Can’t talk right now, I’m transferring energy.

You work all the time. But what is work, really? And how has that changed? In Work: A Deep History, from the Stone Age to the Age of Robots, anthropologist James Suzman digs into these questions. But whether he realizes it or not, he leaves an even bigger one to us.

The future of work is a hot topic. Automation, climate, and inequality make us wonder what’s coming down the pipe, and how to prepare. We might have to change how work works by decoupling labor from pay… difficult questions. But one thing is clear: if we are to change our conception of work, it will help to understand the one we have.

So what’s work, really?

Suzman starts at the beginning—3.5 Billion years ago. Because at its essence, he argues, work is not whatever you get paid for. It is a transfer of energy

Thanks to the law of entropy, he explains, everything in the universe tends to chaos. Life forms impose some kind of order, but creating and maintaining that order takes energy. It requires work to grow leaves or make honey or build a house. So yes, even bacteria and trees do work, despite the fact that they don’t have thoughts about it.

So, Suzman posits that the act of work has been around for a long time, but the idea of work is newer. He explains that our mastery over fire was a likely catalyst. In reducing the energy required to survive, fire gave us leisure. And that might have helped us conceive of its counterpart: work.

How has it changed?

With that energy-definition in place, Suzman talks us through work’s cultural evolution. We start with hunter gatherers: there’s a Kalahari desert tribe who still hunt large animals by chasing them down on foot, just like back in the day. They run until the animal is so dehydrated that it lays down and awaits their spear.

He points out that although such hunts are exhausting, the tribe is lounging most of the time. They conceive of the world as abundant, and have no concept of private property. You only worry about your immediate needs, which are almost always met.

With the arrival of agriculture, that’s what we lost. Because Suzman suspects that the first food surpluses also introduced the concept of scarcity. Once you have a pile of crops, that pile—unlike nature—starts and ends somewhere. And it can be said to belong to somebody.

So farming ushered in modern economics. We started thinking everything was scarce, and inequalities increased. At the same time, farmers had to wait for their crop to mature and thus needed to live on credit for much of the year. So by keeping a record of their debt we created—you guessed it—money.

After that it’s domesticated animals, machines, cities, and the industrial revolution, causing living standards to rise. Working hours rose, then fell, then rose again. Suzman takes us past Luddites, the Great Depression, JK Galbraith, and the War on Talent, all the way until the present where we continue to work a lot while AI seems to breathe down our neck.

As he sends us off, Suzman admits that we can’t go back to hunter-gathering, but hopes that we take inspiration from the tribes and broaden our understanding of work. He reminds us that scarcity and limitless needs are not inevitable truths, nor are they necessary assumptions. These are fantastic points and his detailed evolution of work is very insightful. But it’s missing a piece.

Now for the biggest question

Imagine that you decide to clean up your room, and you call Suzman in to help. He comes over and finds all kinds of junk drawers you didn’t even realize you had, and he spreads the contents all over your living room floor. Then he leaves.

He helped with a crucial step. To reorganize something, you need to know what you’ve got, and identify all the items. But to put them in a better place, you need to know what they’re for. Why did you buy the things you own? And what’s your purpose in rearranging?

To put it bluntly, Work falls short on the question of why. It’s a big book about what we’ve been doing, without much to say about what we do it for. 

To be fair, there are occasions where motives are discussed. One is when he points to a rare bird that builds very elaborate nests only to break them apart and all start over again. Similarly, some people run ultramarathons. Darwin’s survival of the fittest can’t explain it, Suzman says, so it’s probably a way to get rid of energy surpluses. 

I can’t explain the bird either. But ask any ultramarathon-runner, and I bet they’ll tell you they did it because it was a meaningful experience—not because they were sitting on the couch bouncing up and down and only 31 miles would do the trick.

The second occasion is consumer culture. Suzman cites Galbraith who points to the way advertisers exploit our relative needs, making us want to work more to buy more. This undoubtedly plays a role. And to state the obvious, many of those less affluent will do any work that can help them survive.

But is that it?

Consider your own case

Why do you do the job you have? Is it the easiest way to survive? Is it a means to get rid of surplus energy?  I doubt it. The right kind of work GIVES you energy. How does it do that? Because it’s meaningful. Why is it meaningful? Because you are able to contribute something. You are able to make a change. You are fulfilling a purpose you set for yourself. So these are the questions to ask: What’s the work out there that we think needs doing? What should work be for?

Perhaps Suzman didn’t get to these questions because there wasn’t much room for them in the past. In that case, fair enough. It may be that today’s circumstances of relative affluence and increasing levels of automation give them real relevance only now. But if we want a concept of work that we can carry forward, we can’t let ‘em drop.

