What's the real number of jobless people in Britain?
The number of jobless is double the number of unemployed in Britain. See the breakdown by region and the costs of getting people back to work. Read more on guardian.co.uk
17 August 2010
Crises of capitalism by David Harvey and RSA Animate
The animation is brilliant! You can see David's full lecture on YouTube.
I am also including below a related piece published last year by me on the 'open democracy' website.
Crisis in the real economy
A crisis in the US real economy marked by growing unemployment and failing businesses is not a product of the current financial crisis. In fact, the financial crisis was but a symptom of a long brewing systemic crisis in the real economy. These claims are made separately by economists Richard Wollf (Univ. of Massachussetts, Amherst) and Ravi Batra (Southern Methodist University, Dallas). They propose an alternative diagnosis of the current economic crisis. If their analysis is correct, fixing the financial system might just deal with one of the symptoms but not the root cause of a deeper economic malaise. Given the amount of public money that is being thrown at fighting the economic downturn, it is critical to consider alternative explanations of current economic problems in order to devise strategies that make the best use of scarce resources.
A crisis in the US real economy marked by growing unemployment and failing businesses is not a product of the current financial crisis. In fact, the financial crisis was but a symptom of a long brewing systemic crisis in the real economy. These claims are made separately by economists Richard Wollf (Univ. of Massachussetts, Amherst) and Ravi Batra (Southern Methodist University, Dallas). They propose an alternative diagnosis of the current economic crisis. If their analysis is correct, fixing the financial system might just deal with one of the symptoms but not the root cause of a deeper economic malaise. Given the amount of public money that is being thrown at fighting the economic downturn, it is critical to consider alternative explanations of current economic problems in order to devise strategies that make the best use of scarce resources.
Housing Bubble
The most widely accepted diagnosis of the current financial and economic crisis is that it started with the housing bubble in the US. This in turn resulted from irresponsible sub-prime mortgage lending coupled with unregulated and reckless financial engineering. When the housing bubble burst, banks found themselves holding heaps of unsecured debts packaged into complex financial products that could no longer find new buyers. Financial institutions suspected each other to be in a precarious financial position similar to their own and inter-bank lending came to a halt. Several of these institutions went bankrupt or would have gone down that route if public money ($2.98 trillion at last count) had not bailed them out.
The most widely accepted diagnosis of the current financial and economic crisis is that it started with the housing bubble in the US. This in turn resulted from irresponsible sub-prime mortgage lending coupled with unregulated and reckless financial engineering. When the housing bubble burst, banks found themselves holding heaps of unsecured debts packaged into complex financial products that could no longer find new buyers. Financial institutions suspected each other to be in a precarious financial position similar to their own and inter-bank lending came to a halt. Several of these institutions went bankrupt or would have gone down that route if public money ($2.98 trillion at last count) had not bailed them out.
Wage-Productivity Gap
Wollf and Batra do not deny the role of housing bubble and financial malpractices in triggering the financial collapse. What they seem to suggest is that there is a need to explore the chain of causation further. Doing so in their analysis reveals that a wage-productivity gap since the last three decades in the US created a systemic imbalance between aggregate demand and aggregate supply in the economy. Since the early 1970s wages of employees in the US have not risen at the same rate as their productivity (output per hour). In fact, real wages of roughly 80% of the US workforce have been stagnating for more than three decades. On the other hand, productivity has been increasing rapidly due to technological innovation and improvement in human skill levels. Now wages are a key lever for creating demand in the economy whereas productivity drives the increase in supply. In other words, workers' wages need to increase in order to absorb the increase in supply of goods that results from increased productivity. Yet, the wage-productivity gap has now existed for nearly 35 years.
Wollf and Batra do not deny the role of housing bubble and financial malpractices in triggering the financial collapse. What they seem to suggest is that there is a need to explore the chain of causation further. Doing so in their analysis reveals that a wage-productivity gap since the last three decades in the US created a systemic imbalance between aggregate demand and aggregate supply in the economy. Since the early 1970s wages of employees in the US have not risen at the same rate as their productivity (output per hour). In fact, real wages of roughly 80% of the US workforce have been stagnating for more than three decades. On the other hand, productivity has been increasing rapidly due to technological innovation and improvement in human skill levels. Now wages are a key lever for creating demand in the economy whereas productivity drives the increase in supply. In other words, workers' wages need to increase in order to absorb the increase in supply of goods that results from increased productivity. Yet, the wage-productivity gap has now existed for nearly 35 years.
The consequence of this imbalance is that demand for goods and services required to keep up with supply is created in the short term by creating new debt. The housing bubble was a product of this demand-supply disequilibrium. Since real wages are not rising in step with productivity, people could only consume the increased supply of goods and services by taking help of cheap and easy credit. But after the housing bubble burst, credit is no longer easily available and levels of debt have been exposed to be unsustainable. Businesses realize that their goods will not be sold, profits will decline and they are laying off people and in many cases closing shop. Due to the wage-productivity gap, this economic decline may have happened even in the absence of a mortgage driven crisis. Then again, the housing bubble may have simply postponed the real economy crisis that was imminent, and in the process exacerbated the systemic tensions between demand and supply in the economy.
