Disparate Models, Desperate Measures: The Convergence of Limits ∗

This chapter was originally written back in 2003 and published in 2005 in the volume edited by David Coates (god father to a Miliband son I think) Varieties of Capitalism, Varieties of Approaches.  The data contained inter alia is by now stale in one sense.  However in another sense the document holds up for its time and place in the early Anglo-American debates on neoliberalism.  The trends I analyzed–rising income inequality, reduced welfare state effort, eroding quality and conditions of work, and a secular decline in productivity growth–across the rich OECD zone regardless of which model of capitalism was being pursued were in fact, as I noted at the time, secular trends.  At the time, 2003, most academics still had their heads in the ground about inequality and the punitive dynamics of neoliberal labour market policies.   Indeed the  hegemony of neoliberalism was so complete at that time most social democratic intellectuals refused or were incapable of acknowledging the state of affairs.  Even worse many were actively crafting and implementing neoliberal policies.

In the above sense I think the chapter still holds up.  Moreover, it also holds up in terms of its main hypothesis that the advanced capitalist zone, despite being populated by nation states with very different institutions and public policy regimes, was producing increasingly poor outcomes for workers and citizens. For A version of the chapter “Disparate Models, Desperate Measures: The Convergence of Limits,” leave a comment to request the document.

∗This article was originally published in David Coates (ed.) Varieties of Capitalism, Varieties of Approaches. New York: Palgrave Macmillan, (2005). The version of the article reproduced herein may be reproduced on a not for profit basis subject to the GNU Free Documentation License and provided proper citation is provided.

The rich get substitution effects and the poor get income effects

*This post has been popular so imma top post it here.

It is pretty much understood that the basic orthodox labour market model is agnostic insofar as income and substitution effects are concerned. If for example real wages increase workers may choose to work less because they can consume more leisure with less hours of work or workers may work more hours because the opportunity cost of leisure has gone up. Which effects dominate workers’ incentives are not predetermined by the standard labour market model.

Implicitly, however, we can glean what mainstream economics tends to think are the incentives facing different classes (economic classes that is) of workers. In Mankiw’s recently ridiculed here, here, here and here article in the NYT, he argued the impact of a tax increase on the economic class of ‘workers’ at the top of remuneration scale was a decrease in the real wage which would be met by a substitution of more leisure for less work as the opportunity cost of leisure had been cheapened by the tax increase. Simply stated this class of workers would respond to a decline in their real wage with a union strike like reaction.

So far so good. I do not imagine it inconceivable that those workers with compensation packages that put them in the top 1% of income earners could choose to work less hours if they were faced with a wage cut with one important caveat. They would have to have the type of job which allowed them to control their hours of work and or have sufficient means to withdrawal from the labour market altogether aka independently wealthy. For example, an NHL hockey player cannot say to his coach I am playing one less game a year because of the increase in marginal tax rates; although he might try to make the team offset the tax increase with a higher salary. Thank god for salary caps.

However, when we turn to lower classes of workers we find that Mankiw argues that income effects dominate their incentives. In his introductory textbook he has the following to say about unemployment insurance:

So here Mankiw argues that workers respond according to income effects. Lowering unemployment insurance replacement rates would decrease unemployment because workers would have a greater income incentive to take a job.

What, therefore, accounts for the different reactions between these two classes of workers? Why that is will increased taxes on the rich (a decrease in the real wage) lead to a withdrawal from the labour market but a decrease in unemployment benefits (again a decrease in the real wage) increase the supply of labour. The answer of course is that most classes of workers are not independently wealthy and do not meaningfully control their hours of work. Workers have to work and outside of access to unemployment benefits they do not have the option of defecting from paid labour markets. Therefore whether income or substitution effects predominate is largely a function of class. Most classes of workers save for those at the very top respond to a decreased real wage either by seeking more hours of work through one of three ways: overtime, a second job or telling their teenager to go get a job and pay their own cell phone bill.

It is interesting that Karl Marx (well Smith too in some respects) were the first to recognize the differences between classes of workers what we once called proletarians and the bourgeoisie. But that is for another post.