And Suzman will be happy to know that there are plenty of young economists ready to do away with the assumptions of scarcity and limitless needs. But doing away with things is not enough. We need to introduce some new stuff too. And if you’re asking me, that new stuff is meaning

Now if you’ll excuse me, I’ve got some work to do •

About the Author: Heske van Doornen is Manager of the Young Scholars Initiative and co-founder of this blog. Twitter: @HeskevanDoornen

Buy the Book
Work: A Deep History, from the Stone Age to the Age of Robots Book
By James Suzman | Penguin Press (2021)


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Is the falling wage share simply a statistical phenomenon?

Economists have suggested several competing theories to explain the phenomenon of the declining wage share, as it has been falling globally for several decades. In the case of the US, two specific factors can explain a significant part of the decline:  The increase in economy-wide depreciation and the rise of imputed rents as a share of total GDP.

A number of economic studies in recent years have documented the declining wage share in many countries around the world. The wage share is the part of GDP that can be attributed to labor income (wages) and is usually assumed to fluctuate around 60% while most of the remaining part of GDP is accounted for by capital income, such as rents from housing, income from Intellectual Property Products, capital gains and stock dividends, etc.

The chart below shows that the US wage share has fallen from almost 58% two decades ago to just 53% as of today, a decline of about 5 percentage points. This phenomenon is concerning insofar as the majority of the population derives most of their income from wages whereas capital income only accounts for a small share for most people. The reason is, of course, that capital ownership tends to be highly concentrated: About 75% of the US total wealth being owned by the top 10%. While home ownership tends to be much more dispersed, it can actually vary quite significantly from country to country. In the US, the home ownership rate exceeds 60%, but it is significantly below what it was before the financial crisis when it almost hit 70%.

 


Source:BEA

There are several competing (but not mutually exclusive) hypothesis that have been put forward to explain the trend of the falling wage share. Some authors have focused on the decline of the bargaining power of labor, either as a result of eroding labor unions, or the result of globalization as a number of low-wage countries like China entered the global economy during the late 1980s.

Alternatively, some papers have suggested that monopoly power in many industries has increased, thus putting downward pressure on the wage share as markups are rising. Finally, some post-keynesian economists have emphasized increasing financialization as a possible cause.

In what follows, I will focus on yet another explanation that might explain part of the downward trend of the gross wage share. While GDP is usually defined as the sum of all the income streams in the economy, there are several categories that national statistics offices include in the GDP calculation, but technically there is no income stream flowing at all. There are two items that stand out in particular because they are quantitatively the most important: Depreciation of capital and imputed rents.   

Depreciation of physical assets is included in the GDP calculation because it is counted as a cost of production to firms. From an accounting point of view, depreciation is the allocation of cost of an asset over its useful lifespan. Since depreciation expenses can be offset against a firm’s taxable profits, firms might actually have an incentive to overstate annual depreciation expenses.

US tax law allows firms to depreciate all kinds of assets that are used in the production process, ranging from nonresidential structures to all kinds of industrial equipment, and even Intellectual Property Products (IPP). Over the last few years depreciation as a share of GDP has increased mostly as a result of two factors.

First, more and more companies increasingly rely on modern technologies that tend to depreciate at a fairly rapid pace. Equipment like computers, smartphones, software, etc. tend to become obsolete within just a couple of years: According to the BEA, each of these items has a lifespan of only two to three years when it must be replaced. Compare this with other industrial equipment, which has an average lifespan of half a decade at least, with non-residential structures easily approaching a lifespan of two decades.

Second, US corporations have produced an increasing amount of intangible products in recent decades (IPP). This could be a patent, for example, which is basically a monopoly right granted by the government for a specified time period, usually 20 years in the US. As companies can depreciate all cost expenses of their patent over its useful or legal life, companies might also have an incentive to overstate their expenses because they can be offset against their tax liabilities. As the share of intangible assets has increased significantly over the last few years, so have depreciation expenses caused by the production of IPP.

The chart below shows that depreciation as a share of GDP has increased from about 6% in the postwar period to almost 13% as of today and this significant rise can account to some extent for the decline in the gross wage share. Most of the increase in depreciation can be explained by the rise of modern technologies, which tend to have a significantly lower lifespan and thus become obsolete much more quickly, as well as the increasing importance of IPP in today’s economy.

 


Source:
BEA


The second large item that might have put downward pressure on the wage share is the increase in the rent share of GDP. In the case of the US, it is mostly 
imputed rents, the rent-equivalent a house owner would pay to himself in rent, that have risen significantly.

