On some determinants of the level, growth and quality of employment

1. On some determinants of the level, growth and quality of employment

2. Unemployment under capitalism • Unlike the marginalist theory that posited or assumed that full employment was the norm under capitalism, Marx, Kalecki and Keynes argued that unemployment was the norm rather the exception under capitalism. • There were two major areas of difference between Marx and Kalecki on the one hand and Keynes on the other: • 1. The formulation of the reasons why unemployment was the norm rather than the exception. • 2. The assessment of the ability of capitalism to resolve this problem through state action.

3. Similarities on the issue • Critique of J. B. Say’s Law • Keynes: “Say’s Law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.”

4. Similarities on the issue • Marx: “Nothing can be more childish than the dogma, that because every sale is a purchase and every purchase a sale, therefore the circulation of commodities necessarily implies an equilibrium of sales and purchases.” • Though capitalists could, in times of depression, invest to expand production they will not do so because there is no inducement to do so in the form of the ‘prior’ prospect of selling the resulting production at an adequate profit. Idea captured by the concepts of “hoarding” (or “liquidity preference” in Keynes). • Problem aggravated by the atomistic decision making typical of capitalist societies with private ownership.

5. Difference: Keynes on the possibility of full employment • Autonomous government expenditure that is not driven by the inducement to invest can be undertaken so as to serve as a countercyclical stimulus driving demand and growth. • Such expenditure not constrained by current income because: • It expands production and tax revenues • Governments (unlike firms and households) have the right to raise taxes to cover the interest and amortisation commitments associated with debt. • Government action such as a reduction in interest rates can encourage private investment and revive expenditure and growth.

6. Marx on persistent unemployment • Structural determinants of unemployment which work back on aggregate demand: • Because of of competition, capitalists are always seeking to reduce costs of production by utilising labour-displacing machinery or other means of securing the same output with less labour, thus continuously creating unemployment • Capitalism needs “an industrial reserve army” both in order to discipline labour and keep wages down to a level which makes production profitable. • As the system tends to full-employment, real wages rise, product wages increase and profits are squeezed, resulting in a cutback in investment that slows growth in output AND employment.

7. Is near-full employment more likely than not? • Keynes: Yes • If the state and capital can be persuaded to act in the best interests of the system • Marx and Kalecki: No • Unemployment and inequality squeeze consumption in the lower income groups—a tendency that is not necessarily compensated by investment and upper income group demand (Rosa Luxemberg, the extreme view) • Capitalists respond to rising employment early once the lessons have been learnt

8. Features of classical industrialization • Outlay on labour or the wage bill was kept to the minimum possible in order to maximize profits, through the ‘extensive’ exploitation of labour that raises absolute surplus value by the lengthening of the working day or the widespread use of the underpaid labour of women and children. • Shift to “intensive’ methods of labour exploitation involving a rise in relative surplus value through a two routes – a reduction in necessary labour, ensured by reducing the cost of wage-goods (in which colonial exploitation played a major role) and a rise in labour productivity through the substitution of machinery for living labour. • Thus unemployment, segmented labour markets and poor labouring conditions seemed to tally with what Marx and Kalecki conceptualised.

9. The export of unemployment • Early industrializers partly overcame the problem of growing unemployment inherent in their capitalist growth and technical change by exporting their unemployment abroad • The most direct form of export of unemployment was the physical migration of population • Second, unemployment was exported by industrializing countries like Britain, for example, through the flooding the subjugated already populous tropical colonies with its cotton textiles and other manufactured goods under discriminating commercial policy • Third, unemployment was exported by the imperialist country through a more complex route in which tropical colonies were made to finance capital exports by the imperialist power

10. The Golden Age • However, these features came to be seen as exceptional during the Golden Age between the Second World War and the 1970s. • The experience, with the Great Depression and the New Deal, the influence of Keynesianism, the need for “reconstruction” and “development” in order to avoid another World War and to combat the socialist threat encouraged a shift to state spending and the welfare state that seemed to make recessions and depressions phenomena of a past gone by.

11. The defeat of Keynesianism • Once the productivity spin-offs of war-related defence research had worn off and falling unemployment and the dole increased working class power and the real wage rate, wages rose relative to prices. Product wages fell and profits were squeezed. The age of “New Paradigm”—reasonable growth, low inflation and low unemployment—was over. • The profits squeeze and the crisis paved the way for a backlash against Keynesianism. Shift to a ‘fake’ monetarism, involving fiscal conservatism and the substitution of debt finance private expenditure for debt financed public expenditure to stimulate growth. • Periodic crises followed. Resolution of the crises sought through austerity for the majority and support for a minority of firms and agents. Damaging impact on labour markets.

12. Relevance for the UDCs • Capitalist expansion and colonialism as the pre-Keynesian “solution” to periodic crises affected them both in terms of the level of accumulation and the structural features of their economies. • Colonial extraction that allowed for the import of cheap raw materials and wage goods and kept down raw material costs and wage rates to moderate inflation not an option. • No singificant possibility of exporting unemployment.