Varieties of Capitalism: A Critique

Abstract

The Varieties of Capitalism (VoC) has become the dominant approach in comparative political economy and enjoys wide application and attention in disciplines outside of political science and sociology. Indeed the VoC approach has enjoyed much attention in comparative industrial/employment relations (IR). This article undertakes a critical evaluation of the importation of the VoC paradigm into comparative IR. Inter alia, it is argued that the VoC approach, as it is presently configured, may have little to teach IR scholars because its basic theoretical concepts and methodological priors militate against accounting for change. This article begins with a summary of the routine problems researchers in comparative political economy and comparative IR have encountered when attempting to account for change within the constraints of the VoC paradigm. Here the focus is on the limitations imposed when privileging the national scale and the problems engendered by a heavy reliance on comparative statics methodology infused with the concepts of equilibrium and exogenous shocks. The article then goes beyond these routinely recognized limitations and argues that the importation of terminology from neoclassical economic theory, of which the original VoC statement makes foundational reference, further serves to constrain and add confusion to the comparative enterprise; namely, comparative advantage, Oliver Williamson’s neoclassical theory of the firm, the use of the distinction made between (im)perfect market competition in neoclassical economics and the fuzzy distinction made between firms, markets and networks.In the concluding section we argue that the VoC’s narrow focus on the firm and its coordination problems serve to legitimate IRs traditional narrow focus on labour management relations and the pride of place that HRM now enjoys in the remaining IR departments. Ultimately, however, the embrace of the VoC paradigm by comparative IR is a net negative normative move.

The full article can be found here

How to read economic language for bias: “wage inflation” in Newfoundland and Labrador

Sometimes we read things and we get that gut feeling that we are being subtly manipulated.  Economics is of course full of this subtle manipulation.  Words like “choice”, and “efficiency” and even phrases like “free trade,” “efficient markets” and my favourite “the natural rate of X” have a very specific meaning in neoclassical economics which do not not have much connection to what the layperson might think they mean.  What is curious about the above terms is that they all lead the layperson in the right ideological direction even if they (the layperson) have no idea what the terms really mean in economic practice.

To my mind one of the most egregious ‘tells’ is the phrase “wage inflation.”  Here even the pedigree of the phrase is suspect.  In economics the word inflation is generally reserved to refer to an increase in the price level.  If just one good rises in price what we have is a relative shift in prices.  Sometimes when, for example, we disaggregate inflation data we talk about the relative contribution of specific  items like food, and energy to the overall measure of inflation.  But to talk of wage inflation is just bizarre.  Economists do not talk about profit inflation; so why would we talk about wage inflation?  The only reason I can come up with is that when an economist does talk about wage inflation they are either too ignorant to bother listening to, or too biased to bother taking seriously.  There is the third possibility that they think inflation is anywhere and everywhere a function of wage increases which normally goes by the name of a wage cost push theory of inflation.  So the third is really an expression of the soft bigotry that comes from being too biased.

Lest anyone think I am making up false examples or hitting at straw men just click on this document.  Here an economist talks specifically about “wage inflation” in Newfoundland and Labrador.  Now I am sure he is a fine economist but why would Mr. Locke talk about wage inflation?  If he were simply unbiased but confused about what the word inflation meant why would he choose to not also talk about profit inflation?  Indeed, in 2008 profits as a percent of wages were running at 125%.  The decadal average was over 70% whereas the national average was around 25%.  If anything it sounds more like a case of profit push inflation but then again Newfoundland and Labrador do not have an inflation problem: prices rose on average 2.45.  So why talk about inflation at all?  Even more embarrassingly Mr. Locke’s own graph plots wages in Newfoundland and Labrador as a percent of the Canadian average.  His stellar proof (p.10) that wages are the cause of an almost non-existent general rise in the price level in Newfoundland and Labrador is that wages in the province have risen to less than 95% of the national average.

The only answer I can come up with is that in such a context the use of the word “inflation” after the word “wages” is designed to tell the reader that increasing wages are BAD.  Why is it bad?  Because inflation is BAD.  And not as in Michael Jackson’s Bad, but you know BAD.

In any case when you read the phrase “wage inflation” stop reading and do something more intellectually rewarding like cleaning your toilet.  And as you watch the water rise in your bowl ask your partner to come in and watch the “inflation” in the water level.  At least with specific reference to the general level of water in your toilet bowl you will be on safer linguistic and scientific ground than talking about wage inflation.

The poverty trap for real

Poverty is of course about a lack of money, but it is also about a lack of resources both in the cultural and social sense. I live in a small village of 1800 citizens.  Outside of myself, the retired doctor and the soon to be retired notary (both of which can’t hope to sell their houses) there are simply two kinds of the working class:  those with secure jobs and those that traverse the revolving doors between work, UI and welfare.  You can literally determine who is who by their smile.

