20 July 2009

1. 20 July 2009 Professor Richard Freeman Faculty Co-Director Harvard University Department of Economics Presented to ACTU Jobs Summit 20 July 2009. Views within are those of the author and not necessarily those of the ACTU.

2. The Global Labor Market post the collapse of Wall Street capitalism Richard B. Freeman, Harvard, NBER Centre for Economic Performance, LSE Financial Review Conference April 6-7, 2009

3. 1) Background: 2-3 decades in which labor reform meant deregulation/more reliance on markets/greater inequality OECD job study told advanced countries how to solve economic problems: “it’s the job market, stupid” Increase flexibility of working time; Make wage and labor costs more flexible by removing restrictions; Reform employment security provisions; Active labour market policies; Reform unemployment and related benefit systems WB told developing countries how to grow:“Labor market policies – minimum wages, job security regulations, and social security – are usually intended to raise welfare or reduce exploitation. But they actually work to raise the cost of labor in the formal sector and reduce labor demand ... increase the supply of labor to the rural and urban informal sectors, and thus depress labor incomes where most of the poor are found.”

4. The high-tide of these policies: Howard’s WC law in Australia Most anti-labor act in any democracy (687 pg law + 565 pg memo amending a 861 pg act ) FIRMS CANNOT: provide for payroll deduction for union fees; entitle employees to paid or unpaid trade union training leave; indicate how a future agreement should be renegotiated; enable a union to participate in a dispute resolution procedure in its own right (even in a union collective agreement); provide for right of entry for union officials; restrict or regulate the conditions of independent contractors and labour hire workers; provide for annual leave to be foregone other than in accordance with the AFPCS;) provide a remedy for unfair dismissal on the basis that it is harsh, unjust or unreasonable;

5. But evidence was weak – enough to meet priors but not to convince skeptic OECD 2004 Employment Outlook :“the evidenceof the role played by EPL … remains mixed” … Favor “the plausibilityof the Jobs Strategy diagnosis that excessively high aggregate wages and/or wage compression have been impediments” but “this evidence is somewhat fragile”;what collective bargaining does “appears to be contingent upon other institutional and policy factors that need to be clarified to provide robust policy advice”. OECD 2006 Employment Outlook notes that English-speaking and Nordic both produce high employment. Wolfman I (the Australian Wolf, World Bank President Wolfensohn, 2004 Shanghai) “The Washington Consensus has been dead for years,”

6. China had different view because of worry over social instability Jan 2008 new labor contracts law; May 2008 new labor dispute law 2000s; start national pension; reemployment and UI for laid-off

7. Big problems facing global labour markets but manageable with growing world economy • Globalization – competition from low wage workers in China/India • Increased skill formation in those countries  workers in advanced not safe from competition • Africa, Latin America not keep pace • Aging populations • Rise of female work force

8. The Growing Informal market BEFORE the collapse Some ILO estimates of Self-employment share of non-agricultural Employment, 1980s to 1990s; World 26% to 32% ; Africa 44% to 48%; Latin America, 29% to 44%; Asia 26% to 32%

9. My Estimated Changes in Informal Market Employment Ten Largest Countries in Developing World, 1990s-2000s Country Period Informal Share • China 1990 to 2005 51% to 52.8% • India 1993/4 to 2004/5 92.7% to 94.1% • Indonesia 1990 to 2003 28.2% to 28.2% • Brazil Urban 1990 to 2003: 40.6% to 44.6% • Pakistan, urban 1997/8 to 2001/2 64.6% to 66.5% • Nigeria, urban 1970s to 1990s 50% to 65% • Mexico 1991 to 1998 61.2% to 63.6% • Philippines 1999 to 2003 78% to 81% Could not find Insufficient data for Bangladesh, Vietnam Based on search of data on web from country studies

10. 2) Collapse of Wall Street Finance Model: WE OWN, WE DO NOT PRODUCE Incentives for risk-taking Weakness of labor & NGOs to push back Labor market problem was in incentives for CEOs/management – options  criminal accounting, more variable performance Regulatory failure Wall Street influence on politics Criminal behavior -- looting

11. “ Don't blame me and my friends, suckahs. We grab what we can just as economics says. It's not our job to worry about systemic risk. As my buddy Gordon Gecko said, greed is good. We follow the incentives. Rewrite options when they go underwater; backdate them when share prices rise; finagle the books so profits look good; leverage to the gills; sell risky assets as if they are safe. Shareholders? Investors? Caveat emptor. We fight unions so there is less for workers. As Warren Buffet said, it's class war and our class won! The biggest share of GDP since the 1920s to us – the financial elite! Where were the regulators who are supposed to protect the public from us? In our back pockets, suckah!