 


Source:
BEA

 

Imputed rents are included in the GDP statistics even though there is technically no income stream flowing to anyone because otherwise a country that consists for the most part of renters (like Germany) would have an “inflated” GDP figure. Consider two countries, A and B, which are equal in every aspect with one single exception. Let’s say that in country A, I live in your house and pay rent to you and you live in my house and pay rent to me, whereas in country B we both live in our own houses. If we exclude imputed rents, country A would have higher GDP than country B simply because we pay rent to each other even though the two countries are equally productive (by assumption). Imputed rents are obviously derived from the value of the underlying dwelling.

As most advanced economies have experienced spectacular house price appreciations over the last couple of decades, mostly a result of supply-side restrictions rather than “speculative bubbles”, imputed rents surely have increased more or less in tandem. In the case of the US, imputed rents have actually surged from about 6% of GDP in the 1960s to about 8% of GDP as of today. The increase in the rent share of GDP, mostly a result of rising house prices being accompanied by increasing imputed rents, thus also puts some downward pressure on the gross wage share.

 

Source: Jorda, Schularick and Taylor (2016) Macrohistory database

 

We have therefore two items, economy-wide depreciation as well as imputed rents, which account for an increasingly large share of total GDP despite the fact that both categories actually do not represent any income streams in the classical sense.

It is exactly for that reason that some economists have argued that from an inequality point of view we should rather focus on the net wage share, meaning net of depreciation. Furthermore, as I have explained above, there is an argument to be made that such a net measure should also net out imputed rents (and potentially other imputed income streams that are included in the GDP calculations), thus focusing entirely on actual income streams instead. Doing so cancels out most but not all of the downward movement of the wage share one can observe across countries in recent decades. For the US, the graph below shows that the “net wage share”, adjusted for depreciation and imputed rents, is not significantly lower today than what it was from the late 1960s onwards.

 


Source:
FRED

 

About the Author: Julius Probst is a Phd student at the Economic History department of Lund University in Sweden. His main research area is long-term economic growth with a special focus on economic geography.

 

There Is No Such Thing As Low-Wage Competitiveness

By Daniel Olah and Viktor Varpalotai. 

An old myth

Moderate labor costs serve as the basis for the international economic success of a country – this has been the approach favored by policymakers and academicians since the eighties. Still today, most analyses and definitions of competitiveness refer primarily to cost and price factors since these are easy to measure. If you keep your wages down, foreign capital will find you – as the overly simplistic approach suggests, which is a very dangerous narrative.

Countries on the peripheries of the richer Western economies often tried to follow this path and it may indeed have been a crucial step towards attracting the much needed capital inflow into developing economies. Think of post-socialist countries which had to achieve what no one managed to do before: to transform their economies from a centrally planned one into a well-functioning market economy in just a few years without an adequate amount of capital, savings, technology, and know-how. A typical win-win situation: developing countries were offered a chance to integrate into global value chains, while companies outsourced production processes with low added value into these economies.

But there is a crucial problem with that: this is just the first period of childhood. To say so, the role of a low-wage model in an economy is similar to that of parents in human life: it is difficult to grow up without them in a healthy way, but once you are an adult you have to realize that you need to live your own life. This means commitment and efforts to move out from the parental nest. Although the low-wage model may be needed to grow up and acquire the potential for an own future life, every economy should move on. But this depends on willingness and ability as well since nothing comes for free. Becoming a successful adult is the most challenging transformation of our lives.

This story is exactly about being able to overcome the low-wage model. When the economy is growing in its childhood period it is key for economic development, but once it turns 18 it suddenly becomes an obstacle to it. The low-wage model conserves inefficient production methods and means no incentive for companies to innovate and invest in the future. A low-wage model is never truly competitive in the long-term: it is a necessary evil in the development process. Nicholas Kaldor already showed this decades ago.


It’s nothing new: Nicholas Kaldor already said that

Kaldor, the famous Hungarian economist of Cambridge University, claimed in 1978 that countries with the most dynamic economic growth tended to record the fastest growth in labor costs as well. The renown “Kaldor-paradox” may be confusing for policymakers influenced by the neoclassical mainstream. It tells us that keeping costs low may not lead to competitive advantages and faster economic growth. So let’s resurrect the Kaldorian ideas and see whether the relationship has changed at all (hint: it has not).

An Econ 101 course would tell us that there is no causality here, and it’s true. But another thing is valid as well: that average annual real GDP growth and the annual growth of unit labor costs per person employed are not negatively related in developed countries.

But let’s examine an even better measure, the export share of an economy, which is the best indicator to grasp export competitiveness in an international context. It shows us that in the case of OECD countries it is hard to find a negative relationship between unit labor costs and export market shares. (If we created two groups of OECD countries based on GDP per capita in international dollars we would find no relationship in case of the richer but strong positive relationship for the poorer countries.)


