The Rising Strength of Management: High Unemployment and Jobless Recoveries?

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The Rising Strength of Management High
Unemployment and Jobless Recoveries?

• Michael Reich
• University of California, Berkeley
• Capital on Trial conference
• September 30, 2011

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Introduction

• TEW 1979 Combined demand-side gaps and
  cost-side profit squeezes to identify causes of
  crises.
• Found Profit-squeeze explained mid1970s crisis,
  mainly because of RSL.
• Caveat RSL was mainly about rising labor share,
  not rising labor strength.
• In current period, Rising Strength of Management
  (RSM), especially since 2000.

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RSM since 1980s (inverse of labor share)
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My focus here, following TEW 1979

• RSM since 1980s
• -- decline in union strength
• -- changes in employment contract- toward
• more short-term and less commitment
• --changes in management incentives toward more
  short term share price
• What are the consequences?
• (Note will ignore globalization, deregulation of
  finance, etc.)

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Outline

• Main question Does RSM generate higher UE rates
  and jobless recoveries?
• RSM and changes in incentives to lay off workers
• Pieces of the puzzle in U.S. and Europe
• Cycle and trend estimated changes in Okuns Law
• Data and findings In Europe, large change in
  cyclical effect. In U.S., small change in
  cyclical component, larger change in growth trend
  
• Conclusions

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Example of RSM
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Main question

• Does RSM generate higher UE rates and jobless
  recoveries?
• Intuition
• --Unions have declined
• --LTERs are less common (Farber 2008)
• -- Increase in short-term, dead-end low-paid jobs
  greater labor market dualism
• --Therefore more disposable workers and slower
  productivity growth

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RSM greater incentives to lay off workers

• Cost-cutting business model In 1980s and 1990s,
  share prices increasingly fall less, and rise
  more, following layoffs (Farber Hallock 2009)
• Consistent with disposable worker thesis of
  Uchitelle 2006 Gordon 2010, 2011
• But in 2000-2007, share price behavior reverts to
  1970s pattern (Hallock 2010)
• Pattern since 2007?

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Meanwhile in Europe, rise of labor market dualism

• Temporary contracts about 10-15 percent of all
  workers, 35 percent in Spain. Implies 80-90 of
  all new hires.
• Workers on temp. contracts are paid less, not
  trained, rarely move to permanent status. (Reich
  2009)
• Result more employment variability with business
  cycle change in Okuns Law

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Figure 2 Trends in temporary (fixed-term)
contracts in Europe, 1983-2010
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Figure 4 Okuns Law France and the U.S.,
1962-2007
Notes Annual observations. Source Bertola,
Giuseppe 2009. Labor markets on the verge of a
regulation crisis. Vox-EU.
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Figure 3 Okuns Law scatterplots for U.S.
states
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Okuns Law Cycle and Trend
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• Conclusions I-- Europe
• RSM has generated more labor market segmentation
  and led to more volatility in UE
• (France- Spain comparison, Bentolila et al. 2011)
• Many European labor economists propose
• Eliminate the sharp distinction between permanent
  and temporary contracts, i.e. move to the U.S.
  model (Boeri et al. The Scourge of Dual Labor
  Markets, 2010)
• But would the U.S. model be an improvement?

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• Conclusions II RSM in the U.S.
• Small effects on cyclical part of Okuns Law
• Perhaps because of an anomaly in 2009, when
  credit channel freeze may have increased
  unemployment (Gabe Chodorow-Reich, forthcoming)
• Larger effect on reducing trend growth rates.
• --Evident in long period of employment slack from
  2000 to 2007 and in high UE in the Great
  Recession and the jobless recovery