Job Insurance – Labor Market Power for the Majority (plus a review of the Jobs Bill)

In Budget Politics, Economic Planning, Economics, Financial Crisis, Full Employment, Inequality, Living Wage, New Deal, Politics of Policy, Public Policy, Public Sector, Public Works, Social Democracy, Social Policy, Welfare State, WPA on December 22, 2009 at 2:24 am


(For previous parts in the series, see here)

As is the case with any form of social insurance, one basic question that has to be answered is why, besides the motive of wanting ones-self  to be protected, people who are unlikely to need a program like Job Insurance should support the program? Beyond the moral and ideological issue that one should support measures that help people in need and that redistribution makes a society more just, there is actually a practical reason why the roughly 80% of the workforce who are employed should support Job Insurance.

And the reason is labor market power. Between 2000 and 2008, despite several years of steady growth and nominally low unemployment, the median income of wage workers shrank, with declines being most prominently felt among the working class, because even employed workers lack labor market power.

Recap of the Jobs Bill:

Before I go further, I want to take a second to examine the House’s newest jobs bill, if for no other reason that it’s important to remind ourselves how far we have to go between what is described in the Job Insurance series and what can pass through Congress today. To begin with, the fact that the Congress has passed a jobs bill is a significant symbolic step. The last time that Congress attempted to enact jobs legislation was in the 1970s, when it passed the Humphrey-Hawkins Act and CETA; through the 1980s, Reaganism dictated that government intervention in the jobs market was big-government liberalism at its worst, and the most that needed to be done was jobs training. After the 1992 election, Clinton’s limited proposals for public works was jettisoned in favor of balancing the budget. In the Obama administration, we’re seeing a much more active stance which, as frustratingly compromised as it is, is miles beyond the status quo of the previous decade, where tax cuts were deemed the only acceptable form of economic policy. What makes the jobs bill different from (and in some ways more significant than) the stimulus is that, at a time when the recession has ended, the government is taking the position that high unemployment rates are politically unacceptable – and that the government has both the capacity and obligation to do something about it.

So what does the jobs bill consist of? Well, in many ways it follows the same logic as the progressives’ preferred version of the original stimulus bill, focusing on infrastructure (i.e, public works) projects, support for state governments to prevent public-sector layoffs, and increased spending on the social safety net:

  • Public Works ($48 billion): includes $27.5 billion for highways, $8.5 billion for mass transit, $4 billion for school renovations, and smaller grants for the Housing Trust Fund, public housing, energy innovation, the Army Corps of Engineers, Clean Water, airports, and Amtrak. The vast bulk of this money will go out as traditional public works, but it’s all laudable stuff, and the housing and school renovation funding should go into effect relatively quickly.
  • Public Sector Protection ($26 billion): includes $23 billion to keep teachers working (which Pelosi tried but failed to get in the first stimulus), smaller grants to keep police, fire, and parks and forestry workers employed, as well as funds for college work-study jobs, summer youth employment, Americorps, and jobs training. Here we see where traditional Keynesianism begins to blend into direct job provision. While most of this money is defensive in nature, trying to prevent future layoffs, the money for college work-study and summer youth employment directly links back to the National Youth Administration of the New Deal. The emphasis on Americorps and jobs training is less appealing, because training is a really ineffective way of lowering unemployment that deliberately ignores the supply of jobs and because volunteer stipends aren’t really adequate paychecks.
  • Social Safety Net ($79 billion): includes $41 billion for UI extensions, $12.3 billion for COBRA extensions, as well as smaller grants for the Child Care Tax Credit and other anti-poverty programs. On one level, there’s something a bit perverse about passing a jobs bill that spends the bulk of its funds on keeping unemployed people from starving. On the other hand, it is absolutely vital both on humanitarian and economic grounds to ensure that millions of unemployed workers do not become suddenly destitute when their social insurance runs out. Moreover, it’s also true that all of this money will be immediately spent in full by unemployed workers and their families, and will have a strong Keynesian effect – indeed, UI spending is among the most effective stimulus out there, due to the higher marginal propensity to consume of unemployed workers.

While this is all to the good, and represents an impressive step back towards what the stimulus should have been, it’s also important to note that direct job creation is extremely limited in this bill. Public works and “automatic stabilizers” remain the dominant form of job creation even within the center-left, and the most direct item in this bill amounts to about a half-million jobs for young people.

Broken Links:

Back to the issue of labor market power.

Neoclassical economists as a tribe do not like having to deal with equality, believing that it interferes with the higher-order goal of efficiency. To that end, it’s hardly uncommon to see economists argue that productivity is the major driving force behind wages, and that if liberals really want to increase the lot of the working class, that they should stop their advocacy for inefficiency creating minimum wages or unions and focus on productivity. The argument here is that we can and should ignore distributional equality in favor of productivity, since increasing productivity will drive economic growth, and “growing the pie” will ensure that living standards will rise for the working class, even though their relative share won’t change.

And yet, in the last decade, we’ve seen empirical evidence that this is no longer happening in the American workforce. Productivity has grown steadily, unemployment has been relatively low, and yet wages have flatlined. The passing-on of the benefits of productivity hasn’t happened; instead the fruits of ever more efficient labor are being entirely captured by the richest Americans. This is a problem on two levels: on a moral level, it’s wrong that workers are being asked to work harder than ever and then not getting anything close to a fair share of their added labor; and on an economic level, it’s creating a structural weakness in our economy, whereby wages are not keeping up with production, such that increasing debt is required simply to clear the market. Thus, as was the case in 2007, when a credit crunch hits, consumption takes a nosedive, because workers can’t afford even to maintain their current standard of living on their own salaries.