Where did the profits go?
So why have wages not kept step with productivity despite what some have called a "golden era of profitability"? Where have the profits from the productivity growth gone? A paper by Gordon and Dew-Becker, economists from Northwestern University, found "that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth...[whereas] the bottom 90 percent of the income distribution fell behind or even were left out of the productivity gains entirely" (italics in original). Additionally, the wage share of national income is declining in the US, while the share going to corporate profits has increased from 17.7% in 2000 to 20.9% in 2005. The European Trade Union Congress complains of a widening wage-productivity gap in the eurozone as well.
So why have wages not kept step with productivity despite what some have called a "golden era of profitability"? Where have the profits from the productivity growth gone? A paper by Gordon and Dew-Becker, economists from Northwestern University, found "that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth...[whereas] the bottom 90 percent of the income distribution fell behind or even were left out of the productivity gains entirely" (italics in original). Additionally, the wage share of national income is declining in the US, while the share going to corporate profits has increased from 17.7% in 2000 to 20.9% in 2005. The European Trade Union Congress complains of a widening wage-productivity gap in the eurozone as well.
It appears that "the killing fields of inequality" (as Göran Therborn puts it in his recent piece) and the relentless pursuit of profits by many businesses are critically undermining the primary source of demand in the economy - its workers' wages. As more people lose their jobs in the recession, there is further downward pressure on consumer demand. Making credit available to businesses alone is not likely to reverse the unemployment trend since businesses will invest only when they have confidence in potential returns on their investment. Lack of demand for goods and services in the economy, however, does not give that confidence. It is a vicious cycle but one that can be broken by restructuring the economic system to distribute the wealth more equitably. And unless this fundamental factor is addressed, according to Wollf and Batra, it is hard to see a long term economic recovery.
16 August 2010
What recession? A few pockets haven't felt warmer...
While the economy is still struggling to come to grips with the severe recession that hit the UK in 2007-08, real wages for most workers have declined. But the average pay package among the UK's top executives increased by £500,000 in the past financial year, according to a report by employment consultancy Hewitt New Bridge Street.
The report says that the pay hike was partly due to weak targets set for the bosses but primarily due to an "improvement in economic conditions". At the same time, wages of a third of the employees of blue chip companies still remain static since the 2009 wage freeze for 60% of the workforce.
I'm sure that the workers of many of these companies would like to know why gains from these improved conditions could not be shared with them, at a time when reduced purchasing power is having a major impact on consumer confidence.
Pay for performance?
Executive pay over the last two years has risen on average by 5% despite a 1% fall in share prices over the same period. In fact, in the last ten years the salary packages for executives in the FTSE 100 companies have quadrupled while share prices have declined showing no relation of their pay to a key performance indicator.
Why such massive pay increases then?
CEO pay packages at top firms are set by a board of directors which often comprises of executives from other similar companies. The CEOs in question may be serving or are likely to serve on other companies' boards performing a similar function. It is a small circle where "you scratch my back and I'll scratch yours" is an indulging self-serving game. Also, the compensation is recommended by consultancy firms who try to match what is offered by other companies. Most importantly though, the consultancy firms are hired by the same elite group and the consultants have every reason not to upset their paymasters.
Why do shareholders not object?
Some shareholders do object. Just recently, 47% of the largest supermarket Tesco's shareholders revolted against boardroom pay at their annual meeting, and it was not the only instance this year. However, in many cases where large shareholders like banks, pension and mutual funds are involved, they may not object since their own executives would not like to draw attention to their high salary packages. In any case, shareholder objections in most cases are not binding on the board of directors and cannot overturn directors' decisions on compensation plans.
Surely, some CEOs deserve their million pounds annual compensation packages?
I would not question the absolute figures but if the executives are paid 100s of times relative to the average worker, it certainly seems obscene and excessive.
Let's say that the profits of a company double under a CEO. Should all the credit go to the CEO alone? What of other workers who must have contributed to the growth? What about suitable market conditions playing a role? What if the growth in profits relative to the previous term were only an indication of the poor performance by the previous executive?
Leadership matters immensely but so does the contribution of those who are led. There's no easy way to numerically compare a CEOs talent and contribution compared to the rest of the workforce. But a fair society and a fair economic system would recognise the contribution of all workers in the economy and not tolerate the grotesque levels of income and wealth inequality that are prevalent today.
Years of research show significant social costs of excessive inequality. And the latest report on inequality shows that the UK is now one of the most unequal among the economically developed countries.
While some inequality may be justified to provide incentives for performance and create efficiencies in the economy, maximum wage level must be tied to a reasonable proportion of the minimum wage, say 10-20 times, to ensure that the gains of economic growth are distributed fairly across the population.
Otherwise we have an absurd system where "to make the rich work harder you pay them more, to make the poor work harder you pay them less – or so it seems," in the words of Billy Hayes, the general secretary of the Communication Workers' Union.
