Low unemployment leads to higher wages—NOT!


UNEMPLOYMENT IS LIKE THAT OLD “BAD NEWS/GOOD NEWS” JOKE. The bad news is there is nothing to eat but buffalo chips. The good news is that there are plenty of buffalo chips. Our current low unemployment rate is like that. What should be good news is actually bad news.

How can that be?! Isn’t a low unemployment rate always good news? Isn’t it a sign that there is a lot of work? Which should give workers a chance to pick and choose and hold out for better pay. Not anymore.

The problem is—the bad news is—that most of that work is low-paid, precarious and limited to certain job catagories. About as desirable as a mouthful of buffalo chips.

The reason has mainstream economists, well, buffaloed. Kinda.

According to the Economic Policy Institute, from 1973 to 2014 most workers in the USA barely saw any increase in pay—about a 9% raise overall (adjusted for inflation.) Yet in that same period, productivity rose 72%.

In reality the reason for unending low wages is—wait for it—employers and bankers colluding to keep things that way.

Working at keeping wages low

The central bankers are petrified by the fear of inflation because inflation makes money worth less tomorrow than it is today. And that’s not good for the 1% crowd. The people who make money by trading in money.

Low unemployment used to always come with a rise in inflation. So, the financial elites have no use for low unemployment. Except things have changed. Now they don’t mind so much because inflation continues to remain low.

This flies in the face of an economic principle invented in the 1950s by New Zealand economist William Phillips. Phillips noticed that when there was a strong demand for workers, wages got bid up, which allowed the workers to bid up the price of goods in the economy.

In other words, low unemployment—like now—led to wage inflation, which led to price inflation.

On the other hand, when there were few jobs and a glut of workers, prices, and thus inflation, grew more slowly.

But, we don’t have wage inflation. We have wage stagnation pretty much. Contrary to what the supposed free market is supposed to deliver.

To begin with, governments have left it to the central banks to stimulate the economy. But their abject fear of inflation keeps them from doing that. So, they keep interest rates low which makes business expansion less attractive.

But it has encouraged the well-heeled to bid up existing assets without creating new assets, thus failing to create new and better jobs, says Herb Emery, who holds the Vaughan chair in regional economics at the University of New Brunswick.

“Low interest rates have created a stock market boom but [that] did not result in an investment boom,” says Atif Kubursi, a professor emeritus at McMaster.

And as those assets rose in value, they contributed to what he describes as a “terrible and unacceptably skewed income distribution,” which leaves spending capacity in the hands of the rich, who fail to spend, instead of directing it into the pockets of workers who would happily welcome a chance to live a little better.

Emery also says we should be more dubious about the way unemployment is measured. He points out the statistics fail to account for workers who have gone AWOL, who have simply given up looking for work that isn’t there.

“You may see that you actually have a not bad unemployment rate, but it’s because people just aren’t even trying to work anymore,” says Emery.

As long as those “discouraged workers” remain in reserve there will be no pressure from within the active labour force to bid up wages.

Another factor may be that an increase in precarious unskilled work means modern employees have next-to-no leverage when it comes to bargaining for higher wages, says Kubursi.

Job polarization

Henry Siu, an economics professor at the University of British Columbia, studies “job polarization”, where wages in the modern job market have grown apart. While workers with special skills do well in a high-technology job market, the unskilled or less-skilled who would normally earn the minimum wage have been making little progress.

One reason is that jobs that can be replaced by machines are being replaced, and that affects simpler jobs such as secretarial tasks and warehouse forklift operation. But part of the blame, says Siu, goes to the growing power of large national employers such as fast food chains and retailers like Amazon that are able to act like monopolists, only in hiring.

“What’s increasingly true is that the labour market is becoming less competitive and more what we call in economics, monopsonistic, which is the labour-side analog of a monopoly,” says Siu.

The other issue, he says, is that while the unemployment rate is definitely falling, the number of available workers is not rising at anything like the rate it has during previous booms.

Outsourcing also works against the chances of higher wage rates. The practice of outsourcing work to subcontractors, who use subcontractors, who use subcontractors and on and on, leaves workers with less and less of the pie to share.

The more layers of businesses in the outsourcing chain, the less money there is to pay the workers, who too often wind up with poverty wages.

Can you say collusion?

And then there is the power of monopoly. Just like in the bad old days of railway robber barons, large corporations—think Amazon, McDonalds, Microsoft, Apple — can corner the market in employment. The technical term for this is monopsony, like a monopoly, except that what is controlled is what employers are ready to pay, and not the control of what they are ready to sell.

Monopsony is no abstract economist’s lingo for Leinani Deslandes. It kept her from  getting a 23% raise.

Leinani got an entry-level job at a McDonald’s franchise in Apopka, Florida, in 2009. She made $7 an hour. She advanced quickly and was promoted to a position that paid her $12 an hour.

Looking to do even better she found an opening for a manager at another McDonald’s, run by a different franchisee. The job there paid $13.75 an hour and would jump to $14.75 after a 90-day probationary period. That kind of pay meant a 23 percent raise over her current job. But there was a catch.

McDonald’s franchisees are required to sign a contract with corporate headquarters that includes a “no hire” and “no solicitation” clause stipulating that they can’t “employ or seek to employ any person” who is either currently employed by another McDonald’s franchise or has been in the past six months.

Deslandes’s boss refused to release her. So she had to stay where she was, at her lower pay.

Deslandes is now suing McDonald’s. Her law suit alleges: “McDonald’s has colluded to suppress the wages of the restaurant-based employees who work not only at McDonald’s in Orange County, Florida, but also throughout the United States.”

Noncompete and nonpoaching agreements like the ones used by McDonald’s are becoming rampant throughout the economy and are frequently applied to workers holding low-wage jobs—jobs without any access to company secrets in the first place.

You are not free to go

Researchers recently combed through franchise agreements at 156 of the largest chains in the USA. They found that nearly 60 percent included nonpoaching clauses among franchisees, similar to what Deslandes faced at McDonald’s, including low-wage employers like Burger King and Baskin-Robbins. It’s hard to imagine what secrets of ice-cream scooping need to be protected by such agreements; instead, it’s likely that they’re meant to keep workers stuck in place.    

“In terms of suppressing competition, companies agreeing not to compete for each other’s employees is the same as companies agreeing not to compete for each other’s customers,” explained Wharton professor of business economics and public policy Joseph Harrington in 2014.

“In the latter case, it results in customers paying higher prices because of the lack of competition, and in the former case, it results in workers receiving lower wages because of the lack of competition.”

Economist Marshall Steinbaum offers four policy solutions to monopsony power:

  • increasing the minimum wage;
  • facilitating unionization;
  • implementing a jobs guarantee that would get the economy to full employment; and
  • instituting some sort of unconditional income, perhaps a universal basic income.

“The whole issue with monopsony power is that [workers’] power is reduced,” he says. “Any form of unconditional income for workers increases their bargaining power.”

 “This is definitely an issue that has galvanized a lot of public attention,” says Steinbaum, “and I don’t think that’s going to go away anytime soon. It’s pretty obviously not just a fad, but how the economy works.”

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