By Dick Nichols
Federal treasurer Peter Costello has announced that a 5% official unemployment rate is now feasible. Have Costello and industrial relations minister Peter Reith, the ministers who cut $1.5 billion from labour market programs and mocked Labor's 5% jobless target, suddenly seen the light? To answer this, it helps to grasp how capitalism can, under certain conditions, deliver "full employment", even if it goes against the system's grain.
But first a warning: definitions of "full employment" are rubbery. For example, we often hear that the postwar boom (1948-1975) was a period of full employment. Yet, this "golden age" began by driving millions of women workers back into the home, after they had maintained war production.
The latest Australian Bureau of Statistics data on "Persons not in the labour force" tell us that there were 765,100 "unemployed persons" in September — 8.1% of the "labour force" of 9,442,800. But when people who want to work (1,209,700) are added, the real unemployment rate more than doubles to 18.5%.
This is the true scale against which to measure progress in the battle for jobs and the employment goals proposed by economists and politicians in the jobs debate.
Demand for labour
It is obvious that the rate of job growth depends on the rate of growth of production or output. In a capitalist economy spending on output is typically classified as: consumption spending by workers and capitalists (67.7% in the US in 1997); private capitalist investment in plant equipment and buildings (10.6%); investment in housing (4%); government consumption and investment spending (17.9%); and "foreign" spending on "our" exports minus "our" spending on imports, called net exports (-1.3%).
At first glance it appears that the capitalists play a minor role in the economy, but this is misleading. For, while the consumption of workers and capitalists is the biggest component of spending, it is dependent on investment and in a capitalist economy it is the capitalists who do most of the investing.
This makes workers' consumption a passive, secondary element in the process of capitalist growth. If investment expands, workers consumption will normally follow (assuming no increase in the proportion of their income saved). Clearly then, other things being equal, when capitalist investment falls so will job creation.
Private investment spending is also the most volatile. First, because the business cycle drives (and is in turn driven by) shifts in investment, so "full employment" is only reached near the top of the boom. Because competition drives firms to expand the sum of their production capacity beyond that needed to meet total demand, demand sooner or later falls short of output; gluts and excess capacity emerge; and a decline in the rate of profit sets in, driving down investment and the demand for labour.
Besides being a source of demand, workers' wages are also a cost to the individual capitalist firm, and capitalists' choices about whether to deploy machinery or workers will be influenced by the wage rate. The relative role of real wage levels and growth rates in influencing the demand for labour remains one of the most contested topics in economics.
From Keynes to 'stagflation'
For the English economist John Maynard Keynes, wrestling with how to solve the unemployment crisis of the 1930s without abandoning capitalism, the answer was to build labour demand through stimulating the capitalists' "incentive to invest" (through tax breaks and lower interest rates) and through programs of government spending and investment.
This required deficit budgets during recessions. These could either be converted into surpluses during booms or, if they were needed permanently, could be funded out of government borrowing.
Keynes' recipe, which helped smooth the boom-bust cycle, came with a price tag for the capitalist class: it reinforced the structural weight of the working class.
As foreseen by Polish economist Michal Kalecki in his 1943 essay Political Aspects of Full Employment: "[U]nder a regime of full employment, 'the sack' would cease to play its role as a disciplinary measure. The social position of the boss would be undermined and the self assurance and class consciousness of the working class would grow ... But 'discipline in the factories' and 'political stability' are more appreciated by the business leaders than profits. Their class instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the normal capitalist system."
The postwar wave of extended growth (1948-1974) seemed to prove Kalecki wrong. Growth rates were historically high, real wages rose steadily, unemployment and inflation were low. Why can't the conditions that created it be recreated today?
Once the captains of industry were certain their investments wouldn't be endangered by militant trade unionism or revolution, they invested massively. In the advanced capitalist countries, the means of production per worker more than doubled between 1948 and 1966. As a result, labour productivity doubled to 3.3% annually.
Labour costs rose at about the same rate, with the result that the capitalists' share of national income (profits) could remain high and stable. The rate of growth of output compared to that of new means of production also remained stable. This relationship, the output-capital ratio, when combined with the stable profit share, meant that the all-important rate of profit remained high and stable.
Against these high rates of investment and productivity growth, rising wages helped the capitalists by making investment in equipment relatively cheaper than taking on new workers, hence increasing the rate of older machinery being scrapped and releasing workers to work the newer equipment, further sustaining the rise in the rate of productivity.