12. But if you broke the law … FBI has 500 investigations on-going. We will see these headlines every week NY TIMES April 7, 2009 Cuomo Sues Financier for Fraud Over Funds Invested With Madoff J. Ezra Merkin, a prominent New York financier whose private clients lost more than $2 billion in the collapse of Bernard L. Madoff’s Ponzi Scheme has been accused of fraud and deception in a civil lawsuit filed Monday by the New York attorney general … The lawsuit, filed under state charity and securities laws, claims that Mr. Merkin improperly collected more than $470 million in fees from his clients, who included more than a dozen nonprofit organizations, by “falsely claiming he actively managed their funds” when in fact he simply handed their money over to Mr. Madoff, without adequate investigation or oversight. The complaint charged that Mr. Merkin had failed to carry out the diligent research and investigation he had promised, and in some cases had deliberately deceived clients about investing with Mr. Madoff.

13. April 6, 2009 Government Cracking Down on Mortgage Scams By THE ASSOCIATED PRESS WASHINGTON (AP) -- Top federal and state officials on Monday announced a broad crackdown on mortgage modification scams, accusing ''criminal actors'' of preying on desperate borrowers caught up in the nation's housing crisis. Government officials say scammers are seeking to take advantage of borrowers in danger of default by charging them upfront fees of $1,000 to $3,000 for help with loan modifications that rarely, if ever, pay off.

14. The Big Lessons The Achilles Heel of Capitalism is the Financial market . WE TOOK OUR EYES AND REGULATORS OFF THE MAIN PROBLEM Social insurance, which can cause modest inefficiencies, is indeed insurance Labor institutions, which reduce inequality, may limit incentives for financial chicanery The losers: normal workers and taxpayers, businesses that produce goods and services

15. Recovery will be slow and halting US unemployment hits 8.5% after 5 million jobs are lost in recession -- will probably reach 10% in September. Previously had jobless recovery as employment has lagged GDP for longer and longer; China's job losses send 20M migrants home – huge unemployment possible among new college grads World economy may lose 51 million jobs: U.N. agency – vast underestimate

16. Dangers from Collapse Money down the banking drain with no response Protectionism Lose sight of big global problems: climate change, energy, pandemic, terrorism Weakness of democracies Worse: Dominique Strauss-Kahn, managing director of the International Monetary Fund, warned on Monday March 23 at ILO that the global economic situation is "dire" and could lead to social upheaval and war.

17. 3. New policies for new world Labor programs and policies; “We are all Keynesians now” Stimulus spending vs huge pressures for wage concessions and cuts in programs and employment; In US, government employment is cyclical because states and municipalities are budget constrained

18. Four questions on road to recovery: 1) Is income distribution critical to stable economy? Standard view is that it doesn't matter for demand if rich buy luxuries or if middle class/poor buy necessities. Conservative view is yes. More to the top is key My new view is yes. More to the middle is key High inequality gives incentives to cheating, financial fraud/crime, speculation, and looting at the top, with huge impacts on economic performance; High inequality leads to capture of regulatory agencies, governments by wealthy capital --> weak regulations on business and finance→ financial disaster. High inequality reduces ability to resolve prisoners' dilemma issues in dealing with global public goods.

19. 2) Can we break the power of the financial-political complex aka crony capitalism? Eisenhower 1961: "we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex . --- 2009: "we must guard against the continued unwarranted influence, based on money, by the financial-political complex, that has turned our economy into crony capitalism of the worst kind.

20. Me – a crony capitalist? Couldn’t be! Two Secretary of Treasuries from Goldman Sachs; Citicorps; Head of JP Morgan on board of NY Fed when it arranges sale of Bear Stearns – Greenspan advises Pimco: chief economist from Citigroup joins treasury team; Millions from hedge funds to Obama advisor Summers; Daeschle rejected because paid by paid consultant and advisor to lobbyist , received access to limo, chauffeur, etc that did not report as taxes

21. 3. Will Regulations control finance or limit entrepreneurship? Efforts by government to stop the “we own” finance gang could spill over to harm the “we make” entrepreneurial culture. So far business has rallied around the bankers getting huge bonuses; not stepped forward with reforms of their own. Replacing CEOs, limiting bankers pay stems from citizens, not the administration

22. 4. Will Unions come to life and provide countervailing power to finance? US – EFCA bill to weaken employers power to prevent unionization. Faces near unanimous employer opposition … but Great Depression saw huge growth of unions But they must modernize and offer solutions to today’s problems

23. Standard economics view is that competition among firms within markets suffices. Labor relations says need some institution within firms • Radical hypothesis is that need labor and NGO pressure to reduce incentives that produce looting, risk-taking, and disaster; buttress regulators to do their job; maintain stable base of consumer demand; Must limit the power of greed to stop the bangsters from destroying economies

24. 5) Great Opportunity to address global problems Resources: more scientists/engineers and knowledge than ever before; more educated work force than ever before Many “green” projects which will demand labor, but must be organized by government Substantial space to restore production of goods and services economy

25. Collapse of the Wall Street finance model opens door to build better world economy through shared capitalism

26. Oh yeah … Not if we can help it

27. Don’t forget us: September 1981unemployment 9.7%