Increasing labor costs: a sign of economic success?

In fact, outside the pure neoclassical framework, the Kaldor-paradox is not a paradox anymore. A wide literature suggests that increasing real wages result in higher productivity: better quality of customer service, lower incidence of absences and higher discipline inside companies. Corporations gain on increasing labor productivity thanks to better housing, nutrition and education opportunities for workers. It is no coincidence that increasing wages improve mental performance and self-discipline as well (Wolfers & Zilinsky, 2015).

As for the companies, a main mechanism for adapting to increasing wages is to improve management and production processes and bring forward new investments. What is more: the often extremely large costs of fluctuation and that of recruiting workers may also be greatly reduced. And finally, the most important aspect: the increase of wages result in greater capacity utilization on the supply side, which results in growing capital stock in the economy (Palley, 2017). Could the Kaldor-paradox imply that most of the examined countries are wage-led (or demand-led) economies?

Several empirical results validate that export-competitiveness is nothing to do with depressed labor costs. Fagerberg (1988) analyzed 15 OECD countries between 1961 and 1983 – more thoroughly than this article does – and found the same results. He states that technological and capacity factors are the primary determinants of export competitiveness instead of prices. Fagerberg (1988) argues that the Japanese export successes are due to technology, capacity, and investments while the US and the UK lost market shares because they allocated resources from investing into production capabilities towards the military.

Storm and Nasteepad (2014) argues that the German recovery from the crisis is not primarily due to depressed wages but to corporatist economic policy, the key reason which focuses shared attention of capital, labor and government towards the development of industry and technology. As for Central-Europe, the case is the same: Bierut and Kuziemska-Pawlak (2016) finds that the doubling of Central-European export share is due to technology and institutions, and not due the cost of labor. In fact, unprecedented wage growth and dynamic export increases go hand in hand in many Central European countries nowadays.

And if we consider the new approach to competitiveness by Harvard-researchers then we come to the conclusion that economic complexity instead of wages is the key driver of future economic and export growth. Their competitiveness ranking seems much different from the traditional measure of the World Economic Forum, having the Czech Republic, Slovenia, Hungary and the Slovak Republic among the first 15 countries in the world. This shows that peripheric countries of the developed West may become deeply embedded in global value chains, becoming more and more organically complex and this complexity of their economic ecosystem has the potential for future growth – even despite forty years of communism.

This evidence shows that policymakers should be careful and conscious. Economic relationships or the adequate economic policy approaches may change faster than we think. Economies are just like children: they grow up so fast that we hardly notice it. That is what the stickiness of theories is about.

 

About the authors:

Daniel Olah is an Economics editor, writer and PhD student.

Viktor Varpalotai is the Deputy Head of Macroeconomic Policy Department at the Ministry of Finance, Hungary.

Reimagining “Right-to-Work”

“Everyone has the right to work, to free choice of employment, to just and favorable conditions of work and to protection against unemployment.” This is Article 23 of the Universal Declaration of Human Rights declared by the UN in 1948. It sounds like a pretty good right to me. I recently learned that in America, we have some states with “right-to-work” laws. That dumbfounded me. Why did unemployment exist in those states if they had a right to work?

It only took a few minutes of research to find out that the “right-to-work” laws some states have are nothing like the fundamental human right. What these laws actually do is defend a worker’s right not to be required to join a labor union to work at a company. This “right-to-work” doesn’t allow more choice, it allows less. Where’s the option to have a union that doesn’t allow freeriders? If you don’t want union benefits, you can work for a company without a union. You still have your choice, but this law has destroyed mine. These laws really promote the right to work for less money, the right to work at a business with a racist union, the right to destroy what unions could and should stand for.

Research from the Economic Policy Institute shows that states with “right-to-work” laws have hurt unionization rates, and hurt the power of unions that do exist. In such states 7% of workers are represented by a union contract, versus 17% in non “right-to-work” states. Wages are lower in states with these laws in place, which makes sense as unions allow collective bargaining for better wages. Nationally, unionized workers are making 27% more than non-unionized workers. “Right-to-work” has been a disaster for the labor movement, those who historically have won us better pay for shorter hours and better working conditions. Those who won us the weekend. Those who won women the right to vote. Those who won us the 8 hour work day.

To reinvent the labor movement we have a lot of ground to cover. One way to start would be with reimagining the “right-to-work” to be much more like the fundamental human right envisioned by the UN in 1948. This actual Right to Work, a Job Guarantee, would transform the labor market. It’d be up to communities to decide what jobs to guarantee as they see fit, but surely our communities could come up with something better than a new fast food joint. If you’re guaranteed a job serving your community, wages will go up across the board, as entry-level workers get real choice. Capitalists would be forced to make burger flipping more attractive than planting trees.

