The U.S. Jobs Miracle

Not the model it's touted to be

by Edward S. Herman

Z magazine, July / August 1998


In both Europe and the United States, the substantial growth in U.S. jobs over the past several decades has been repeatedly cited in support of the view that a "flexible" labor market is the solution to the problem of unemployment that has beset the West once again. "Flexible" is a euphemism for "unorganized and unprotected by unions or government regulation," and the implied remedy is a weakening of labor organizations and power, along with changes in government labor and welfare policies, that will allow wages to be lowered and kept down, and working conditions to be set by employers without obstruction.

The "flexibility" concept fits perfectly the ideological and economic demands of the corporate community, which wants labor costs and the social wage reduced and the government to serve business, not labor and the general citizenry. In the corporate/neoliberal view, direct government service to ordinary citizens increases business costs and reduces "competitiveness," and it is opposed and vetoed with increasing effectiveness by financial markets and corporate-funded politicians. In the neoliberal order, the only allowable gains to the general populace must trickle down from successful business endeavors, and policy is oriented toward increasing business profitability-fattening the geese that lay the golden GDP eggs.

An important part of the supportive ideology is the claim that globalization now demands competitive costs, and with low wages and meager welfare provision abroad, harmonization downward is needed to preserve and increase jobs. Within this framework of thought, the U.S. is portrayed as a model, where "flexible" labor markets have allowed jobs to soar, giving us the best of all imperfect worlds.

It is true that the U.S. model has produced a lot of jobs over the past several decades. Employment grew by 41.6 million, or by almost 49 percent, between 1973 and 1996, and by 17.2 million between 1987 and 1997, and the U.S. unemployment rate of 4.3 percent in mid-1998 compares very favorably with that of France, Germany, Italy, and Great Britain.

But there are three problems with the model. First, its success in producing jobs has not resulted from the flexibility of its labor market. Second, the jobs it has produced have not been good ones by any measure. And third, the social costs of the application of the U.S. model have been very large.

Jobs through deficit spending. U.S. jobs growth cannot be explained by low wages and deregulated labor markets. U.S. jobs growth was even better relative to Europe's in the cycle of the 1970s, when the U.S. welfare state was still virtually intact, than in the 1980s when labor and the welfare state were in retreat. Canada's job expansion record in the 1980s was better than that of the U.S., despite greater market regulation and stronger unions. Spain has had far lower wages than France and Germany, but its unemployment rate has been substantially higher.

The prime cause of the relatively large growth in U.S. jobs has been deficit spending. During the Reagan years (1981-1988) the deficits were so large that the national debt almost tripled, and sizable deficits continued through the Bush and well into the Clinton years. The Reagan-era deficits were based on massive increases in military spending, along with regressive tax cuts that contributed to a stock market boom and spending orgy by the affluent. This expansionary fiscal policy was supplemented by a monetary policy that, while tight enough to contain wage increases, was geared to counter-cyclical action.

Europe also had sizable deficits, but they were produced by the shrunken revenues and enlarged welfare spending of recessionary conditions, not by a proactive fiscal policy as in the U.S. European monetary policy, also, has had a more deflationary bias, as a result of Bundesbank domination, inflation fears, greater exchange rate vulnerability to fiscal deficits, and the budget constraints imposed by the Maastricht agreement. Fiscal and monetary policy have simply not been employed to combat large-scale unemployment.

Another factor making for higher U.S. job creation rates than in Europe has been the more rapid growth of the U.S. working-age population, resulting from higher immigration and birth rates. Still another factor has been the large job decline in European agriculture consequent to the gradual withdrawal of protection, causing a recent yearly fall in agricultural employment of 4 percent (versus 1.6 percent in the U.S.). These factors have probably been more important than labor market flexibility in explaining differences in job creation rates.

It is true that in the 1980s and 1990s the U.S. Iabor market was made more flexible by corporate and government policies working in tandem. Corporations engaged in ruthless downsizing, bargaining down of labor through threats to relocate and actual relocation to union-free territory, and union-busting. They were aided by government policy, which included imposing a major recession in 1981-1982, direct union busting (Patco) as well as policy support for often illegal corporate anti-union actions, reduced unemployment compensation, allowing a fall in the real minimum wage, and forcing large numbers of poor people into the labor market through cuts in public welfare. These actions severely weakened the union movement and labor's bargaining position. But the changes had a far more important effect on job pay and quality than on the number of jobs.

