Jobs, Stickiness, and Class Warfare?

I didn’t bother commenting on last Friday’s dismal jobs report because there was an outpouring of despair from others to which I felt I could not add. To read that the American economy posted a 39,000 gain in jobs, this far after the recovery began, leaves me feeling despondent. What makes matters worse is all the other talk currently filling the policy discussion air waves. No matter where you turn important people are speaking about the urgent need to hammer away at entitlements, social programs, and other, apparent, root causes of our malaise. We are, we are told, at a crossroads. Either we slash at these programs or we are doomed to second class status.

I respectfully disagree with them, but somehow they have gained the initiative. From my perspective it is precisely those nations with such programs who have attained the coveted “first class” ranking. Thus to eliminate or reduce them is a sign of failure. It is to admit we have fallen to the second rank. It is not a way to save ourselves from such a decline, it is a sure sign that the decline has already occurred.

To put it another way: why on earth would we slash at Social Security benefits in order to avoid the reduction of said benefits? It makes no sense.

Be that as it may, let’s look at jobs:

Consider these numbers: 27, 30, 46, 93. What are they? OK, I made up the last one, but that shouldn’t throw you off. They are the number of months between the cyclical peak of employment, and the return to that peak subsequent to each of the last few recessions. There is a story here. It is that the American job market has undergone a fundamental change. No longer does it veer through sudden and dramatic downturns followed by equally sudden and dramatic upturns, with a return to the previous peak within a short time. Those classic “V” shaped employment recessions are distant memories. The amount of time and effort it takes the American economy to return to peak employment is longer than ever. It was this observation – which is hardly a revelation – that made me one of those forecasting a very long and slow recovery. And even I appear to have underestimated the problem.

Here’s another observation: the longest postwar cycle of peak through decline and back to peak was during the 1958 recession. But since 1981, which corresponds to the 27 in that list above, each subsequent recession has seen a progressively longer cycle. The 2001 recession was bad. It took a full forty-six months to get back to the previous peak, Worse, it took longer – twenty-five months – to hit bottom than the entire 1958 cycle which was the previous worst case. The 2007 disaster is playing out along the same prolonged lines, only on an epic scale. We fell away more deeply, took twenty-two months to hit bottom, and are on target to emerge back at the peak after nearly eight years of high unemployment.

To say that we have a problem is an understatement for the ages.

So what is the problem?

A typical answer nowadays is that we have “structural” problems. Either our workers are unwilling to take big enough wage cuts to clear the market, or they are not skilled enough to take the jobs that are available.

This is plainly ridiculous.

There is no evidence of a skills mismatch. If there were we would be seeing rampant wage increases in the jobs where skilled workers were scarce. We see no such thing. And to talk about the need for big wage cuts, or associated payroll tax holidays, in order to induce businesses to hire is stretching our credulity when we are witnessing quarterly profits hitting record levels.

Which brings me to stickiness.

What is it that business leaders are clamoring for so that they start re-hiring? Tax cuts and incentives. They need to be sure they can hire workers profitably, so we need to provide them with bigger profit margins. At least this is what the CEO of Coca-Cola recently argued. The problem, as you can see, is that all the evidence undermines this position. Businesses are rolling in cash and profits. But they are not hiring. There is no sign at all that were we to bolster those profits they would suddenly go out and hire. On the contrary. The evidence suggests they would simply hoard more profit.

And therein lies the root of our problem.

The balance between that portion of corporate earning being assigned to wages, and that portion assigned to profit has become wildly unbalanced. For much of the past three decades profits have done well and wages have languished. This is the era of productivity enhancement for profit. It is not an era of productivity gain for wage growth. The flood of management theories emphasizing shareholder value, and the accompanying Wall Street drum beat for quarterly profit gains, have combined to undermine the older, pre-existing, notion that workers should share in the greater productivity they contributed to. Now all those gains go to capital, none to labor. It used to be that growing productivity was sure sign of rising living standards. Now it isn’t. Our relentless focus on free market forces as the be-all solution to every economic – and social -problem has produced a management class equally relentless in exploiting its workforce. Extracting every last ounce of productivity is seen as a comparatively easy way to bolster near term profits. It sure beats the more complex solution of actually thinking up new products or services to sell.

So, when the economy goes into decline, our fearless managers, ever eager to defend their bonus pools, apply what they have learned at business school and from experience: a quick way to keep profit levels up is to treat the workforce purely as a cost to be eliminated, and not as an asset to be nurtured. I realize this is a generalization, but those numbers don’t lie. In each of our last few recessions the firing has become more commonplace, and the re-hiring more hesitant. An entire generation of managers is now accustomed to this form of profit protection.

The lesson?

That talk about wage stickiness is absurd. We should be debating “profit stickiness”. Why should the entire onus of a cycle fall asymmetrically on the workforce and not on the shareholders? The social and political imbalance is enormous. The economic imbalance ridiculous. Even more absurd is that some folks still babble on about how the unions get in the way of a better functioning labor market; or how unemployment assistance stops workers from accepting pay cuts. Frankly the unions are a non-factor nowadays, and unemployment payments keep cash flowing into those business coffers via bolstered sales.

No. The rigidity in our economy is all within the halls of capital. The chase for illusory and unsustainable returns on equity have both injected increased risk into our economy, and withdrawn wage based purchasing power. The combination of these two factors produced the great crash, and are the root cause of our slow recovery.

It is inevitable that the overreach of shareholders, urged on by bureaucratic managements, will induce a decline in the very demand that produces the profit source they seek. By sapping away at wage growth in order to favor profit, business has produced the conditions for its own demise.

One final thing: this decline we are told has led to the impoverishment of our government, which, in order to fix we are asked to attack those same workers previously ignored. We are being asked to protect the elite, the capital holders and rentiers, by reducing social programs designed to assist the large majority of our populace. A majority that has already been deprived of its share in recent growth. If this isn’t class warfare, then tell me what it is.

Oh. But we don’t talk of such things here in America. That is so Old Europe.

Right.