Tag: Free Market Economics
Structural Rigidities are not such bad words
by sahilalvi on Sep.12, 2010, under Culture, Economics
“…I’m an alien I’m a legal alien
I’m an Englishman in New York
I’m an alien I’m a legal alien
I’m an Englishman in New York
If, “Manners maketh man” as someone said
Then he’s the hero of the day
It takes a man to suffer ignorance and smile
Be yourself no matter what they say…”
How the development of structural rigidities in Anglo-Saxon employment markets would help restore their economic vibrancy?
There is a basic flaw in the more fundamental form of the capitalistic model practiced primarily in the Anglo-Saxon world.
What often gets little coverage, or is dismissed contemptuously as a socialist notion, is that of employment security.
The economic and social ramifications of having little-to-no structural rigidities to ensure continuity of employment and health benefits creates the possibility of “fat tail” risks only too real at the micro-level, i.e. at the individual and family unit structure. In aggregate, of course, the micro “fat tail” risks affecting an individual or family become the macro “fat tail” risks affecting a community or a nation.
An utterly “free,” labor market with no obligations from the employer’s side towards the welfare of the employee creates a perverse corporate, economic, and social environment. In fact, this lack of employment and social safety net is one of the central causes behind the behavior of market participants that led to the Great Recession.
The “at will” employment law doctrine has created a culture of trigger-happy executive leadership that seeks to “get rid” of hundreds even thousands of employees at the slightest hint of weakness in corporate profits. Corporate “restructuring” or “downsizing” often becomes the first port-of-call rather than the last resort for companies to cut costs and increase profitability in times of financial weakness.
Corporate leaders, of course, are almost entirely beholden to shareholder interests because virtually no other constituency (employees, customers, government, etc.) has a say in their employability. Hence, a long-term, strategic greater good for the enterprise and for the society is sacrificed for boosting corporate earnings for the next quarter.
The net result of having little-to-no obligation and loyalty between the employer and employee is a chronic, short-term, superficial and socially deleterious view of relationships. There is very little “skin in the game” for either side to invest in the long-term welfare of the other. The employer does not invest much in the professional development and personal welfare of its employees. The employee, on the other hand, does not care as much (as she/he would otherwise) about the long-term sustainability and profitability of the employer.
In fact, it is human nature that if the employee views job security to be contingent upon managing perceptions and work politics, the commitment to long-term, organizational objectives and quality of output fall through the cracks in pursuit of “job security.”
There is, however, a hidden cost or, shall we say, a hidden tax that all of the corporations have to bear on a collective basis by creating instability and uncertainty among employed workers, and even more so, their unemployed counterparts. We all know this only too well that employment instability and consequent economic uncertainty creates an environment that is not particularly conducive for consumer spending or capital expenditure. By pursuing a myopic, narrow, and short-term objective of sustaining a corporation’s bottom-line for a quarter or two, or even a year or two, those very corporations end up exacting a self-inflicting wound by catalyzing lower demand for their products and services in a continuous downward spiral that the “Anglo-Saxon” economies find themselves in today.
Not to mention, the psychological and socio-economic effects of unemployment (and under-employment) manifest themselves in very visible ways across different facets of life – be it higher incidence of crime, psycho-somatic disorders, drug use, prostitution, home foreclosures, personal credit defaults, and ultimately, suicides.
“Fat tail” events for individuals and families create reverberations that echo in their lives for years to come, and in many cases, alter the course of their lives on a permanent, irrecoverable basis.
Hence, the “at will” employment law is, effectively, a license for a mutually abusive relationship rigged heavily in favor of the employer.
How does lop-sided employment law affect economic growth?
A mutually abusive employer-employee relationship creates an environment of low commitment, high uncertainty, and therefore, lower consumer spending.
Such a short-term, myopic view characterized by fear and doubt constrains the ability of the employee (and even the corporation) to innovate. Innovation happens in a healthy and relatively stable environment. Creative destruction in an environment dominated by fear, uncertainty, and doubt paralyses the ability of individuals (and corporations) to take risks – a necessary condition for innovation to blossom.
Switching gears, let us, for a moment, look back at those developed economies that fared better than others during the Global Recession: Australia, Germany, Canada, Japan, Norway, Switzerland, Sweden, Denmark, and The Netherlands, and to a lesser extent, France. All of these economies follow some sort or another of a hybrid liberal socialist-capitalist model.
