Labor Market Policy – Tackling the Pyramid

In Budget Politics, California, Democratic Governance, Economic Planning, Economics, Education Reform, European Politics, Financial Crisis, Full Employment, Health Care Reform, Higher Education, Housing, Inequality, Liberalism, Living Wage, Political Ideology, Politics, Politics of Policy, Poverty, Progressivism, Public Policy, Regulation, Social Democracy, Social Policy, Taxes, Unions, Welfare State, Youth Policy on March 21, 2012 at 4:53 pm

Introduction:

It’s somewhat out of vogue to talk about the quality of jobs and the shape of the labor market at a time when unemployment is so high and the obvious issue is the number of jobs being created. This wasn’t the case prior to the recession, although rather specious reasons were given to justify the rapidly increasing inequality of wages as the outcome of superior education or productivity. What can’t be denied is that even before the recession, we were sliding into a highly unequal labor market in which many low-paid, insecure workers (50% of American workers made less than $26,000 or 230% of poverty in 2010) serve a small number of ever-richer elites.

This trend has only continued since the recession, and it’s a problem that has to be solved if we are to either fully recover or protect ourselves from the next recession.

Taking the Low Road:

I’ve written before about why we’ve seen a rapid acceleration of a longer-term pattern in wage deterioration for ordinary workers and the mirror-image trend among executives. The short story is that this disjuncture is basically cause by a massive and growing inequality of relative power between those who rely solely on labor and those who have access to capital, which has created a maldistribution of income and wealth, which in turns exacerbates this inequality by making the overall health of the economy more and more reliant on credit, which further enhances the value of capital and the likelihood of recessions caused by credit crunches.

In addition to the moral evil of a society that rewards wealth over work and denies millions the chance to contribute to society, there’s also the practical evil that it’s this very inequality that’s tamping down the renewal of economic demand (since more money is in the hands of those less willing to spend it, and less in the hands of those who are more willing), and allowing the debt overhang to retard economic growth (which shifts potential demand towards paying down debt rather than purchasing consumer goods). This economic effect is bolstered by a political effect outlined by Larry Bartels, Jacob Hacker, and Paul Pierson, in which the concentration of wealth concentrates political power in the hands of the wealthy, who in turn push for weakened regulations, cuts in progressive taxation, and weakening of potential threats from labor.

As I’ve argued, the weird thing is that this strategy for economic growth has been terrible both in the long and short terms. During what Paul Krugman calls the “Great Compression,” American and European economies managed an incredible feat – at the same time, they shifted from a pyramidal labor market which rewarded the wealthiest the most and kept the vast bulk of workers in poverty to a solidaristic economic in which income was more broadly distributed and income growth more evenly shared across class lines, and increased rates of economic growth and investment. While many pundits of the conventional wisdom might argue that this is the way of the past and couldn’t possibly work today, Krugman’s point that the more egalitarian countries in Europe are actually doing the best shows otherwise.

So how do we pull off an economy-wide shift in the labor market?

Bringing Up the Bottom:

Fixing the lower half of the labor market is a bit more complicated than simply raising income by increasing the minimum wage and expanding the EITC, which are necessary but not sufficient steps. While empirical research has shown that minimum wage increases have no significant impact on employment levels, part of bringing up the bottom of the labor market includes de-casualizing low-wage, insecure, temporary and part-time and replacing them with more secure living wage jobs. In our current political economy, this would be made almost impossible due to the likely eventuality that employers would respond with “increasing productivity” (the modern euphemism for speed-up and stretch-out) and automation, increasing unemployment.

However, if we can establish a job guarantee, we can make significant inroads against casualized, low-wage labor without increasing unemployment. In this new environment, wage increases can push the bottom of the labor market up and free up workers for other, more high-productivity jobs, thus improving the efficiency of the economy as a whole. Moreover, workers would be bolstered in their efforts to demand higher wage for their labor by the floor set by job insurance wages, and the lower unemployment rates created by direct job creation.

However, I think increasing worker power through the empowering of unions is probably the most crucial and indispensable step. The experience of the British Labour Party during the Blair and Brown years have shown that without counter-acting the “undertow” of neoliberal political economy, income transfers are extremely limited in their effectiveness. A combination of direct job creation in order to counter-effect this undertow and labor law reform to give unions space to run is needed to allow income transfers to live up to their potential.

Opening Up the Middle:

One of the great weaknesses of Republican class politics is their blithe assumption that the entirety of the working class can lift themselves up by their bootstraps into the middle class, that the room exists for no one to be poor; as McDonnell said “we must always be a nation of haves and soon to haves.” This is complete nonsense.

