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LABOR DAY 2013: LOW WAGES. HIGH ANXIETY. LIFETIME EMPLOYMENT “DEAD.” MILLIONS OF WORKING POOR.

In honor of Labor Day, we comment on what is happening in the U.S. labor market. It is a frightening place.

Robert Samuelson says in the Washington Post (“In today’s world, workers are scared,” September 2.) that

.. American workers face a buyers’ market. Employers have the upper hand .. What looms, at best, is a sluggish descent from high unemployment (7.4 percent in July) and a prolonged period of stagnant or slow-growing wages. Since 2007, there has been no gain in average inflation-adjusted wages and total compensation ..  The weak job market has a semi-permanence unlike anything seen since World War II.

Samuelson offers a historical synopsis. He references three labor regimes since 1900. The first regime was nearly devoid of regulation:

[It] featured “unfettered labor markets,” as economic historian Price Fishback of the University of Arizona puts it. Competition set wages and working conditions. There was no federal unemployment insurance or union protection.

The second came after World War II and, as a Hegelian anti-thesis of the first regime, saw increased regulation:

[L]abor relations became more regulated and administered .. The Wagner Act of 1935 gave workers the right to organize; decisions of the National War Labor Board also favored unions. By 1945, unions represented about a third of private workers, up from 10 percent in 1929.

Finally, the current regime is a confusing mix of old and new:

The private safety net is shredding, though the public safety net (unemployment insurance, Social Security, anti-poverty programs, anti-discrimination laws) remains. Economist Fishback suggests we may be drifting back toward “unfettered labor markets” with greater personal instability, insecurity — and responsibility. Workers are often referred to as “free agents.”

Karen McVeigh in the Guardian (“Fast food workers continue fight against low wages,” The Guardian, August 29) discusses the movement to increase the minimum wage, and notes how the U.S. lags behind the U.K.

..where the minimum wage is £6.11 ($9.50), Australia, where it is 15.96 Australian dollars, ($16.91), France, €9.43($12.68), and Tokyo,$9.10. And while the U.S.’s nearest neighbour, Canada, doesn’t have a minimum wage, the lowest provincial wage in Alberta is $9.73 in US dollars.

According to those striking in a nationwide protest, this is a question of social justice. Pastor WJ Rideout the III of Detroit is part of a campaign for a minimum wage of $15. He says that

People can’t survive off $7.25 an hour .. A gallon of milk is almost $5 today .. Every thing has gone up significantly but the minimum wage has not. People are crazy to think you can live on minimum wages. Fast-food jobs are no longer starter jobs, they are mom-and-pop jobs, even senior citizens jobs. We call them survivor jobs now, because all people are doing is surviving.

For a statistical profile of the working poor, we refer our readers to an April 2013 US Bureau of Labor report.

In sharp contrast to McVeigh, the August 30 editorial of Investor’s Business Daily (“Doubling fast-food workers’ wages will kill jobs,” ) focuses on econo­mic effici­ency, not justice.  

With last week’s one-day strike, fast-food workers sent a clear message .. But they should be careful what they wish for; they just might get it. ..  It isn’t hard to see what a doubling of the minimum wage would do in an industry that pays out an estimated 70% of revenue to workers: Hundreds of thousands would lose their jobs overnight.

So who will do their jobs, you ask. A more apt question is what will do their jobs. Because they may go to robots. Or computers. Don’t laugh. When labor costs rise, technological substitutions suddenly make economic sense.

It’s already happening in Europe, where it costs a lot to hire a worker, McDonald’s has installed 7,000 new ATM-style machines that take orders and payments. No muss, no fuss, no arguments, no misunderstandings — and no minimum wage ..

“The U.S. government may trust the U.S. government. That is not a trust the world shares, and recent polls indicate that it may not be a trust American people share as well.”

Anthony Cordesman

Center for Strategic and International Studies

Financial Times, August 29, 2013

OH COME ON, THIS IS THE WAY THE WORLD WORKS NOWADAYS.