One may argue that they are resource-rich countries (Australia and Canada) or small (Norway, Sweden, Denmark and The Netherlands).
But, what about Germany, France and Japan?
What about, even, developing economies such as India, China and Brazil?
In all of these countries, capitalistic pursuit of profit is tempered by the pragmatic humaneness and common sense inherent in structural labor market rigidities.
All of these economies have different degrees of preservation of workers’ rights built-in to their legal and regulatory framework, and more importantly, woven in their social ethos. Granted some of these economies have gone too far along the socialistic spectrum in the process discouraging the natural condition of human entrepreneurialism. They, however, have not sacrificed the larger, social good at the altar of “flexible labor markets.”
The question here, however, is not about the extent of structural constraints but about the consequence of them. While there is a legitimate debate to be had about how much socialism is just right and how much is too much. Indeed, too much structural rigidity creates inefficiency in labor markets and squelches a few percentage points off the GDP per annum. Indeed, beyond a point, structural rigidities hurt the competitiveness of economies in a rapidly and increasingly globalizing economy.
What, however, are the long-term benefits of these structural rigidities:
- Flatter income distribution;
- Lower economic volatility;
- Fewer and smaller economic distortions (and asset bubbles);
- Lower incidences of crime and social maladies;
- Higher quality of life (better healthcare, education, and public services).
In the Anglo-Saxon capitalistic model, the question is, is there any structural rigidity of any consequence to maintain and restore a healthy social order – and by extension – a vibrant economy.
Yes, one may argue, there are unemployment benefits and worker training programs sponsored by the government. But do they go as far as is required. More importantly, what is the burden and involvement of the employer in the welfare of the employee in these initiatives, anyway? Is paying the government a corporate income tax enough to absolve the corporation of all its responsibilities towards the employee?
Let us look at the two worst performing economies (on most economic indicators) compared with their developed peers; they are United States and United Kingdom.
Both of these countries, to different degrees of course, have followed a fundamentalist view of promoting flexible labor markets. Look where such misplaced trust in market fundamentalism got them.
To further reinforce the notion that too much of a “free” market economy (whether from a labor market perspective or from a capital market standpoint) isn’t really a healthy approach to capitalism, let us also look at the economies that had lax fiscal (and in some cases monetary) policies: Greece, Spain, Italy, Portugal and Ireland.
Hence counter-intuitively, in order for countries like US and UK, building a healthy number of structural rigidities in the labor market would actually re-build the foundations for a vibrant economy to emerge in the future.
It is entirely conceivable that, as the average employee benefits from greater job security, there is some likelihood of lower productivity due to a reduced fear of her/him being rendered redundant by the employer. Perhaps if you are an optimistic believer of the human spirit, the more likely scenario is that the employee might feel a greater sense of commitment towards her/his employer and hunker down to ensure the long-term viability of her/his company since she/he has greater “skin in the game” for the company to survive and thrive in a difficult period. Furthermore, job security would lead to a greater sense of well-being among the employees – thereby reducing risk of sub-standard quality output, fewer “sick days,” and lower healthcare costs resulting from psycho-somatic disorders such as hyper-tension, insomnia, among others.
From the shareholder class’ perspective, the most tangible benefit of having certain structural rigidities (or protections) in place within the labor market would mean a rise in consumer confidence resulting in greater consumer spending – which would spur economic activity through the classic multiplier effects.
A “happy” median can be found between the market fundamentalist view of the Anglo-Saxon economic model and the continental liberal, hybrid socialist-capitalist approach.
As demonstrated by the Great Recession, disproportionate amount of economic power residing among a few market participants creates social and economic distortions that, in the long run, hurt the financial elite themselves. At the end of the day, corporations (and their owners or shareholders) need confident consumers willing to spend on the goods and services these corporations produce. After all, a wealthy, “free market” capitalist has to live, breathe and operate in the same sovereign and geographic ecosystem as her/his unemployed, under-employed, stretched or destitute neighbor. If the neighbor’s house is burning, sooner or later, one’s own house is going to catch fire too.
Ultimately, what is good for the many (low-to-middle income families; shareholders or not) is good for the few (wealthy, shareholder, high-income constituents).
(You can read more about this thesis in my essay: The Great Moral Squeeze at www.sahilalvi.com)