Rising real wages boosted employment and nobody talked about the need to cut wages, attack labour market "rigidities" or eliminate supposed disincentives to work created by the welfare system. However, this nirvana could not survive long.
First, the sources of new workers began to dry up and competition among employers began to bid up real wages. Bosses' initial response was not to increase prices but to accept a decline in profits in order to remain competitive. Increased worker confidence also made it harder for the employers to enforce work organisation schemes that could wring the most from their new investments.
So the rate of productivity growth and the output-capital ratio began to fall, leading in turn to a decline in the rate of profit, investment, growth and job creation.
Table 1 compares the contributions of the various components of spending on output for 1960-73 to 1973-89. Not only did overall growth halve, but the contribution of the business sector to fixed investment more than halved (between 1960 and 1973 the growth rate of the manufacturing capital stock averaged 5.5% a year; by 1983 it had fallen to 1.9% before recovering to 3.2% by 1989).
The capitalists had to counterattack, both as individual producers and as the ruling class, to reclaim their profit share and restore the efficiency of their investments.
As individual producers, the major firms used their price-setting power to protect their mark up of prices over costs. This lifted the inflation rate and reduced real wages. The eventual result by the mid- to late-1970s was "stagflation" — combined inflation and unemployment.
Stagflation stymied the old Keynesian recipe against unemployment because, with the working class still strong enough to pursue wage increases above a declining rate of productivity growth (putting constant pressure on profit share), it could only drive up the rate of inflation. Reductions in inflation could only be bought at the price of increased unemployment.
NAIRU and the "natural" rate
The capitalist counterattack couldn't be left to individual firms, it had also to embrace economic theory and government policy. The foundations of today's "unemployment debate" and its special vocabulary were laid. The basic theoretical concept was the appallingly titled "non-accelerating inflation rate of unemployment" (NAIRU).
NAIRU theoreticians argued that there was a "feasible" level of real wages for any level of labour productivity. This was an oblique way of saying that there is an untouchable profit share and any attempt to win wage increases that reduce that share would bring retaliation from the employer, and set off an inflationary spiral.
There was now to be a permanent trade-off between inflation and unemployment. The level of wage demands that would maintain inflation and unemployment at "acceptable" levels was the NAIRU. The job of government was to find ways to reduce this "natural" rate, chiefly by weakening the capacity of the unions to win wage gains and by squeezing the growth of the money supply to reduce "inflationary expectations".
Stagflation generated two broad responses. The first was to "defeat inflation first", which was administered most brutally in Britain with Margaret Thatcher's 1979-85 "class war". The second was the "fight inflation and unemployment together" approach typified by the ALP-ACTU Accord and its rhetoric about the need to "restrain" wages in order to expand the "social wage".
By the 1990s, the dragon of inflation had been slain, the killer blows probably being a combination of recession and the intensification of competition caused by excess global capacity in many major branches of industry.
Capitalist governments have lost their main rationale for not doing something about unemployment. So why can't we have a revival of the old policies and overcome what US economist Paul Krugman calls the "diabolical trade-offs" of the past two decades?
We have to take note of one very important difference from the "golden age": the need to maintain the pace of economic "reform" so that Australian big business does not lose its niches in increasingly competitive world markets.
The Coalition's charade of a "campaign for jobs" is a political ploy. The essence of the strategy is to use the unemployed and the under-employed as a battering ram against the unions, especially those that are serious about defending working conditions.
One of the theoretical by-products of accepting the imperatives of global competition is acquiescence to the argument that "excessive real wages" is the villain.
What the capitalist class does with the extra income a real wage cut gives it and how workers react to a wage cut are critical to the final impact on output and the demand for labour.
If workers react by consuming more out of their falling incomes, then the cut in real wages can lift labour demand. This was a feature of the Accord years: in the face of falling real wages, families tried to maintain living standards by saving less. There was an increase in part-time work, particularly among women. The rate of job growth reached 3.4%.
If a cut in real wages leads workers to increase their rate of savings to meet more difficult times, then consumption demand will shrink further and help bring on the downturn they fear. The most recent spectacular example of this was the 1990 collapse in consumer demand in Sweden, which lifted the unemployment rate from under 3% to more than 10%.
If the capitalists don't productively invest their newly obtained wealth (or devote it to paying their old debts, or indulge in speculation), the resulting decline in investment demand (and consumption spending) will seem to justify their caution as unsold goods pile up and excess capacity develops.
There is conflicting evidence. A controversial 1996 study by US researchers Card and Krueger found that increases in the minimum wage had no effect on employment in Philadelphia take-away shops.