The real human right to work would mean you could quit working for your abusive boss and cross the street and get hired. We could make job guarantee jobs come with awesome benefit plans, that capitalists are forced to match. We could have contracts with our employers that require “just cause” to be fired, rather than the uneven “at-will” employment contracts we all toil under today. We could have unions that represent all of the workers in our businesses rather than just a small subset. It’s going to take a lot of work to get there, but coalescing around a shared demand, a good job for everyone, is a great start.

We can see the work that needs to be done. We need care workers to serve our aging population. We need police officers that actually serve our communities. We need solar panels harnessing the free energy of the sun. We need to capture the carbon capitalists have polluted the environment with. We need affordable housing so we don’t have people living on the streets. We need the right to build these things together, including everyone willing and able. We need to take care of those who aren’t able, for whatever reason. If we reimagine a true right to work, the unimaginable becomes possible.

Why You’re Not Getting a Raise

By Nikos Bourtzis.

 

Much of the developed world has experienced stubbornly low real wage growth since the financial crisis of 2007. Currently, the British people are seeing their earnings decline in real terms. Even in Germany, where unemployment keeps falling to record lows, wage growth is stagnating. This phenomenon has squeezed living standards and has been one of the main culprits behind the rise of anti-establishment movements. Faster pay rises are desperately needed for the global recovery to accelerate and for ordinary people to actually be a part of it. This piece explains why rising labor compensation has been relatively minuscule during the current economic upturn and how this phenomenon could be remedied.

A bit of history

The lack of meaningful pay rises is not a phenomenon that started with the financial crisis of 2007. It can be traced back to the 1970s and 1980s, when monetarism started sweeping into academia and politics. The stagflation of the 1970s, the simultaneous rise of inflation and unemployment, led some governments to abandon the Keynesian policies of the past because apparently these policies could not deal with the stagflation. Monetary policy became the preferred tool to control inflation, together with a revived notion that markets, if left to their own devices, would bring the best social outcomes. The Thatcher and Reagan governments are some of the most famous examples of States adopting and implementing these beliefs. The first institution targeted for deregulation was the labor market. Wages increases were frozen and employment protection was scaled back, because it was believed that demand and supply forces would restore full employment. However, unemployment in the UK exploded after Thatcher came into office in 1980, increasing  to over 10% and never returning to its post-World War II lows of between 1% and 2%.

Labor unions are one of the most important institutions regarding pay rises. In most industrial countries, they are responsible for wage and working conditions negotiations between employers and employees. Union membership in OECD countries grew until the mid-1970s but then started dropping. With the rise of neoliberal governments in the West, organized labor came under attack. Under the free-market ideology, unions disrupt economic activity with strikes and demand higher-than-optimal wages. Thus, their power needed to be kept in check. What is more important, though, is the shifting of ideas in what the goals of the State should be. In the post-War period, an expressed purpose of governments was to keep aggregate demand at full employment levels. The UK government, for example, stated full employment as its purpose after the War in its Economic Policy White Paper in 1944. That goal changed with the rise of neoliberalism.

When the commitment to keep employment levels high and stable was abandoned, and labor markets were deregulated, unemployment spiked in most countries and has never fallen at levels where it can be stated that full employment exists. Even during strong upturns unemployment levels in most countries did not dip below 4%. As a result, labor unions, and workers in general have lost their biggest bargaining chip. When there is full employment, and thus jobs are abundant, workers have more power to demand higher wages and better working conditions. With the neoliberal policies of the Reagan administration, real wages in the US got decoupled from productivity, meaning that workers stopped receiving their fair share of the output produced. The same phenomenon has been observed in many other industrialized countries, such as the UK. The policies introduced in the 1980s were pretty much sustained and expanded up until 2008.

 

The Financial Crisis: A turn for the worse

The situation became even worse after the financial crisis erupted. For example, in both the US and the UK the growth of wages slowed even more, as shown in the following figure, even as the headline unemployment returned to pre-crisis levels.

Moving towards a low headline unemployment rate, though, does not mean full employment is being achieved. In the US, the U-6 measure of the unemployment rate, which adds the underemployed to the headline rate, shows that the real unemployment rate is at 8.6%. Far from full employment! In the UK, it has been reported by the Office for National Statistics that the number of people employed in zero-hour contracts has risen by 400% since 2000 but most of the rise happened after the financial crisis. Thus, the employment situation is worse than before the crisis which leads to a further decline in wage growth.