 Children of the wealthy and well-connected get the best jobs in a quid-pro-quo. Do they deserve it?

Since the start of the financial crisis, much has been said about inequality in income and wealth, how the 1% earn and possess so much more than average Americans. Less has been said about the societal mechanisms that are a barrier to equal opportunity and that keep economic mobility low, e.g.,  admission policies to Ivy League universities, and cronyism in hiring.

Now, Andrew Ross Sorkin writes in the New York Times that the recent SEC investigation whether JPMorgan Chase hired the children of Chinese government officials “to help the bank win business” is “sending shudders through Wall Street.”

“[If] JPMorgan Chase is found to have violated [1977 Foreign Corrupt Practices Act] by hiring the children of the elite, then the entire financial services industry is probably in a heap of trouble,”

Sorkin says, listing numerous examples of how common the hiring of the children of the elite really is. Access to a network of powerful friends and relatives has obvious value. So, profit-maximizing firms pay for it. In the process, the market system reproduces past disparities. It also joins the economic and political elites, since wealth buys political influence, and influence can be cashed out.

But, if cronyism is a “time tested practice here in the United States,” Sorkin asks, what’s the problem? 

“[In] truth, it is the way of the world. It is hard to fault a business for hiring someone who has better contacts than someone else .. As hard to defend as the phrase may be, it is a reality of life, “It’s not what you know, but whom you know.”

Sorkin’s wraps this type of nepotism up in a form of meritocracy:

“… Given that many of the children of the elite have some of the best educations and thriving networks of contacts, it is hard to see how businesses are supposed to not seek them out, let alone turn them away.”

In other words, if the market system has an inherent tendency to produce great inequality, then it is less objectionable. Recent papers by Gregory Mankiw, Steve Kaplan and Joshua Rauh, published in the Journal of Economic Perspectives, appear to follow a similar line of reasoning.

One more academic companion piece to Sorkin’s article is a recent empirical study in the American Sociological Review by Lauren Rivera, a cultural psychologist at Northwestern University, titled “Hiring as cultural matching: the case of elite professional service firms.”

Rivera finds that “[h]iring is more than just a process of skills sorting: it is also a process of cultural matching between candidates, evaluators, and firms… Evaluators implicitly gravitated toward and explicitly fought for candidates with whom they felt an emotional spark of commonality… Moreover, evaluators tended to favor extracurricular activities associated with the white upper-middle class and that were acquired through intense, prolonged investment of material and temporal resources not only by job applicants but also by their parents…. In many respects, they hired in a manner more closely resembling the choice of friends or romantic partners than how sociologists typically portray employers selecting new workers.”

Rivera notes the long-run dangers of these practices. Perhaps, we should not be surprised that, as Charles Murray states in  Coming Apart (Crown Forum, 2012), the upper and lower classes in American society have diverged so far in core values and behaviors that they barely recognize one another.

“No matter how corrupt, greedy, and heartless our government, our corporations, our media, and our religious & charitable institutions may become, the music will still be wonderful.”

– Kurt Vonnegut

“I DO NOT DOUBT THE ABILITY AND UNDERSTANDING OF CHAIRMAN BERNANKE ..”

..but the future of central banking, and of the world economy, is foggy, says PAUL VOLCKER. He wants the Federal Reserve to return to “a more orthodox” approach. Studying history an absolute must. Abstract economic modeling “of little help.” Praise for behavioral economics, still “in its infancy.”

 Paul Volcker writes a lengthy opinion piece in the New York Review of Books.

“I have been struck by parallels between the challenges facing the Federal Reserve today and those when I first entered the Federal Reserve System as a neophyte economist in 1949.

Most striking then, as now, was the commitment of the Federal Reserve, which was and is a formally independent body, to maintaining a pattern of very low interest rates, ranging from near zero to 2.5 percent or less for Treasury bonds. If you feel a bit impatient about the prevailing rates, quite understandably so, recall that the earlier episode lasted fifteen years.”

He continues to draw strong parallels between the past and the present, and it is precisely a need for this “reading of history” that Volcker believes is critically at issue.