Other econometric studies show that increases in the minimum wage have a negative impact on employment, with the degree of the impact ranging from a small 0.4% for every 1% increase in the real wage to a one-to-one relationship. It is on the basis of such models that five leading economists are proposing that a 2% cut in real wage growth will secure a 1% decline in unemployment.
The trouble with such models, however, is that they are extremely sensitive to changes in parameters and assume that things will carry on as they have to date.
A recent paper by former Australian Industrial Relations Commission deputy president Keith Hancock finds no correlation between unemployment levels and labour costs. "Policies that imply that the problem of unemployment will be resolved by 'flexible' labour markets, at best, are at the periphery of the problem and, at worst, are headed in the wrong direction", Hancock observes.
Even if a cut in real wages does produce an increase in labour demand in the short run, we still need to weigh the long-term cost of making labour relatively cheaper than capital, reducing the rate of investment in machinery and hence productivity growth, longer-run demand for labour, not to mention living standards.
That a decrease in the relative cost of labour brings a lower rate of productivity growth is shown clearly in the comparison between the US and Western Europe between 1973 and 1995 (see Table 2). The same process was observed during the Accord years. So why doesn't the capitalist class today choose the high-wage, high-productivity growth path when it is proposed by Keynesian economists?
In an environment of global excess capacity and deflation, any economy that takes that path runs the risk of an unsustainable increase in its current account deficit, a depreciation of its currency and an increase in inflation — as happened in Mexico and Brazil. There is also the permanent threat of capital flight if international investors judge that the economy is exceeding its "speed limit".
That is why the basic "full employment" formula is always boringly the same. In the words of the most recent International Monetary Fund report on Australia: "A more fundamental break from past industrial relations and social welfare systems may be desirable." The Financial Review's Alan Mitchell states: "If we want the unemployment rate cut to 5%, we have to stop pretending that our unemployment problem will melt away if only the government and the Reserve Bank have the sense to stoke up the economy with more public spending and lower interest rates."
Reject the trade-off mentality
The end of stagflation has not brought the end of the "trade off". Indeed, trade-offs are being posed more bluntly than ever and it is not surprising that nobody believes in a target of 2% unemployment or in "win-win" solutions.
ANU professor Bob Gregory captured the mood at last year's
Reserve Bank seminar Unemployment and the Australian Labour Market: "To achieve 2% unemployment would require a combination of growth and labour productivity outcomes far outside the range of experience of the past two and a half decades."
Even to achieve Costello's modest target would involve painful choices. Comparing the US and Australian experiences, Gregory notes: "The unemployed could get jobs if the employed get no improvements in living standards; the unemployed could get more work provided the unskilled are prepared to work for a pittance (the 'equilibrium' wage), massively increasing income inequality."
Maybe greater employment of the unskilled could be achieved through a reduction in their wages, but the ratio of unskilled-to-skilled wages for Australia has fallen just as much as in the US over the past 20 years and would have to fall even more if there was to be an increase in demand for unskilled labour.
Gregory's conclusion: "Large falls in low wages would require substantial redesign of the Australian social security system leading to reductions in benefits and pensions if employment disincentives are to be avoided. This would require an acceptance of a society in which there would be a large increase in the working poor."
More brutally, the unemployed in the US have to get work once their social security payments lapse after six months, although there is the alternative of becoming one of the US's "unregistered" unemployed, petty criminals, beggars or 2 million-strong prison population.
All in all, groans Gregory, "the US provides us with a counterfactual that is not very attractive".
What is the alternative? The last time the trade union movement had a serious debate about unemployment, it ended up with the Accord. It was sold as the way to create jobs while maintaining living standards for those in work.
The result was some increase in jobs, a decline in living standards and an increase in on-the-job exploitation. The rate of private capitalist investment, supposedly the point of it all, stagnated.
Now the labour movement is being asked to cop another false choice. This time the salesmen are Reith and Costello. As well as a noisy rejection of the Coalition's plan, the unions need to break the manacles of the trade-off mentality fostered by both major capitalist parties, Labor and Liberal.
It is time for the trade unions to develop a strategic alliance between workers and the unemployed to demand jobs for all, defend living standards, fight for a shorter working week with no loss in pay and campaign for a massively expanded program of public investment.
The bill for it should be sent where it belongs: to the desk of corporate Australia.
[Dick Nichols is the national industrial convener of the Democratic Socialists and a candidate for the Legislative Council in the March 27 NSW election.]