12 August 2010
Unemployment dips but the numbers are far from comforting
Unemployment in the UK declined by 49,000 to 2.46m in the last quarter. However, the number of claimants seeking jobseeker's allowance fell by only 3,800 which is less than what many economists had expected, raising concerns about a slower than expected recovery.
Here are some other numbers to take home from recent reports and statistics on the UK job market:
- The number of 18 to 24 years old who are out of jobs for two or more years increased by 42% over the last year to reach 72,000. In the same age group, numbers of those unemployed for over a year has increased from 104,000 to 184,000. According to the Recruitment and Employment Confederation's Youth Employment Taskforce, the direct cost of youth unemployment is £4.7bn a year.
- Jobseekers over the age of 50 are finding it particularly difficult to get back into the market. Numbers of those out of job for more than 12 months has increased by 52% over a year to reach 170,000, the worst numbers in a decade. While the government plans to extend the retirement age limit, the job market is struggling to find place for a number of over-50 workers.
- An extra 40,000 people over the age of 65 have taken up jobs amidst fears of reductions in expected pensions.
- According to the Chartered Institute of Personnel and Development, it is likely that private sector job creation will not keep pace with public sector cuts for at least the next two years, as nearly one-third of employers, among the 600 surveyed across all sectors, were looking to downsize in the coming three months.
- Another survey among businesses in Wales shows that around 84% of those businesses have no plans to recruit this year.
- Scotland saw a rise in unemployment by 34,000 over the last quarter to reach 223,000, or an 8.4% unemployment rate compared to 7.8% for the UK.
- Vacancies have increased by 9,000 over the quarter to reach 481,000.
- Real wages continue to decline among those employed as earnings growth rate falls behind the rate of inflation.
10 August 2010
News digest 9-10 Aug 2010
- Exports start to take off
- Real-time happiness data launched for the UK
- Biggest Problem in UK Economy
- Structurally high unemployment?
- Credit Crunch Short Report 3 Years on
- Public debt & the left
- Prison population predicted to hit record 88,500 by 2016
- The big switch: How Britain's homes could make cost-free emissions cuts
- Chris Grayling defends plan to use credit rating agencies to help catch benefit cheats
- CBI says government needs to speed up energy reforms
- BBC boss to scrap directors' pension top-ups
- Sainsbury's top easy access Isa pays 2.6%
- Cameron's war on benefit fraud: the unanswered questions
- Anger at looming fuel price rises
- Bank bosses get together to ease credit woes
- RICS: House price fall fuels double-dip fears
- EU bids to impose new taxes on Britain
- Petrol prices up £7 a tank on last year
- Benefit fraud and tax evasion: Tracksuit vs. White collar
- Retail sales growth slows on fears of government cuts
- Young from jobless families 'expect future on dole'
9 August 2010
25p an hour, 16 hrs a day
Amidst recent protests by garment workers in Bangladesh and Cambodia for a living wage and decent working conditions, a new sweatshop case was uncovered by the Observer at Indian factories where workers are paid 25p an hour and forced to work overtime to manufacture clothes for M&S, Next and Gap. A few workers who voiced complaints were beaten up and fired from their jobs. This story from the garment industry is nothing new nor is it surprising anymore. But what are we going to do about it?
I suspect, many of us have come to accept what mainstream economists like Paul Krugman, Jagdish Bhagwati, and Jeffrey Sachs have preached for too long. "Bad jobs at bad wages are better than no jobs at all".
At the time of slavery, these economists would have given a similar argument for slavery being better than no jobs at all. By their logic, husbands can perpetrate violence on their wives, as long as they provide them shelter and food, especially if their wives are unskilled and cannot get a job due to market or social constraints. Just because slaves would "voluntarily" choose slavery over starvation, and oppressed wives would continue to suffer their husbands instead of ending up with prostitution, does it justify the status quo? In fact, there is often a worse option to compare with when attempting to justifiy the most horrific and exploitative practices.
We should know better than find comfort in the ethically deviant arguments supporting sweatshops. Due to civil society campaign pressures, many big companies in the UK, including M&S, Next and Gap, have signed up to a code of conduct called the Ethical Trading Initiative. However, this form of self-regulation has not improved labour conditions by much so far.
Most of the global garment retailers work through a network of sub-contractors. This setup allows the retailers to distance themselves from unfair practices of their sub-contractors. On the one hand, the retailers may ask their sub-contractors to adhere to labour standards. But on the other hand, they apply intense pressure on these sub-contractors to reduce costs. Competition is fierce among the sub-contractors and they know that costs are the main factor in securing contracts. Labour standards therefore get a short shrift.
The greatest power consumers can exercise in this struggle for labour rights is by discriminating in favour of ethical retailers and manufacturers. However, there are serious constraints in doing so. Most people's income is in some proportion to the overall price of goods in the market. This makes it difficult for a large section of the population on average income to pay a significantly higher price for ethically produced clothing.
Nevertheless, big social changes and victories in the fight for human rights have only come at the cost of personal sacrifices. If we all can do our bit, according to our respective financial capacities, we can send a strong message to the retailers. Looking at the alternatives is a good start.