I do not doubt the ability and understanding of Chairman Bernanke and his colleagues. They have a considerable range of instruments available to them to manage the transition, including the novel approach of paying interest on banks’ excess reserves, potentially sterilizing their monetary impact. What is at issue—what is always at issue—is a matter of good judgment, leadership, and institutional backbone. A willingness to act with conviction in the face of predictable political opposition and substantive debate is, as always, a requisite part of a central bank’sDNA.

Those are not qualities that can be learned from textbooks. Abstract economic modeling and the endless regression analyses of econometricians will be of little help. The new approach of “behavioral” economics itself is recognition of the limitations of mathematical approaches, but that new “science” is in its infancy.

A reading of history may be more relevant. Here and elsewhere, the temptation has been strong to wait and see before acting to remove stimulus and then moving toward restraint. Too often, the result is to be too late, to fail to appreciate growing imbalances and inflationary pressures before they are well ingrained.

It is a thought provoking article and well worth a read.

TOURRE GUILTY, JURY FINDS. SEC IS JUBILANT. SHOULD YOU BE?

Watching the SEC victory celebration last week, one may think that Fabrice Tourre, a 34-year old Frenchman, now a Ph.D. student at the University of Chicago, almost single-handedly caused the 2008 global financial crisis. In reality, Tourre was a minor player merely trying to advance his career. He was one of many employees in the structured finance division of Goldman Sachs. If Tourre did not follow orders, he was likely to be fired.

Abacus, the toxic security at the center of the civil suit brought by the SEC, was designed in cooperation with John Paulson, the hedge fund billionaire. Tourre described it as a “monstrosity.” The security blew up as intended, to the benefit of Mr. Paulson, with IKB Deutsche Industriebank of Germany as one of the big losers. No senior executive at Goldman has been charged, either by the SEC or the U.S. Justice Department. In a settlement with the SEC, Goldman’s shareholders (or is it, the U.S. taxpayers?) paid $550 million to let the firm and its CEO, Lloyd Blankfein, walk free.

Goldman Sachs put Tourre in a moral dilemma. In retrospect, it seems that Mr. Tourre’s main crimes were that he was born in France, therefore an unpopular defendant, easy to bring down, and that he had some (but surely insufficient) moral scruples. In deeply sarcastic e-mails that became his downfall, the young man, still fresh out of Stanford University, repeated the sham argument that “the real purpose” of his job was “to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself.” So, Tourre joked with his girlfriend, he “did not feel too guilty.”

The SEC’s courtroom victory does nothing to remedy structural immorality inside too-big-to-fail U.S. financial institutions. Yet, poor regulatory oversight and enforcement have greatly contributed to the economic crisis. People around the world will also read the Tourre verdict as one more black eye for the U.S. system of “justice.” Evidently, in America, the powerful architects of evil —in business and government— are forgiven, and receive endless second chances, while the (relatively) powerless are held accountable to the full extent of the law.

“I can’t remember when I last heard someone genuinely optimistic about the future of this country. I know that when I get together with friends, we make a conscious effort to change the subject [from the state of the country] and talk about grandchildren, reminisce about the past and the movies we’ve seen, though we can’t manage it for very long. We end up disheartening and demoralizing each other and saying goodnight, embarrassed and annoyed with ourselves, as if being upset about what is being done to us is not a subject fit for polite society.”

–Charles Simic

Poet, Winner of the Robert Frost Medal in 2011

“Of the tendencies that are harmful to sound economics, the most seductive and, in my opinion the most poisonous, is to focus on questions of distribution [of income and wealth]. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 25 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of millions of people that has occurred in the 200 year course of the industrial revolution to date, virtually none can be attributed to direct redistribution of resources from rich to poor.”

Robert E. Lucas, Jr.

Nobel Laureate

University of Chicago

WITHOUT STRUCTURAL REFORM, NO SUSTAINABLE GROWTH IN EUROPE.