To break this cycle we would need real institutional robustness.  You can give all the training opportunities you want to the poor but if they show up at a job interview missing their two front teeth; well let us just say it is not the winning smile.  At this level of concrete observation the labour market functions more like a market in chattel slaves. But even if we gave all these people a smile the labour market in which they are stuck would just change the vectors of discrimination.  The truth is there is a permanent oversupply of this quality of labour and  outside a real intervention by the state there will always be an oversupply: capitalist labour markets just can’t afford to hire all these bodies whatever the cost per hour may be.

The irony of greed: The end game for Neoliberalism?

The global economy is in the toilet and the Boomers’ representatives are chanting: “flush, flush, flush.”  Me? I am eating cigarettes and wine while admiring the remarkable consistency in the myopia of all of it.

In the name of fiscal prudence the whole of the advanced capitalist zone is in engaged in austerity budgeting and calls for more of the same.  Even Martin Wolf, in his otherwise insightful column in the FT online today, felt the need to tap his hat and nod in the direction of the genteelism of supply.  Exhibit A, the conclusion to his incisive intervention:

Reconsidering fiscal policy is not all that is needed. Monetary policy still has an important role. So, too, do supply-side reforms, particularly changes in taxation that promote investment. So, not least, does global rebalancing. Yet now, in a world of excess saving, the last thing we need is for creditworthy governments to slash their borrowings.

As is widely acknowledged, monetary policy has little outside of conciliatory role to play at this time.  In so far as the CBs should not make the mistake of tightening policy as the ECB and the BoC did.  But apart from the role of spoiler there really is not much left for the CBs to do.  The problem is squarely fiscal.  As Wolf himself went to pains to argue.  Why then the conclusion given that further tax reductions are not only going to make the fiscal positions of governments worse they will also likely have the same effect as lowering interest rates at this time:  Nadda, ziltch, rien, nothing?  The problem is that Wolf has to tip his hat to conventional wisdom.  If not; he has no hope of bending the ears of policy makers.  Oh well, that is his plight not mine.

Here, given none are listening we may speak frankly.  The world economy is in the toilet because free trade, tax cuts, deregulation and above all the liberalization of finance over the last thirty years let loose a Tsunami of forces both economic and political.  The liberalization of finance and production allowed for the national gutting and then global whipsawing of labour.  As the profiteers profited and retired workers slept while the assets they had built were being systematically stripped and the fortunes being amassed were then turned to the seedy business (although a time honoured practice if one cares to actually read Smith) of buying off the government–and it must be stressed the intelligentsia too–broadly understood.

We now have the perfect storm.  A generation of public and private sector functionaries has been trained to believe that the market can do no wrong and the government no good.  As a corollary is of course the proposition that monetary and regressive tax policy is everything.

The irony, of course, is that any credible account of the present crisis would have to admit that we are here because free trade, tax cuts, deregulation, the flexibilization of labour markets  and above all the liberalization of finance brought us here.  How odd it is then that we should be treated to more of  the same as the cure for what ails us.

The Sensitivity Problem and the Social Sciences: Warn your students

This is a problem I am sure almost anyone who works with data runs into from time to time.  It is also something we need to teach our students.  Which I am sure we all do.  This post is simply elegant example of the problem.

We all know that definitions matter because sometimes the phenomenon we want to look at is very dependent on how it is defined.  Sometimes a small change in the underlying definition is not just sufficient to change the level but also the trend in the time series.  Take the US and the incidence of part time (PT) employment.   If you use the BLS definition of PT employment as anything below 35 hours then since the 1970s there has been an increasing trend in the incidence of part time employment.  If you use the OECD  definition you will arrive at exactly the opposite conclusion.

*Please note the labels on the graph are inverted: fix to come.

What is interesting is that for the other national cases that I am presently looking at the definition only changes the level not the trend.  That is to say, in the case of Canada the long term trend is towards the increasing incidence of part time employment even if on different definitions the prevalence is greater or lesser.  So in the case of the US you can literally come to an opposing conclusion just by a subtle shift in the underlying definition of the phenomenon being investigated.   Econometricians regularly face this problem and it will not do to simply choose one of the two definitions.  Say you want to “test” the proposition that unemployment rates are correlated with the incidence of  PT employment.  Based on the US case you have good reason to believe that the results are definition dependent and you know the definition is arbitrary as the underlying phenomenon is a relative concept.  I would be interested to know what econometricians council when they face this sensitivity problem.