Excessive unemployment. Although the U.S. has created many jobs and gotten the official unemployment rate down to 4.3 percent, it has still maintained a reserve army of unemployed large and insecure enough to prevent any significant escalation of wages. This has been assured by Federal Reserve policy, which focuses on the inflation threat, which is viewed as turning on labor costs. Unemployment is kept at a level sufficient to prevent any substantial labor cost increases, and this policy, along with the more "flexible" labor market, has been crucial in causing the median real wage of non-supervisory workers (80 percent of the total) to be lower in 1998 than it was in 1973. Only in 1997-1998 have real wages shown a modest upswing, after many years of decline or stagnation that continued for five years into the cyclical expansion that began in 1991. Alan Greenspan will not tolerate much more of this dangerous development.

The Fed's long success in preventing wage increases suggests that the U.S. unemployment figure is understated. The U.S. number in February 1998 excludes 4.3 million "discouraged" workers (who have not looked for work in the past month) and 3.9 million part-time workers who would prefer full-time work. Adding in discouraged workers, the U.S. unemployment rate is 7.8 percent, and adding in the involuntary part-time workers gives us an underemployment rate of 10.6 percent. Economist Fred Pryor notes that in the mid-1960s, 6.3 percent of prime age men (25-50) were unemployed or out of the labor force, whereas in March 1997 that number was 11.9 percent.

Nor do these numbers include the prison population of some 1.3 million men of working age, a large fraction of whom would have been unemployed if they had not been incarcerated. Another very large number of people are employed to guard and manage the prisons. The system of incarceration is unique to and an integral aspect of the U.S. model, flowing from the maintenance of loose labor markets, the weakening of welfare state protections, the failure to deal with racial discrimination and segregation, and the use of racial scapegoating as a political tactic to facilitate neoliberal control.

Poor and declining job quality.

The quality of U.S. jobs has deteriorated since 1973, as measured by wage levels, benefits, working conditions, and job security. As noted, the median real wage of non-supervisory workers was lower in 1998 than it was in 1973. New jobs have been heavily concentrated in low-wage sectors. Between 1979 and 1995 there was a net loss of 2.2 million jobs in the goods producing sectors, while 29.1 million jobs were created in services. The former sector had an average wage of $20.22 in 1993, whereas services' average wage was $15.51. The relatively low-paying retail trade and business, personal, health, and temporary services accounted for some 80 percent of new jobs. There have been numerous attempts by apologists for the status quo to prove that new jobs are in high wage occupations and sectors, but this is clearly wrong for the big job surge of 1979 to 1995. The most recent studies invariably fail to demonstrate that new workers in relatively well paid occupations are themselves well paid (only occupational or sectoral average pay is readily available), and the contrary is suggested by the steady decline of the median real wage through 1996 (Jared Bernstein, "Anxiety over Wages Still Justified," Economic Policy Institute, 1996).

The stagnant and declining wages of the 80 percent, 1973-1996, were offset in part by longer hours of work by employed workers, a sharp increase in multiple job holding, and a surge of women's entering into the work force, often driven by the need to compensate for declines in men's wages. All of these developments, while increasing family incomes, reflect welfare losses for those driven to these compensatory actions.

Through 1996, also, the U.S. model provided a steady decline in employee job stability and in employee benefits (numbers covered, extent of benefits), a growth of involuntary part-time and contingent labor, increased accident rates, and an increasing intensity of work under "lean" production methods and "management by stress." (Mishel, Bernstein and Schmitt, The State of Working America 1996-97; Kim Moody, Workers in a Lean World, 1996.) In this new work environment, Taylorist methods have been refined, with more frequent and rigorous studies and recalibration of tasks to extract maximum effort, causing media and even business reference to a return to "Dickensian" conditions, "throwaway workers," a "slash and burn" treatment of the labor force, and "creating something like a Third World economy right here in the U.S."