13. Impact through agriculture • Reproduction of backward forms of production forms and consolidation of land monopoly. • Reinforcement of extra economic systems of domination and coercion and of patriarchy • Land monopoly results in institutional barriers to land-augmenting investments that constrain growth in output and marketable surpluses from agriculture. • Two implications: • Limited growth of mass market for manufactures • Binding supply side constraint on availability of essential wage goods.

14. The “irrelevance of Keynesianism” • One view, Keynesianism irrelevant to developing countries since they are supply constrained systems. Debt financed expenditures would not provoke trigger quantity adjustments in the form of increases in output, but price adjustment that lead to inflation. • Second view builds on this to argue that since, beyond a point, governments are “sensitive” to the erosion of real wages due to inflation, public expenditures “automatically” contract, undermining the Keynesian countercyclical response.

15. Implications • Unless institutional reform (land redistribution and cooperativisation or socialisation) is adopted in UDCs, the problem of the unemployment characteristic of capitalism is like to be more intense. So would be the problem of clearing the “backlog” of the unemployed. • A huge reserve army and the reproduction of backwardness intensifies the adverse impact of non-market forms of coercion such as caste, community hierarchies and patriarchy on wages and the conditions of labour on the degree of exploitation.

16. The specificity of Post-Revolution, pre-Reform China • The experience in post-Revolution China different from that in post-Independence India (for example) for three, among other, reasons: • China adopted a system with almost no private ownership making it a supply-constrained rather than a demand-constrained system. • China implemented radical land reforms • Employment guaranteed • The wage level and productivity increase were of course a problem

17. China post-Reform • Unemployment and underemployment return as problems with rural reform, public enterprise restructuring and relaxation of rules on labour movement. • Problem partly addressed by the administratively supported investment-driven strategy. • Incremental demand for labour also driven by the mercantilist, export-prioritising strategy and the internal income effects it has. • In the early stages employment conditions worse because of lax labour regulation and China’s own version of forms of non-market coercion.

18. Technology and unemployment • Since reforms open economic borders as part of the export effort, the adverse effect of integration on employment growth felt. • Imports adversely affect domestic production and employment • With recent date technologies imported from abroad, labour productivity rises and the responsiveness of employment to output growth falls. • Years of high GDP growth with persisting unemployment and a highly segmented labour market, with a highly ‘exploitative’ component.

19. The situation now • Indications that China has reached the Lewis turning point, having exhausted its inexhaustible reserve at a constant low wage. Does that mean that an external-demand driven transition of the South Korean kind is possible? • Rising wages could undermine export competitiveness. • Investment rates are increasingly proving unsustainable because of the debt overhang. • This requires shifting to an internal demand-driven, consumption- and wage-led strategy. • But with China increasingly a private-enterprise economy would the profit squeeze hurt investment further making the transition difficult?

20. The Indian case • Crisis in India far more severe. Attempt to pursue a supply-side, investment-goods driven strategy without implementing land reforms leads to inflation and the post-1960s secular stagnation. • Partially “successful” effort in the 1980s to resolve the impasse by relying on external debt ends with the balance of payments crisis. • Shift to a typical neoliberal strategy implemented with the degree of gradualism inevitable in a quasi-federal democracy. Acceleration since 1990s.

21. India-specific problems 1 • Export success post-reform restricted largely to IT and IT-enabled services. India fails to emerge as a manufactured exporter based either on the prowess of a restructured domestic industry or on the inflow of relocative foreign capital. • Growth substantially services-led • Moreover, even services export sector characterised by a low elasticity of employment with respect to output • Growth rate till 2003 not very different from earlier, so problem of un- and under-unemployment worsens.

22. India-specific problems 2 • Reform in India (unlike in China) associated with a gradual shift away from proactive fiscal policies with high capital expenditures for two reasons: • Emphasis on tax forbearance • Emphasis on fiscal deficit reduction in the name of fiscal consolidation • Induces a contractionary bias into the system that further constraints growth • This tendency strengthened by the growing presence of foreign finance in the domestic economy

23. Temporary reprieve • Increased capital inflows results in huge infusion of liquidity into the system • Sharp rise in credit-deposit ratio from 20-22% average during 19990s to 56 per cent by 2012 • Debt financed consumption and investment boom • But largely driving capital intensive demand so employment fall-out not significant. • Signs that the process, like that in the 1980s, not sustainable.

24. Implications • The level of un- and underemployment low and the quality of employment deteriorates • Reform and services-led growth encourages “outsourcing”, implying the formal sector intrusion into those segments of labour markets that are characterised by non-market forms of coercion • Worst kinds of labour market features persist and intensify.

25. An explanatory note • The argument here is NOT that is and when an economy reaches a state of near full-employment historically evolved discrimination based on non-economic characteristics would end, even in the labour market. • Rather, the argument is that so long as unemployment and a large labour reserve are realities, social systems of discrimination would be used to segment labour markets and resort to discriminatory practices in search of profits.