And yet for thirty years, we’ve acted as if it were possible to end poverty and inequality, simply through supply-side measures to boost the numbers of college entrants. Ironically, in combination with an absolute resistance to raising any kind of taxation, these efforts have had the opposite effect – increasing demand for higher education and decreasing resources to meet the need has greatly contributed to ever-higher tuition that increasingly boxes out working and middle class families from higher education.

A further problem is that there’s little evidence that there’s room for new entrants into the middle class. The wages of the college educated have stagnated just as much of those of high-school graduates, their “college premium” more of an artifact of previous advantage than any sign of demand for more educated workers. When law schools are admitting two times as many applicants than there are legal jobs to place them in, it’s hard to see how we cram the children of the working class into the ranks of the professional classes.

So more intervention is needed to boost the middle class than just expanding higher education. The first thing we can do is to prevent downward mobility by boosting effective income of middle class families and reducing the need for dangerous levels of debt. Progressivizing the payroll tax  could increase middle-class take-home incomes by 5-7% and create a permanent economic incentive to create middle class jobs on the employer side. Expanding access to public health insurance by raising income limits on Medicaid and lowering the age limit on Medicare could save middle class families up to 3% of their income a year in premiums alone. Finally, reducing college tuition costs via a tuition support model outlined by Speaker Perez in California or by endowment support could save up to 9% income a year during the college years. Put together, this kind of income boost would put the middle class on secure footing, and place those working class families below the line on a path upwards.

Next, we can diversify sources of middle class income for the next generation. An entirely wage-based middle class is relatively new in history, and as we’ve seen, heavily reliant on the labor demand for educated professionals that puts middle class generation at the mercy of the market. If we remove the necessity to invest in children’s education to the exclusion of all else, middle class families could invest some of the 17% of their income saved by the policies listed above in making sure that their children enter the job market without debt and holding income-generating assets. This would ensure that the next generation of the middle class have some economic security starting out in the labor force, so that a professional income is less of an all-or-nothing chance.

Finally, we can diversity the basis of middle-class employment. As has already been discussed, the middle-class has focused itself almost entirely on college-trained professional occupations despite stagnant demand and ever-expanding supply. There are alternatives. One obvious one would be to take some of the 17% of saved income and start their children out in small businesses if a professional salary isn’t forthcoming. Another would be to look to the skilled trades. As CNN points out, there are still skilled blue collar factory positions that pay solid middle class wages and few takers. A presidential initiative to invest in and raise the prestige of technical colleges and apprenticeship programs – along the lines of Germany’s successful Berufsausbildungsgesetz (vocational training program), which has resulted in 51% of German youth completing an industrial apprenticeship in 2001 – could rebuild a section of the middle class that flowered when the union movement was in full bloom.

Restraining the Top:

I’ve written extensively about ways to restrain the economic power of the wealthy, which largely point to making our tax system more progressive and harder to evade, eliminating corporate welfare, and regulating financial capital to the point where it’s “safe, stable, and boring.”  One rare area where there is widespread popular support for progressive causes is tax fairness – witness the popularity of the “Buffett Rule” in the U.S, the unpopularity of Chancellor Osborne’s decision to lower the top income bracket in the U.K, and Hollande of the French Socialists staking his platform on a top tax rate of 75% on the wealthiest.

However, there’s one additional area where we can divide the affluent from the mega-wealthy and really construct a 99% coalition – by maintaining the real income of professional incomes while decreasing their gross income through reducing professional costs and professional prices. For example, taking over the costs of medical malpractice insurance could allow doctors to save a median of $12.5k a year and pass that on to the consumer in the form of 2.5-6.7% lower prices for medical bills. Reducing the cost of going to professional schools like law and medical schools would mean that new lawyers and doctors would need about $200,000 less in earnings to break even from their debts, which would mean that their gross incomes could be significantly reduced (which in turn would lower the cost of health care and medical bills, while increasing the relative demand for their services) without affecting their take-home income.

In this fashion, for at least part of the top 20%, we can restrain the income growth of the top of the labor market pyramid without actually hurting anyone.

Conclusion:

Ironically, for all that the 1% and their allies would scream to the heavens over any of these proposals, let alone the entire package, the reality is that a more egalitarian economy is better for the rich too. The more egalitarian an economy is, the broader its economic base is – with more people with disposable income to spend and invest with, the more scope there is for increasing sales and investment, and thus the more scope there is for economic growth. We’ve seen this before in the Great Compression – while the wealthiest had a smaller share of the overall income growth than they do now, their overall rate of income growth was nearly twice as high.

In some ways, it’s the oldest lesson of capitalism – better to sell more volume at a lower margin then to sell less at a higher margin, or in other words, better a smaller slice of a bigger cake than a bigger slice of a cake that might start shrinking.

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