Increasing inequality.

The U.S. model has produced an increasingly two-tiered system of privileged executives and core skilled workers, on the one hand, and a great mass of unskilled and less fortunate skilled workers who have done poorly, on the other hand. The former, comprising at best 20 percent of the working force, can also be broken into two tiers of skilled workers who have made modest real wage gains, and a specially privileged management group of 2 to 5 percent at the top, who have done exceedingly well and reaped gains well in excess of productivity advances. Average CEO pay grew by 152 percent between 1978 and 1995, more than 5 times as rapidly as productivity. This same small group captured a very large fraction of the wealth gains from the huge rise in the stock market over the past 20 years (66 percent went to the top 10 percent). The lower 80 percent, with minimal stock ownership-some 60 percent own no stock, directly or indirectly-have had stagnant and falling incomes, and have therefore not shared at all in productivity advances of the past 25 years.

With its huge proliferation of low wage employment, and substantial declines in real wages in this large sector, the U.S. model has nurtured an important new category called the "working poor." These comprise families with members in full-time employment pulling in incomes below the poverty level. The number of male workers earning Iess than 75 percent of poverty wages more than doubled between 1973 and 1995, and the number of very poor working families (incomes less than half the median, spending 50 percent or more on housing) rose from, 1.1 to 1.4 million between 1991 and 1995. The overall U.S. poverty rate of 13.8 percent and the 21.5 percent rate for children tower over those of its European and Japanese rivals. There are an estimated 30 million people who suffer from hunger in this richest of the world's countries (up by 50 percent from 1985).

Just as the U.S. model disconnected wages and productivity growth, so it has produced a new disconnect between economic growth and poverty reduction. In earlier years economic growth meant a decline in poverty rates; but between 1973 and 1995, despite an over 30 percent increase in per capita productivity, U.S. poverty rates rose.

A Class Warfare Model

It is clear that the U.S. model is one of successful low-intensity class warfare, with the corporate elite taking advantage of its improved economic and political position to force gains at the expense of the 80 percent. It has weakened and bargained down labor, and, with the help of mainstream intellectuals and media, it has reshaped government policies to serve its own interests. Even today its political representatives push for tax legislation that will further restructure taxes to the advantage of the beneficiaries of the gains of the past 25 years.

The new tax and labor policies have not improved U.S. productivity growth, which has remained in the vicinity of 1 percent a year since 1973, down from the prior 25 years, and, for the years 1979-94, substantially lower than that of France, Germany, Italy, Japan, and Sweden. The elite's gains have come from its success in containing wages, ruthless downsizing, regressive tax changes, and harsh cutbacks in the welfare state, which have been translated into high profits, high executive incomes, and huge stock market gains. With weak productivity growth, there has been a virtual zero sum game, with the elite picking up the chips at the expense of the losers-80 percent of the population.

If we assume that the purpose of the economy is to serve and improve the welfare of the entire body of citizens, the U.S. model has clearly been a major failure. It has served a minority, and the majority have not only failed to share in the income gains yielded by the model, they have suffered from reduced benefits, greater job instability and stress, and a diminution of expectations and sense of hope for the future. There can be little doubt that the high crime and drug use rates in the U.S. are related to the country's failure to provide decent work, help, or encouragement to vast numbers of its own citizens. Inequality has adverse effects on health and mortality through a variety of channels. Richard Wilkinson's important studies show that in Britain during the Thatcher years and in the U.S. during the Reagan term, the sharply increased income inequality had significant effects on mortality rates, working through stress related diseases and crime. There is also evidence that the learning capabilities of children are adversely affected by economic distress. (Richard Wilkinson, Unhealthy Societies: The Afflictions of Inequality, 1996.)

Breakdown Threats

A part from its blatant class bias and short-run anti-general welfare effects, the U.S. model is immensely dangerous for the future of human society. It represents a short-term "apres moi le deluge" approach, in which the dominant class exploits its advantages ruthlessly, despoiling both the human and natural environment, weakening any sense of community, polarizing and creating a huge mass of alienated, dissatisfied, and sometimes desperate people, and relying on a new police-prison complex to keep them in check. The facade of democracy within which this takes place is gradually losing credibility and may well be swept away in the wake of social upheavals that are likely to follow the continued application of the model.