 

Why is high wage growth important for the recovery?

It is essential to point out that one of the main reasons the current economic recovery has been weak is low wage growth. Wage income is the main propeller of consumer spending, which accounts for more than 60% of GDP in industrialized countries. Low wage growth means low consumer spending, thus low GDP growth and employment. Currently, households are borrowing to keep their living standards stable and that is what’s keeping consumer spending going. This process, though, is unsustainable and will not last long. When households cannot afford to borrow anymore another financial crisis will almost certainly occur. That’s why governments need to do everything in their power to restore wage growth.

What can be done?

The power of organized labor has been decimated since the 1980s. If workers cannot actually have a say in what happens in the workplace then they cannot fight for fair wages. This is why unions need to be strengthened and supported by governments. Employers should be forced to negotiate wages through collective bargaining and union coverage should be expanded above the current 50% OECD average. This will level the playing field between powerful employers and the currently weak labor class.

As mentioned before, productivity and real wages have been delinked since the 1980s. That’s where the minimum wage could potentially help. In the US, the real minimum wage fell after 1980 and has stayed relatively flat since then. With the liberalization “mania” sweeping the western world, governments are freezing public sector pay rises and Greece even cut the minimum wage in the name of restoring public finances and growth. That’s the exact opposite of what should be done to restore growth. Wages drive consumption and growth, cutting them can only depress the economy. Hiking the minimum wage will help sustain consumption based on wages, employment growth and, thus, wage growth.

A sure way to speed up wage growth again is fiscal stimulus. Government spending lifts aggregate demand directly and effectively. If enough spending is injected into the economy, it will create enough jobs to bring full employment. The momentum and labor scarcity created by the stimulus will force wages up and give workers and labor unions more bargaining power. A Job Guarantee Program, if ever implemented, would effectively set a wage floor in the economy, since any person working at a lower wage than the Job Guarantee offers will be given work in the public sector.

The “curse” of low wage growth is not something new and it definitely got exacerbated with the financial crisis. Even though unemployment is currently falling in many countries, it is still way above full employment levels. With workers’ rights under attack for some time now, unions do not have the power they once did to promote strong pay growth. If the current recovery is to accelerate, and for ordinary people to participate in it, wage growth has to rise substantially. The only way to do this is for labor unions to be strengthened and governments to once again commit to full employment.

About the Author
Nikos Bourtzis is from Greece and recently graduated with a Bachelor in Economics from Tilburg University in the Netherlands. He will be pursuing a Master in Economics and Economic analysis at Groningen University. Research interests are heterodox macroeconomics, anti-cyclical policies, income inequality, and financial instability.

Employ Young Americans Now: Beyond Education

Over forty years ago, President Lyndon B. Johnson declared a “War on Poverty” in his state of the union address. This war emphasized education as the remedy to America’s economic hardships. Critics, like Hyman Minsky, worried from the beginning that this would not be enough. As explained in some of his writings collected in Ending Poverty: Jobs Not Welfare, Minsky believed that without a focus on providing jobs the war would end in failure. In 2016 it is  hard to say the poverty situation in America has improved drastically. Inequality has gotten worse, the minimum wage has stagnated, and food and health care prices have risen faster than inflation. I argue in my master’s thesis that while education has been shown to improve individual employment chances at higher wages, it is a fallacy of composition to assume those results can apply for everyone.

Trying to push all of our youth through high school will not guarantee them jobs, especially in today’s economy where we are far from tight labor markets. Minsky argued that programs should be designed which hold the promise of a useful and productive life for our high school dropouts. In my view, this would help students learn different skills that can’t be acquired sitting at a desk. Perhaps even more importantly, having an income would enable many students to either stay in or return to school, as requiring a student to forgo an income for four to eight years is just not realistic for many families living in poverty. College graduates are competing for jobs that do not require college educations. Our youth needs a more comprehensive “War on Poverty” than a focus on receiving a formal education.  

14212114_10210003402663742_2076273988545782318_n
Illustration: Heske van Doornen

Senator Bernie Sanders and Representative John Conyers have introduced the bill Employ Young Americans Now, which would provide $5.5 billion in funding to create jobs for disadvantaged youth. This seems like a better solution for our youth living in poverty. Employment is connected with a slew of benefits that education and welfare have not provided. Employment is shown to reduce incidence of mental illness, reduce criminal activity, and it allows production of useful goods and services. In my thesis I modeled EYAN and demonstrated that it will provide 500,000 jobs to young disadvantaged youth. This gives a young person a job in 11% of families with unemployed disadvantaged youth. My results suggest that if the bill were expanded 10x, we could provide a job for every young person living in poverty at a cost of $50 billion.

