The Sources of Unemployment

• Lindsey Grant
• February 1, 2012
• Forum Papers
• Forum Paper
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I raised the question in 1996: “How do we maintain our living standards in a world with free movement of capital, technology, management, marketing systems, and goods? The multinationals can produce where the labor is cheap and docile, and then sell the goods back here. Eventually, we won’t be able to afford them, but then the MNCs will find something else to do. Any proposal to address the problems of joblessness and alienation is dead on arrival if we do not take another look at the American free trade shibboleth.”⁶

Sixteen years have reinforced that conclusion.

What Can Be Done?  We should tone down our free trade rhetoric – which we already ignore when national or corporate self-interest dictates. We should review our tax code to avoid encouraging the out-sourcing of jobs. We should enforce the rules against dumping, and write labor standards into our trade agreements, plus such protections as a compensatory tariff to help equalize the labor costs in the participating countries. That will not be an easy task. Such agreements are dictated by the MNCs that seek them, and they will not be at all interested in protections for U.S. labor.

Our “free trade” agreements such as NAFTA devote more space to assuring the access of U.S. MNCs to the other countries than they do to free trade.  We should systematically re-examine them to see whether either objective serves our national interest.  President Obama in his 2012 State of the Union message called for changing our tax code and subsidies to reward companies for keeping employment here, rather than for outsourcing it abroad.  That is a beginning.

The Penalties of Rising Productivity. There is a subtler but still important way in which our present economic policies cause unemployment. Our “leaders” seem to think that rising productivity is always a good thing.   Historically, it has been good because, in successful economies, it has generated a rising standard of living. But, as Wassily Leontief pointed out decades ago, we have reached a point where we cannot mobilize the resources that modern productivity at full employment could use, or make use of all the services that it can generate.  Leontief advocated a massive transfer of money from the employed to the unemployed, but permanent public support of a large fraction of able- bodied but idle people is neither an attractive prospect nor politically possible.

Modern productivity helps us to deal with the aging of the population that is integral to modernization. Properly managed, it can assure that the old have enough to live on.  But it condemns a fraction of working age people to unemployment. The present so-called recovery from recession is a case in point.  Employers have resorted to investing in machinery to produce additional goods, rather than rehiring the people they laid off. That is why massive unemployment persists in the face of rising GDP.

Part of the rise in productivity is real.  Part of it is illusory.  We have moved from producing real goods and services into more nebulous “services”.  We have dodged Leontief’s dilemma by employing more people in those sectors even as employment has plummeted in manufacturing and stalled in agriculture.  The “leisure and hospitality” sector has doubled since 1980. It is now larger than manufacturing, but with average earnings only about one-third of those in manufacturing. Employment in the “financial activities” sector has grown 52%, particularly in private investment banking and speculation, which produce very little social good and which generated the crisis from which we are trying to escape.  We need banks, but how much of that activity do we need?

To make matters worse, the profits of rising productivity since the 1970s have gone exclusively to management and capital, while hourly wages have stagnated. This is directly contrary to the U.S. historical experience, when labor shortages enabled working people to demand a share in the growth of labor productivity. We need to get back to that situation.

Eventually, we may again want to increase productivity.  Its future is murky. Technology and the digital revolution will tend to drive it up, but the decline of cheap energy will tend to require more labor to replace energy in agriculture and other “real” sectors, driving labor productivity down.  The prevalence of unemployment itself suggests that we are not there yet.

What Can Be Done? It is dangerous for modern politicians to be seen as anti-technology “Luddites”. Government is not likely to restrain the growth in productivity and thus encourage the creation of jobs. Indeed, that would be an intrusion into corporate management that would go against the American mindset. I don’t believe that a direct attack on productivity is wise. Be it noted, however, that my earlier proposal to restrict mass immigration would stop the growth of the work force. That at least would help to drive unemployment down, and wages up, whatever happens to productivity.