from neoclassical models where workers sit in the catbird seat choosing between work and leisure and where employers are played-off one another in an infinite bidding war for human capital. In fact, our metric actually understates the degree of decline in worker’s share of value added because it includes all employee income including that of upper management and executives.

In the real economy what matters is leverage and in general there are only three ways worker’s can get leverage to bargain with employers. The first is to acquire a skill or technical competency in an area of high demand and low supply: indeed this is the individual strategy par excellence. The problem with this strategy is (a) there are very few jobs of this type so it is not a general strategy that can be pursued by all workers and (b), baring barriers to entry, it is hard for individual workers to exclude others from obtaining that specialized skill set and thereby undermining the “rents” they are earning on their human capital. The second way for workers to increase there leverage is to press for wage increases during times of low labour slack. The problem with this strategy is that periods of low unemployment are (a) relatively short and crucially (b) are not determined by the actions of workers but rather by the pace of accumulation (the economic cycle). The only way that workers can achieve, as a group and individually, on a consistent basis, a higher share of national income is to act in concert via some form of collective organisation whether that is through professional associations or unions (yes the Ontario Bar Association is a glorified craft union for lawyers as are faculty associations for prefessors and the Ontario Medical Association for doctors).

And all of this brings us directly to the causes of the decline of labour’s capacity to bargain for their share of output (GDP): the prolonged exposure to high levels of unemployment throughout the 80s and 90s and the relative decline in the percent of the labour force covered by collective agreements. The graph below provides a nice indication of the correlation between decreasing union density and the decrease in labours’ share of output. Indeed the apparent positive correlation between the level of union density and labours’ income share of output from the early 1950s to the present is so tight that it hardly merits further comment.

The relationship between unemployment and labours’ share of output is more complicated. Unlike density where the level of unionization translates in a straightforward manner into bargaining power via collective agreements the effect of low/high unemployment is less direct in terms of workers capacity to bargain. First off, workers tend to view the labour market in the same way as their income; i.e., past experience weighs more heavily in current decision-making than present circumstance. We can therefore expect a lag between the observed level of employment/unemployment and the effects on income shares. Second, where robust unemployment insurance programmes exist the effect of high unemployment on wage growth is more muted. Third, the degree of union density also helps condition worker’s responses to deteriorating condition in the labour market as the threat of the sack is less effective. As such it is quite remarkable the degree to which increasing unemployment visually correlates with a receding share of labour income (click on thumbnail below). If I were to lag the effects of unemployment on labour income shares the relationship would be even tighter.

Notice that for all the talk of record levels of low unemployment in the recent cycle if we cleave the graph into two periods 1946-1975 and 1976-2005 unemployment averaged 4.7% and 8.8% respectively. Further observe that as the unemployment trend curve gets steeper the labour share of income trend curve also moves into a state of decline. Moreover, and crucially, the present low level of unemployment does not appear to have reversed the declining trend in income shares which either reflects a lag in the effect of unemployment levels (probable) or significantly altered institutional environment in which decreasing levels of unemployment do not translate necessarily into greater bargaining power for workers as a whole (equally probable).

Last Friday, Statistics Canada released it’s monthly employment figures. This is the monthly event that forces stock traders and staff out of bed early. According to StatsCan, employment increased by 88,900 between December and January, at the same time drawing people into the labour force (the reason the unemployment rate actually rose to 6.2%). So what did traders do after they heard the good news? They sold, leading to the biggest loss in 5 weeks.

It seems that the market saw this news for what it is: bad jobs that will not be associated with higher economic growth. Employment growth in the service sector represented the bulk of the increase, adding 67,700 jobs over the one month period. A Globe and Mail article shed more light on the issue, citing a CIBC report showing job quality for January near an all time low. These jobs are primarily part time and unstable, pay little, and have little to no benefits. Oddly enough, the following comment was attributed to the economist responsible for the CIBC report:

Many people are entering the work force not because they have to, but because they want to, he said. They tend to take services-oriented jobs that pay less and produce less. That, in turn, means they’re not contributing as much to GDP growth.

The argument that there is a whole bunch of people out there who have decided to jump into the labour market to earn some extra cash is absurd. Although the StatsCan report does not give a socio-economic breakdown, there are a number of facts in the StatsCan report to back up this criticism. Adult men saw a 5% increase in full time employment and a whopping 35% one month increase in part time jobs – hardly the group (stereotypically) seen as taking a job at the local mall to kill some time. I suspect that this part time increase was most significant in Ontario, where layoffs are battering the once mighty manufacturing sector, but this data isn’t yet available.

Secondly, off-reserve aboriginal people experienced gains in employment in western Canada. Again, it’s hard to imagine one of the poorest groups of people in Canada choosing low productive work for a little extra cash on the side. Apparently nothing overcomes discrimination and racism in hiring decisions like an oil boom.

The monthly jobs report tends to stir a lot of media attention, but is for the most part meaningless. A more useful report would look at real wage growth in terms of full-time equivalent jobs by sector, region, and income group.