One issue with EYAN is finding jobs suitable for young Americans that do not yet have high school degrees. One possibility is to pay EYAN participants for raising young children in their families, since this is a responsibility that already exists for many youth living in families in poverty. Early childhood education has been shown to have great returns. Another prospect would be something along environmental lines. In the National Youth Administration as a part of Roosevelt’s New Deal he had youth plant trees, forming his “Tree Army.” This is another job that any able bodied youth can do. Jobs offered by EYAN do not necessarily have to be profitable jobs. The bill specifies that they could help the nonprofit sector with jobs volunteers are already doing for free. The nice part about this bill is that it allows local communities to determine who to hire and what type of jobs to do, as Minsky foresaw for a Job Guarantee program. That is, it is federally funded but locally administered. It would thus be up to individual communities to determine how they can best be benefited.

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In a previous article I have discussed the role that college should be playing in today’s workforce and how education, as it is currently administered, has actually increased racial and class inequalities. In tight labor markets racial inequality has been shown to decrease, while with loose labor markets we have seen racial discrimination get worse. Economist Sandy Darity has shown that job prospects for black high school graduates are worse than for white high school dropouts. As I have discussed earlier, expanding the education system fails to provide income for all of our youth, and it does not payoff the same for those from low income families. Automation is on the rise, and business does not have enough demand to justify hiring more workers. We can thus not rely on the private sector to get us to full employment, and should push our legislators to create more local public jobs. While we can probably expect a huge infrastructure bill with our next president, if it’s anything like the American Recovery and Reinvestment Act it is unlikely this will help out low skill workers. With proper targeting, EYAN could hire 22% of our high school dropouts nationwide. This is why I believe in this type of policy, and would love to make it happen.

Reducing poverty and inequality will be hard, but I think a new focus on employment beyond education is the right way to do it. Argentina has had a direct government job creation program, Jefes y Jefas, which was modeled after Minsky’s ELR proposal and showed a lot of promise. It is therefore reasonable to see how such a program would work within the States, and EYAN offers us this chance. I wish I knew how to get it through Congress.

This post is an adaptation of my master’s thesis, and you can find the whole argument here. Comments and feedback are appreciated.

State of the Unions in the US Economy

Debates about the disappearance of the middle class and the lack of opportunities for the majority of Americans have been at the forefront of the 2016 presidential election. However, discourse surrounding unions and ways to increase the bargaining power of workers are often overlooked in these discussions.

Illustration: Heske van Doornen

These are integral components of the issue that could enhance the current economic climate for the middle class, and especially benefit low-wage, minority, and immigrant workers. Without unions, employees can be fired at-will in most states and have no collective leverage to negotiate with employers over their most basic terms and conditions. There are almost 15 million union workers across the country who have these rights, and therefore benefit considerably from better wages and working conditions. Here are four ways unions make a difference.

1. Unions benefit workers—especially women and minorities—through the union wage premium,according to data from the Current Population Survey.

  • Collective bargaining gives union members wage advantages over nonunion workers, despite holding the same jobs and sharing similar characteristics (e.g. education level, age, race, gender). This is called a union wage premium. On average, union members commanded a 26 percent wage premium in 2015.
  • Women tend to have considerably higher union wage premiums than men. In 2015, they made about 33 percent more than their nonunion counterparts, on average, while the union wage premium for men was approximately 17 percent. Unions are also offering another advantage through helping to close the gender pay gap.
  • Minorities have also shown to have better economic outcomes when they belong to unions. As of 2015, average Hispanic full-time workers’ weekly earnings were 47 percent higher when they were part of a union. The typical African-American worker received a 30 percent union wage premium.

2. Unions not only push for higher wages, but their members also tend to obtain more comprehensive benefits. According to the U.S. Bureau of Labor Statistics, union workers are more likely to have access to health insurance, as well as have retirement plans and paid sick leave.

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  •  This is especially important for immigrant workers and employees in low-wage jobs. The Center for Economic Policy Research (CEPR) finds that immigrant workers who are union members have close to a 50 percent higher chance of having employer-provided health insurance, and twice the probability of having a retirement plan. Union workers in low-paying jobs have a 25 percent higher probability of having these benefits.

3. Unions fight to maintain an equitable distribution of income among employers and workers.

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  • It is no coincidence that the percent of income going to the top percent of earners has increased while union membership has declined. The erosion of collective bargain reduces the share of income going to American families in the middle of the income distribution—not only union members. That is because unions pull millions of non-union Americans into the middle class by setting higher compensation standards that push everyone’s wages up. The decline of the middle class is, therefore, directly related to the decline in the density of unions.
  • The shrinking middle class has resulted in less spending money for many American families. Considering that household consumption is the main engine of our economy—accounting for around 70 percent of GDP—when the majority of workers can’t afford to spend the economy stagnates. Thus, contrary to popular opinion, unions do not impede economic growth when they fight for labor to receive its fair share of income, they are actually necessary to maintain a strong economy.