The U.S. model also sows the seeds of financial collapse, both at home and globally. For both, deregulation of finance and capital markets, and the erosion of regulatory capabilities in a privatizing and "anti-government" world, have helped create a casino-like market pervaded by speculation, essentially unregulated. In contrast with lucky Thailand, South Korea, and Indonesia, which had been brought fully into the global financial markets, the press has noted that poor China, which still maintains significant capital controls, is not yet so well integrated and is therefore likely to escape serious damage in the latest crisis. Well, maybe in a few more years China will have had adequate "reforms" to qualify, and in a few more years global crises may well be beyond the bailout capabilities of the U.S. and IMF.

Within the U.S., feedbacks from external crises, the high level of consumer debt and the vulnerability of a greatly inflated stock market provide interrelated threats to stability. But underlying these, here and abroad as well, the impact of the U.S. model on the lower 80 percent of non-beneficiaries poses the greatest threat. Excess capacity threatens in many lines of activity as the 80 percent don't have the incomes to buy all that immense flow of goods (Alan Simpson and Colin Hines, Who Will Buy?, 1998). Furthermore, there is the always present danger that they will revolt against their oppressors, and, even if not removing the rascals, may force them to raise wages and rehabilitate the welfare state, thereby making the geese leaner, taking away some of their golden eggs, and reducing "competitiveness."

Some Alternatives

It may of course be argued that the U.S. model is simply mature capitalism, the Marxian model in pristine application, and that everybody is moving in this direction under capital's newfound power and competition in the New World Order; that this will continue until the system produces the counterforces and crises that will bring it down altogether.

There is little doubt that the U.S. model represents the global trend, but whether it will be fully realized and cannot be contained short of this, and without coming to a violent end, is far from clear. Democratic structures remain in place in the West and are common elsewhere, and the profoundly undemocratic workings of the U.S. model produces resistance that cannot be dismissed in advance as hopeless. That resistance assumes many forms, but using the instruments of democracy to try to preserve and enhance social democracy must be one of them.

That resistance should not be stymied by the ideological successes of capital. One of them, that the U.S. model is a jobs, productivity, and welfare enhancing triumph, I have shown to be false. A second is that globalization and the demands of "competitiveness" must rule out social democratic policy options. There can be no doubt that globalization constrains social democracy, but its limiting effects depend on allowing the market full hegemony. This should not be permitted-democracy and the choices and welfare of national majorities should take precedence over the demands of the business community, and with determination and a resurgent democracy they can.

What forms should these efforts take? Capital controls should be put in place and transactions taxes imposed on foreign exchange trading to curb speculation and to allow governments to prevent finance capital from counteracting policy decisions deemed important by democratic governments. International agreements such as GATT, NAFTA, and the proposed Multilateral Agreement on Investments, which give transnational corporations (TNCs) and supranational bodies rights to override democratic polities should be drastically revised or-as is clearly the case with the MAI-scrapped altogether.

Taxes on TNCs should be restructured to favor domestic investment, and TNC obligations to serve their home populations should be made clear in law and policy. Macropolicy should cease to be almost entirely preoccupied with the inflation threat and should give substantial weight to maintaining full employment. Inflation threats based on negative foreign exchange market reactions to social democratic policies should be attacked by using an incomes policy (collective and group regulation of wage and price changes), capital market controls, and, if possible, coordinated policies among countries. But national policies to protect and serve the majority cannot be sacrificed to the demands of the global market.

The objectives of national policies must be changed from service to the corporate community to working in the interest of national majorities. All of the needed policy actions and changes therefore hinge on a recapture of the state and state policy by these national majorities. That is the greatest challenge: and it rests on an understanding and reframing of the issues, a refusal to be blackmailed by claims of No Other Options, the rebuilding of the labor movement and its reorientation toward pursuit of a broad social agenda, and the development of other effective grass roots organizations.

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