A truly enormous amount of ink has been spilled spinning why this is the case. The major neoclassical argument is that some vague change in the economic structure – some point to a post-industrial shift to a “knowledge” economy, others to the effects of “technology” – has privileged workers with higher education or some related form of merit. The problem with this is that the median income for college graduates has declined since 2000 (male college graduates have lost $3900 a year, female graduates only $500 a year), and is currently below its 1985 level – such that college graduates have actually lost ground in the last 25 years. Moreover, this answer would hardly explain why those few who have seen steady economic gains have seen such high degrees of stratification, with the top 1% doing better than the top 10%, and the top .1% doing better than the top 1%, and so on. After all, within the top 1%, virtually everyone in that group has been to an elite university, and probably holds an advanced degree – so, given this equal level of elite education, what then explains why some people in that group are wealthy and others are megawealthy?

Opponents to the neoclassical explanation have cited many factors that they think are driving this combination of stagnation for the masses and ever-increasing wealth for the few: offshoring, outsourcing, and free trade is the answer for some, others emphasize the decline of industry or unions. Rather than getting sucked back into the trade wars, I think it’s important to notice that the key factor in all of these explanations is that the outcome is a decline in labor market power on the part of workers. Both in terms of the transnational labor market, where employers are using outsourcing and offshoring to seek out any part of the globe with lower labor costs (interestingly, a recent article has pointed out that urban Indians are beginning to lose their call center jobs to rural Indians, suggesting that the process will not stop with cross-national transfers of employment, and that employers will continue to look for ever-cheaper wage rates), and in the domestic market, where employers are keeping labor costs down at all costs, including over-firing in recessions, being deliberately slow to re-hire in recoveries, attempting as much as possible to meet their labor force needs with increased productivity, and the increasing reliance on a casualized workforce of part-time, temporary, and “independent contractor” workers. To me, this suggests that focusing on the international aspect of this process would be of limited value – the same process would continue inside the United States, as employers cultivate our “internal global South.”

What this means is that even when unemployment is low and the labor market is relatively tight, workers are too uncertain of their job security to demand the wage increases their increased productivity has earned. Without a countervailing force similar to the American labor movement back in the day when a 35% unionization rate meant that union wage increases percolated outwards to non-union workers, this state of affairs is unlikely to change.

The 80% and the 20%:

Here’s where the advantage of Job Insurance begins to show. For the unemployed, Job Insurance represents a wage income that can get them back on their feet; but for the employed, a permanently lower unemployment rate means the creation of a countervailing force that should increase wages. Keep in mind that even in the 1990s, the U6 measure of unemployment never dropped below 7%, reflecting the hidden weakness in the American labor market discussed above.

Source: Bureau of Labor Statistics,

By creating a permanently lower unemployment rate, the majority of workers with jobs gain increased labor market power in negotiating with their employers. With fewer available workers, the already-employed would be less fearful of being terminated for asking for a pay increase; likewise, with fewer competitors for each job, workers have less of an incentive to accept employers’ wage dictates without negotiation. That would be the case regardless of whether the lower unemployment rate was the result of private sector or public sector hiring.

The advantage of creating a Job Insurance system is that, similar to the public option, a public employer would be able to act as a yardstick employer, free from the incentive to obey informal employers agreements on wage levels, or the incentive to maximize short-term profit rates and the expense of all else. A Job Insurance system would thereby prevent the functioning of any labor market mono- or oligo-psony (a situation in which a single or a few employers dominate a labor market and are able to set wages at a sub-market level), especially in the low end of the labor market where workers have the least amount of leverage.

A third dimension where Job Insurance would benefit the already-employed is straight out of Keynes: as Job Insurance workers leave the unemployment lines and pick up their paychecks, their consumer spending will increase. With an increased number of consumers spending at higher incomes, retailers (and eventually the manufacturers who supply them, the transportation workers who ship their orders, the service workers who provide business and other services, and the wider economy) will find increased profits, which should mean at the margin more jobs and increasing wages.

Thus, one of the major effects of a Job Insurance system should be to see stronger wage growth among the roughly 80% of the workforce who are currently employed, a compelling practical reason for them to support such a program.

  1. […] reduce one’s potential for advancement in life, or that would give ordinary workers the leverage needed to establish a broadly shared middle class and the mobility that comes with that status. […]

  2. […] The right to a job ultimately requires the government to act as an Employer of Last Resort, directly hiring the unemployed and competing with the private sector as an employer of workers and a producer of goods and services. Not only would the right to a job therefore envision the end of unemployment, but it would also end the monopsony (a single purchaser – in this case of labor – as compared to “monopoly,” a single seller) position of employers. This would also work to diminish the disciplinary powers of employers, creating a countervailing force in support of workers. […]

  3. […] jobs for the unemployed and thus a generally lower unemployment rate will help on the wage front as well, but more will be needed to counter-act nearly fourty years of wage […]

  4. […] seeking a fairer share of their labor. At the same time, permanently lowering unemployment through Job Insurance and other forms of labor market policy both removes another source of inequality at the bottom and […]

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