4. Unions are crucial for democracy.

  • As a recent Century Foundation report explains, unions serve as counterbalancing influences to arbitrary government powers. They function as “schools of democracy” for workers and help maintain a public education system that fosters democratic values. For example, the Milwaukee Teachers’ Education Associationsuccessfully advocated to revitalize the school curriculum to include issues surrounding civic engagement. Unions also represent one of the largest forms of an organized voice for low and moderate income Americans. In short, strong unions could ensure that society does not become governed by a small number of wealthy individuals.

So Why Are Union Membership Rates So Low?

Although there is overwhelming data showing the benefits of unions, they are battling to maintain their crucial foothold in the economy, especially in the private sector.

According to data from the Current Population Survey, unions remain strong in the public sector, with more than one-third of employees identifying as union members. Not surprisingly, the public sector employs more minorities and provides more equal wages than the private sector. The professions with the strongest unions include teachers, police officers, and firefighters.

However, workers in the private sector are over five times less likely to participate in unions, with membership rates down to 6.7 percent.

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The decline in union participation in the private sector has dragged down the total union membership rate. However, thanks to strong public sector unions, the rate of decline has stagnated in recent years, remaining at 11.1 percent since 2014.

Among states, New York has had the highest percent of union members with 24.7 percent in 2015. South Carolina has been on the other end of the stick, with only 2.1 percent of full-time workers belonging to a union. Examining the breakdown of union workers by state reflects the impact unions can have on lifting the wage floor for all citizens. States with higher union density tend to have a higherminimum wage for union and nonunion workers alike.

Even though polls show that close to 60 percent of workers see unions favorably, structural barriers have been holding back organizations from embracing unions.

The election process to establish a union, governed by federal law (National Labor Relations Act), puts major barriers in place for workers who want to become members. Even when workers want to be part of a union, they are typically harassed and can find themselves illegally fired. The National Labor Relations Board (NLRB) maintains that workers have the right to “form, join or assist a union.” However, the CEPR found there has been a steep rise in illegal firings of pro-union workers in the 2000s compared to the previous decade. Employers have a variety of unfair labor tactics they have used in union organizing drives—like hiring anti-union consultants (a $4 billion-a-year industry) or spying on their workers. However, minimal penalties and slow enforcement disincentivize companies from following the law. For example, two of the biggest employers in the U.S.—McDonald’s and Walmart—have been targets of such lawsuits but have rarely faced significant enough repercussions to dissuade them from continuing to employ these practices.

Another obstacle to establishing unions have been the Right-to-Work (RTW) laws, which are estimated to reduce union membership rates by 8.8-9.6 percent. With the addition of Wisconsin and West Virginia in the past two years, twenty-six states now have RTW laws. Under RTW state laws, companies can’t lawfully agree to agency shop, which allows workers to receive benefits secured by unions without contributing to cover collective bargain costs. The lack of agency shop cripples unions, and dissuades those interested in organizing drives.

Proponents of RTW argue these laws foster economic growth by raising competitiveness and attracting more business into their states. However, these laws promote economic growth by supplying their citizens labor at the cheapest price, instead of promoting and creating higher wage jobs. Workers in RTW states, which are most common in the South, are estimated to make $1,558 less per year, on average.

How Are Unions Responding?

Unions and their allies are developing new strategies to overcome these challenges and build alternative forms of workers bargaining.

A first priority has been strengthening labor laws and access to unions. Promising developments include the WAGE Act introduced last year that would extend civil rights laws to workers in unions. And, an emboldened National Labor Relations Act has put in place new rules to make elections faster and to make it easier to organize workplaces, like McDonald’s, that are jointly owned by a main company and numerous franchise.

In response to the limitations of firm-by-firm bargaining, unions are mounting cross-industry, cross-state campaigns to uplift the working conditions of all workers. The Fight for $15 movement is bringing together thousands of workers to demand a $15 minimum wage,which has already been implemented for workers in Seattle,New York, and California.

Unions are also partnering with alternative labor organizations, like workers centers, to provide support to workers—mainly people of color, immigrants, and low-wage workers but also those in the patchwork economy—that do not have access to union
representation.

By Oscar Valdes-Viera
Illustration by Heske van Doornen

This piece was originally published (here) by The Century Foundation in New York.