A rotting fruit that does not give vent to its own demand?

Given we seem to be stuck in fairly heady economic times it seems worthwhile to me to put out another post on the subject of employment, labour force growth and unemployment. In this post I am going to revisit the question of labour supply and demand and then take a closer look at the related issues of structural unemployment and the rotting skills (hysteresis) and dependency thesis  that has gained so much popularity in policy circles since mid 90s.

In a former post I mentioned the surge in labour supply during the 70s and 80s yet the graph I produced was a little underwhelming because it took a look at the underlying demographic growth of potential labour supply and not actual labour supply.  So this time I have have subtracted total labour force growth from total employment growth. Again, a positive reading indicates demand growth is outstripping supply growth and thus a decrease in the unemployment rate.  The inverse is that a negative reading says labour supply growth is greater than labour demand growth and thus leads to an increase in the unemployment rate. Here is the graph:

This is fairly sobering stuff.  The jobs boom of the 60s gave way to the deluge in the labour supply of 70s from which the employment market not to mention the welfare state has never fully recovered.  All that talk in the 90s about the need to reform UI/EI was not really about workers gaming the system it was about a welfare state that could not and would not provide the kind of insurance necessary to cover an over 70 % participation rate in which workers were more likely to be unemployed.  The graph below shows just how ugly it can get.

Clearly the deluge in the labour supply 70s had profound impact on long term unemployment which amounted not to an institutionally determined behavioural switch in workers propensity to work but rather a structural shift in the labour supply curve sans an equally profound shift in the demand curve for labour.  We know for example that for two decades, from the late 70s to late 90s, that real wages were stagnant indicating a loss in the bargaining power of Canadian workers. Yet despite the loss in wage bargaining traction, demand for labour was not forthcoming until the dot com and later housing booms of the late 90s and 2000s.  At the end of the day it was the bubble economies which finally, and fictitiously managed to work through the supply boom of the 70s.

If there is any doubt that demand for labour is the most important determinant of structural unemployment rates we need only look south to our American cousins.  In the graph below I have plotted US long term unemployment rates along side the Canadian rates.

Despite or because of higher US productivity during the 2000s the US had already begun to move towards higher levels of structural unemployment than Canada during the early 2000s something not seen since the mid 70s.  Clearly the severity of the last recession in US accounts for most of the difference in long term unemployment rates.  I have not seen any research which argues that the US has a significantly more generous unemployment insurance system than Canada.

The popular myth promulgated throughout 90s was that structural rates were high because they were high.  In the literature this is called hysteresis.  The basic idea is that the longer  a worker is unemployed the less employable they become because their skills degrade like a piece of fresh fruit on the kitchen table.  The hysteresis argument was used in turn to argue for more restricted access to EI and lower benefits to encourage workers to get back to work before their skills rotted.  This all had the air populist plausibility particularly when combined with the trend toward increasingly individualistic explanations for collective social problems in the social sciences especially economics.  But whatever the strange brew of populist folk wisdom–that workers prefer the dole to working–and academic fads the problem is, as the graph above demonstrates, high structural unemployment and hysteresis seem to magically disappear when there is strong demand for labour.  And that demand, as the graph above also suggests, is determined by the general health of the macro economy and has nothing particularly to do with the supply characteristics of labour.

To put a fine point on the argument what needs to be demanded of the purveyors of the hysteresis hypothesis is just what reversed the rotting of workers’ skills that magically made them employable after 1991-92.  Was there a steady increase in the funding of retraining programs for example?  And what about the US what was going on after 2001 did the Skills of US labour all of sudden just start rotting?

The alternative narrative to the rotting skills / lazy labour thesis is that the 70s was a period of structural realignment in which secular period of decreased GDP per capita growth set in matched by a deluge of labour supply.  The 80s and 90s were thus periods of adjustment to this new reality.  The UK the US and Canada were early supply side reformers which consciously sought to re-enforce the punitive logic of capitalist labour markets in order to assure price stability (tame inflation) and break workers bargaining power.  In other words, neoliberal macro-policy, despite protestations to the contrary, had nothing much to with solving the problem of long term and high structural rates of unemployment.  It was a feature not a glitch that the solution to that problem would have to wait until the supply side reforms delivered up their magic via a tsunami of consumer credit and control fraud serving up a ponzi economy that could approach something close to what could be called full employment.

