This appears to be the virtual consensus among those practitioners of the “dismal science,” if one turns to the advice of three fairly recent books on the subject: William Baumol, Alan Blinder and Edward Wolfe’s Downsizing in America: Reality, Causes and Consequences (2003); Pierre Cahuc and Andre Zylberberg’s The Natural Survival of Work: Job Creation and Job Destruction in a Growing Economy (2006); and Clair Brown, John Haltiwanger and Julia Lane’s Economic Turbulence: Is a Volatile Economy Good for America? (2006). We should note that some of these authors could be regarded as liberals (for instance, Blinder and Wolfe). I am making this point so that the reader will not assume that these books are all written by conservatives and libertarians.
Let’s take the first book. Baumol, Blinder and Wolfe wanted to investigate questions such as
- What is the difference between industrial change (restructuring) and reductions in force (downsizing)?
- Was restructuring and downsizing driven by efforts to maximize shareholder value and short-term profits?
- Is there more turmoil today?
- How do the jobless fare in this constantly changing economy?
Using a new data base, the economists discover that almost one-half of the firms that downsized returned to their previous size a few years hence. Downsizing in manufacturing has been steady and serious since the 1960s. Upsizing characterizes the other economic sectors. Also, big firms in manufacturing are growing smaller as smaller firms are getting bigger – a case of regression toward the mean. Downsizing in manufacturing has not increased productivity, but it did increase profits and cut workers’ salaries and benefits. Oddly the stock values of these firms have not gone up. Although downsizing firms have not gotten more output per labor hour, they have gotten more output per labor dollar. After eliminating other factors from their model, workers who lost their jobs and changed occupations or sector made less money. The demand is the major short-term influence on downsizing, while technological change in particular sectors is the major long-term determinant. The authors forecast these causes to continue to foster downsizing at its current rhythm and pace.
Regarding policy, they call for no dramatic new directions, since there is no evidence that the country is going through a protracted and widespread shrinkage in the size of firms. Good macroeconomic policy is critical. Protectionism is a bad idea. Improvements in and additional money for aiding displaced workers into new, hopefully comparable or better jobs is also needed.
The Natural Survival of Work is a translated book originally aimed at a European audience. They point out that every day, the U.S. economy loses 90,000 jobs and gains around the same number. Some level of constant unemployment is the natural result. This churning is not caused by globalization; it is, instead, more a symptom of how capitalism fosters growth through the process of “creative destruction.” Without the job loss and shift in capital investment, wealth generation could not occur. They further argue that European policymakers have been too focused on preventing job loss and not enough on creating the conditions for job generation. This misplaced set of priorities and failure to promote more flexible labor markets has, in fact, made the employment situation worse in Western Europe. For instance, every day the US creates 90,000 jobs while France creates 10,000.
Most of the book is a thoughtful polemical piece to change existing European policies, such as cutting the workweek, having a minimum wage out-of-whack with productivity, letting payroll taxes and the marginal rate on income taxes get too high, setting of wage replacement rate for unemployment insurance too high, not requiring proof of job search while receiving jobless benefits, providing unemployment insurance for too long with few conditions, creating overly strict job protection laws and so forth. They recommend changes in these programs, along with increased resources for early childhood education and services and hiring subsidies to target jobless adults. The authors are lukewarm on retraining and down on public service employment. They do admit that many of their recommendations would not apply to the US because it already has a better set for flexible labor markets and, as compared to Europe, should increase its generosity to the poor and jobless. For example, they would argue that the minimum wage in America is too low.
Economic Turbulence covers much of the same ground, arguing that the economy is stronger because of this restructuring. The authors make a compelling case for this position using a variety of household, individual and specific economic sector databases. They argue that there are winners and losers, although most workers ultimately improve on or match their previous employment. The degree of turbulence differs by person, by firm and by industry. Entry and exit rates for young firms are higher. Firms also differ significantly, even if they are in similar business, regarding their human resource management and development practices. Some invest in their employees, train them, create career ladders, and keep turnover down (i.e., Costco), while others do the opposite (Wal-Mart). Strangely, their data gives support for both – “you must job-hop to advance” and “loyalty pays off,” and it appears to depend on the firm and the employee. For example, if you start with a low-paying job, in most cases, you should eventually leave if you don’t want to get stuck. The best jobs are in large, growing, low-turnover firms.
Policy conclusions and research suggestions are rather vague and include the following non-surprises:
- High turnover rates and low worker skills hinder firm survival.
- Most workers eventually find a decent career path, but some don’t.
- The dynamics of the creation and destruction of high, middle, and low income jobs are very complex, therefore it is difficult to impose a one-size-fits-all policy.
- Industry analysis is a necessary complement to aggregate data work.
- Worker adaptability may be more important than specific job skills in making it through the turmoil.
Although I am fairly convinced by most of the above, it is important to realize this is the view from 30,000 feet. The book, The Disposable American by Louis Uchitella, should be read for its real, live stories, if you are to plow through all three works above. It will inspire a bit of needed urgency even if we follow solely these books’ policy counsel.
Another much more helpful work for getting a grip on this problem is Jacob Hacker’s The Great Risk Shift: The Assault on American Jobs, Families, Healthcare and Retirement and How You Can Fight Back. 1 He contends that much of this new job and income insecurity will not go away: Americans need to take stock of new realities, recognize their risk, borrow less, save more, and manage their insurance risks and costs appropriately.
But self-help and more prudent household budget management will not provide enough protection for most Americans. The government can play a role in reducing risks through effective policy proposals. The “acid test” on policy reforms is “Do they substantially impose more risk on the already burdened shoulders of the average citizen?” If so, then it’s back to the drawing board.
Hacker offers numerous proposals for how we as a nation (government, employers/employees, families/individuals) can reduce the risk factor in the ever-increasing risk-filled society we live in. Here are some of Hacker’s proposals:
- Strengthen unemployment insurance programs in a number of ways, including the restoration of higher wage replacement standards and better coverage for the workforce;
- Experiment with wage insurance for dislocated workers by topping up their wages in new jobs for a couple of years if the employment opportunity pays less than his or her previous job;
- Replace the confused plethora of tax breaks for non-retirement savings with a single Universal Savings Account;
- Preserve social security and lower its reliance on payroll taxes;
- Create a new “Universal 401(k) that gives tax breaks to employers that match an employees’ contribution and target these to low- and- moderate income workers; and
- Save Medicare by converting it into a universal health insurance program. 2
I will leave Hacker with the final word on the state of risk management in American society today: “While today we still have limited liability for American corporations, increasingly we have full liability for American families.” 3 Let’s get to work on these and other policy proposals to relieve some of the burden of financial risk on the shoulders of so many Americans.
1 Hacker, Jacob. The Great Risk Shift: The Assault on American Jobs, Families, Healthcar, and Retirement and How You Can Fight Back. New York: Oxford University Press, 2006.
2 This is a summary of policy proposals presented in Hacker, The Great Risk Shift, ‘Conclusion: Securing the Future.’
3 Hacker, p. 192.