A sustainable labour market: what kind of structure?

A sustainable labour market structure, at industry-wide and national levels, should enable the productive efficiency of the economy to grow over time, and promote at the same time high levels of employment and low levels of unemployment. In a modern democracy, mass unemployment is unsustainable because it represents a tremendous level of waste, and also because it is likely to create social unrest and can undermine the very foundations of such a democracy. Governments may not always be able to ‘control’ the economy such that mass unemployment is banished for ever, as the current economic crisis has made clear, but they can pursue policies which banish it for considerable periods of time, and should do so.

Measures of economic growth record the increase in the production of goods and services in an economy over time. But growth is a complex process and involves a change in the structure of production over time as well. Companies and industries fail and can disappear altogether while new ones start up and develop. Jobs likewise ‘disappear’ both within such companies and industries, as well as within growing companies. New jobs are at the same time created across the economy. The balance between the two over time determines whether employment levels rise or fall.

As Geoff Harcourt has argued, in theory a ‘rigid’ labour market with industry-wide wage setting behaviour by trade unions is not incompatible with a dynamic economy. If wages are set at some uniform rate across an industry, those (less successful) firms with inferior techniques and low and declining profits will be forced out of business quicker without being able to cut their workers’ wages, while those more successful firms with superior techniques of production and higher profits will be able to sustain and expand investment and output without being hindered by flexible wage-setting behaviour forcing wages higher. Inferior techniques will be scrapped more quickly and resources will be re-allocated towards superior techniques of production. Economic growth and structural change can in this theory proceed apace.

I have been wondering about the more orthodox view that regards flexible wages across the economy as important facilitators of structural change and growth. In this theory, less successful and failing firms will be forced and able to cut wages to maintain profit levels, while more successful and profitable firms will be able to raise wages. In fact, they will want to raise wages to attract more labour as they invest and expand output. Workers are likely to respond to the different wage levels as a market signal, and apply for jobs at the firm which offers higher wages. Competition will prevent the failing firms from cutting wages too far, for fear that they will lose their workforce to rival firms, or even firms in a different and more successful industry. In a way similar to the ‘rigid’ wage-setting behaviour outlined in the paragraph above, the dispersion of wage levels across an industry and even the whole economy will have limits set in this case however by the forces of competition in the labour market as well as the market for firms’ output. In the first case, wage-setting is more institutionalised by trade unions, in the second it is market-driven. But the outcome of both cases does not seem too dissimilar in theory.

In theoretical terms then, institutionalised wage-setting in a market economy need not imply a stagnation of output caused by inhibited structural change. It is highly simplistic to argue that trade unions by themselves and in all cases cause unemployment and slow economic growth. Cross-country case studies would seem to suggest this. The Scandinavian economies have in general been successful in recent years, while maintaining strong welfare states and, I believe, trade union movements of significance. The large economies of France, Germany and Italy have to varying degrees suffered from high unemployment for decades now, and many economists have come to accept that labour and product market ‘rigidities’ have been the cause of this. Personally I would add restrictive monetary and fiscal policies maintained over long periods, and the costs, both static and dynamic, of German reunification. Economists need to take a subtle approach to recommending structural ‘reform’ to these governments. And these governments need to be bolder, in the face of economic crisis, with their macroeconomic policies, to prevent unemployment rising more than it needs to in the medium and longer term.

A sustainable labour market structure then, can be compatible with the presence of trade unions, especially those that accept that structural change is part of the dynamic of economic growth and development. Other ‘rigidities’ may or may not be compatible with this dynamic and labour market regulations and structures require close study before recommendations are made for blanket reforms which could sweep away those institutions that sustain social cohesion and also promote the very dynamism that economies need to grow.

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The separative qualities of capitalism and the dynamics of social evolution

The separation of the products we consume from the people who produce them; the separation of financial speculators from the products and people affected by their activity. These phenomena, while a function of the market and contributing to productive efficiency, create problems for many. They can be seen as the outcomes of an increasingly complex society, set in my view on a path towards rising globalisation and integration, and further complexity.

These separative qualities are probably a necessity of a society which is, as already mentioned, increasingly complex. Society is evolving faster than the individual human organism. Nevertheless (some) individuals are being driven to achieve their full potential by the forces arising from capitalism. This is all to the good, although these trends have not been examined from the point of view of human welfare and happiness. The forces unleashed by capitalism are driving some kind of evolution for the sake of itself.

The complexity of society then, reflected in these probably rising separative qualities, paradoxically involves many individuals in an increasing alienation from each other, from neighbours in big cities for example, even as they are integrated into a more global society. Where incomes inequality is rising, those at the top of the earnings scale become more and more divorced from those at the bottom, from those outside their gated communities or private clubs. Global production supply chains, whereby goods consumed in one country are part-manufactured in many others, with inputs of natural resources, labour and capital from all corners of the world are another part of this rising complexity.

These trends mean that human and natural resource exploitation can be hidden from the final consumption of goods and services. Of course, the hidden qualities of the production process can be revealed to the consumer and, once aware, he or she can take action to change and improve labour conditions and prevent environmental problems that may have been occurring. This kind of campaigning for forms of corporate social responsibility can be difficult and may involve contradictory processes. Raising the rate of growth of economic and social development may be required for labour conditions to improve, but protecting the environment may require a slower rate of development. The latter may involve internalising environmental externalities and companies realising more fully the costs of their activities.

‘Development’ then may necessitate increasing social complexity, even while the progress of individuals remains negligable biologically. Social transformation can revolutionise the behaviour of individuals, just as the behaviour of individuals can in turn transform society. These two views of progress are usually associated with the ‘left‘ and the ‘right‘ respectively. They remain models of society, simplifications of ‘reality’. I would argue that they are more fruitful when combined in dynamic fashion, moving us beyond simple political affiliations.

Sustainability and Sustainability

I am reading parts of the book ‘Deforesting Malaysia’ by Jomo et al. at the moment. In the context of producing palm oil, some companies as well as the government of Malaysia, pay various degrees of lip service to the idea of ‘Sustainable Palm Oil‘. What does this mean? In the book, one of the authors distinguished between two kinds of sustainability. The first would mean producing at a level and in a way that allows this level to be sustained into the future. The second would take into account biodiversity and the wider environmental impact. The author argued that no modern agricultural production methods were sustainable in this second sense.

In the very long term, the neglect of this second form of sustainability could well impact on the production of other commodities, manufactures and services in the region of production of the original commodity (palm oil) if, for example, climate change and soil erosion make such production difficult. A more macro-environmental approach, taking account of wide-ranging externalities, not simply a focus on the narrower production of one particular commodity, while more difficult to analyse and draw clear predictions from, should be taken into account when formulating environmental policy. While the conflict between planetary ecology and economic production is clear, some middle ground could and should be found. Increasingly, the environment needs to be managed and cared for by humanity. To coin a cliche, with knowledge comes responsibility. We are aware of the problems, and it is an imperative to find the solutions.