“We Germans don’t want a German Europe…“ Wolfgang Schäuble writes in a new article in the Guardian:

The idea that Europe should be – or even can be – led by a single country is wide of the mark. Germany’s restraint does not just reflect the burden of its history. The truth is that the unique political structure that is Europe does not lend itself to a leader–follower dynamic. Europe signifies the equal coexistence of its member states. At the same time, however, Germany does feel a special responsibility towards the mutually agreed strategy for resolving the crisis in the eurozone.

Schäuble continues, outlining that Europe has a desperate need for sound fiscal policy that helps address the overdue consolidation of public budgets and encourages economic competitiveness across the Eurozone, alongside reforming the welfare state and modernizing the labor markets.

From the very beginning of the crisis we Europeans have pursued a joint strategy. This strategy aims to achieve the overdue consolidation of public budgets. But even more, it aims to overcome economic imbalances by improving the competitiveness of all eurozone countries. This is why the adjustment plans for countries that are receiving financial support call for fundamental structural reforms that aim to put them back on track towards long-term growth and thus secure sustainable prosperity for all. Sound public finances create confidence.

But sound public finances are not enough to ensure sustainable growth. In addition, we need to reform and modernise our labour markets, our welfare state, and our legal and tax systems. We have to make sure that all citizens of Europe enjoy working and living conditions that are not based on artificial growth bubbles.

Schäuble warns that “without these reforms there can be no sustainable growth. Stimulus programmes based on even more government debt will only shift higher burdens on to our children and grandchildren, and will have no lasting benefits.”

Instead of funding debt-piling stimulus programmes, Schäuble suggests that Europe should instead strive to “create conditions that are conducive to successful economic activity, in the context of global competition and demographic trends that pose a challenge for the whole of Europe. None of these things are German ideas. They are the tenets of forward-looking policies.”

Finally, Schäuble stresses that these policies are not simply a German obsession, imposed on unwilling partners. Instead, these programs and reforms are something that the majority of Europeans desire.

We do not want a German Europe. We are not asking others to be like us. This accusation makes no more sense than the national stereotypes that lurk behind such statements. The Germans are joyless capitalists infused with the Protestant work ethic? In fact, some economically successful German regions are traditionally Catholic. The Italians are all about dolce far niente (delicious idleness)? The industrial regions in northern Italy would not be the only ones to bristle at that. All of northern Europe is market-driven? The Nordic welfare states, with their emphasis on social solidarity and income redistribution, certainly do not fit this caricature.

Those who nurture such stereotypes should look at recent surveys that show a clear majority of people – not just in northern Europe, but also in the south – in favour of combating the crisis through reforms, public spending cuts and debt reduction.

FEEBLE RECOVERY: MANY MORE LEAVE THE WORKFORCE THAN FIND A NEW JOB

Mort Zuckerman, in an opinion article in the Wall Street Journal, analyzes the United States’ recovery from the Great Recession through the lens of job growth.

In recent months, Americans have heard reports out of Washington and in the media that the economy is looking up—that recovery from the Great Recession is gathering steam. If only it were true. The longest and worst recession since the end of World War II has been marked by the weakest recovery from any U.S. recession in that same period.

The jobless nature of the recovery is particularly unsettling. In June, the government’s Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000—but there are jobs and then there are “jobs.” No fewer than 557,000 of these positions were only part-time. The survey also reported that in June full-time jobs declined by 240,000, while part-time jobs soared by 360,000 and have now reached an all-time high of 28,059,000—three million more part-time positions than when the recession began at the end of 2007.

That’s just for starters.

Essentially, he asks the question: is it really a recovery if more people have left the workforce than got a new job by a factor of three?

That brings us to a stunning fact about the jobless recovery: The measure of those adults who can work and have jobs, known as the civilian workforce-participation rate, is currently 63.5%—a drop of 2.2% since the recession ended. Such a decline amid a supposedly expanding economy has never happened after previous recessions. Another statistic that underscores why this is such a dysfunctional labor market is that the number of people leaving the workforce during this economic recovery has actually outpaced the number of people finding a new job by a factor of nearly three.