As this report from the BLS (p.23 A-12) demonstrates long term structural unemployment has gotten worse in the US not better since 2009.  Most sober economists will concede that this has everything to do with the health of the US economy.  But it will not be long before the rotting skills thesis is floated into the stream of policy discourse as a cover for the fact that like with the financial sector the solution is to kick the problem down the road and blame the victims along the way.

*Note that Stats Can defines long term unemployment as 1 year + whereas the BLS defines it as 27 months weeks +.  By using 6 months + which conforms to the format of the data reported by the OECD I have more less deployed the BLS definition.

UBC economist Milligan throws cake at educated, unemployed youth

I tuned into a rebroadcast of this morning’s the CBC’s the Current while cleaning the kitchen this evening which had an unusually good documentary on the problem of youth unemployment; specifically, the problem of university undergrads in finding jobs.  As someone who suffered the 90s recession in spades (really you should see my work history I can sharpen your kitchen knives and the teeth on your chainsaw to a fine edge of efficiency*) I was very much in sympathy with these newly minted baccalaureates.  Personally I pursued my education as an end in itself.  If I had become a logger full time I would a least be able to attempt to make sense of something beyond the hill.  That said I can totally understand why so many of those interviewed in the documentary felt let down: they did what they were told; they followed the path as laid out by parents, teachers and councillors; they volunteered; they studied hard and upon graduation the ambitious among them took jobs as servers.

One of the newly minted graduates arrived to a jobs fair with 40 resumes in hand, another paid a months rent to get a professionally designed CV worked-up.  All for nigh.

In any event a very sobering documentary about the problems facing the educated unemployed youth.  That was until they finally interviewed the economist Kevin Milligan from UBC.  In true Victorian form, Milligan’s bottom line was that however this documentary might tempt you to think something can be done for these wayward educated unemployed forget about it:  Denmark tried it in the eighties and it was a disaster.

Let us just forget about the fact the eighties and early nineties brought all kinds of ideas to the rocks of reality and let us similarly forget that Denmark is a small open economy (this will work in my favour below), what Milligan fails to do and what an economist ought to be able to do and suggest the form that public policy could take to ameliorate the situation.  But that is the rub, the mainstream of the profession takes a do nothing position as the default optimal policy stance with respect to unemployment.  As a nod to their objectivity I suppose I should say their glib nature is not particularly directed at the youth: if the 55+ cohort was suffering above average unemployment rates Milligan’s response would be FIF you too.

Ok so those are the preliminaries.  What Milligan fails to mention is that instead of admitting defeat Denmark learned from its mistakes and doubled down and developed a different strategy to combat youth unemployment.  This time they coupled income support with training and an integration of training with private sector demand.  In short they revamped both their retraining regime and welfare state institutions to match incentives and crucially demand.  So at the height of the down turn in 2009 the youth unemployment rate was fully 4% higher (12 vs 16) in Canada with an overall unemployment rate of 7.2 vs 8.6.  What does that mean? It means with some policy effort that both the general rate of unemployment and the youth rate of unemployment can be lower.  In short, instead of throwing cake, you can have your cake and eat it too.  Serious economists would do well to concentrate their efforts on making the world better rather then resting with lame ideological proclivities to leave it as is; and those of us who pay their salaries would be well advised to demand the same.

Cake just don’t cut it any more.

*In the abstract the sharpest blade would have a length but no width.  It would therefore be a line.

The insanity of Canada’s non-existent domestic labour training regime

Canada does not have nationally coordinated labour training regime. Why does this matter? Just take a look at what is going on in Alberta. There the oil patch is gearing up for record labour shortages and the federal government is pumping out temporary foreign worker permits and individual corporations are opening training centers in Mexico. The estimated labour “shortage” in Alberta ranges from 75 to 130 thousand. The highest estimate therefore is less than 1/10 of a percent of currently unemployed Canadians. Moreover the estimated demand is around 1/5 of unemployed Canadian workers who qualify for unemployment insurance.

Clearly something beyond labour supply is going on here. I can think of only two reasons a deluge of temporary worker permits is being contemplated in the context of nearly 1.5 million unemployed Canadian workers: semi skilled and skilled foreign workers are both cheaper and more pliant than Canadian workers. Oil companies simply do not want to pay the cost of retraining central and eastern Canadian workers nor make the remuneration attractive enough to convince unemployed workers to move to Northern Alberta. What is more the federal government has no appetite for robust national labour training and mobility regime. The result is that the most expedient path is the issuing of temporary foreign worker permits.