medicineman
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Sluggish growth and increased financial instability
Global economic growth is anemic. The United States and the European Union are both expected to grow less than 3.0% in 2003, and Japan’s projected growth is only 1.1% (IMF 2002). Considering that productivity growth remains strong in all industrialized economies, these growth rates are too low to measurably lower unemployment.
The reason for this lackluster economic growth is too much global capacity. Faced with too few customers, firms increase profits by holding down wages and benefits, outsourcing work, and relocating to countries with weak worker protections and low labor costs. Often firms may even forego profits in the short-run, just to keep their existing capacities in use (e.g., by giving generous discounts or offering low cost financing). Ultimately prices begin falling (as has been the case in Japan for most of the last decade) and consumers and businesses become reluctant to shop or to invest as debt burdens grow and profit opportunities vanish.
The lack of customers is at least in part a result of national policies that often weaken worker rights. In Europe, the European Central Bank has kept interest rates high to the detriment of growth, while simultaneously pushing publicly for the reduction in labor protections. In Japan, savings rates remained high as households faced increasing uncertainty with the end of lifetime employment contracts. In the face of fewer safeguards for workers, rising unemployment dampened consumption, as did deflation. And in the United States, workers—facing a recession exacerbated by growing trade deficits—saw essentially no gains in employment and wages over the past 18 months. To compensate for this poor wage growth, households increased their borrowing. Now burdened with growing debt, households ultimately have curtailed consumption to avoid bankruptcy.
The lack of demand is not limited to industrialized economies. The frequency and severity of financial crises in emerging economies grew with increased liberalization (Weller 2001). Many emerging economies have implemented a mix of deflationary macro policies, often to appease lenders such as the World Bank and IMF, in the wake of financial crises. These policies consist of higher interest rates, the elimination of budget deficits, and structural changes (especially the deregulation of many markets, including labor). Increased labor market flexibility tends to lower labor income, leading to less consumption. In turn, this slowed consumption often exacerbates the problems created by the financial and economic crises, keeping economies from growing faster for lengthy periods of time.
Labor standards and economic growth
The bulk of the economic research on worker rights shows that these labor standards are associated with significant increases in economic growth in the nations that have implemented and enforced them. In particular, child labor, forced labor, labor market discrimination, and legislation barring unionization or collective bargaining all inhibit productivity growth.
In theory, child labor and forced labor increase the supply of cheap or free labor within a country, driving down wages for everybody. Easy access to cheap labor removes incentive for firms to lower their costs by developing or adopting new technologies. Consequently, productivity growth is slowed. Furthermore, the fact that children are working in low-wage jobs instead of attending school will impede the growth of a nation’s stock of human capital in the future, potentially inhibiting long-term productivity growth as well (Maskus 1997).
Economic theory also suggests that labor market discrimination may impede effective matching in the labor market between employers and workers. Economies are much more productive when jobs are allocated on the basis of skills and ability instead of ethnicity, gender, or caste (Acemoglu and Shimer 1999).
From a theoretical perspective, the right to form labor unions and bargain collectively has the greatest potential impact on economic growth. Unions give workers a direct voice to management, making it more likely that conflicts will be resolved through discussion rather than through employee separations (i.e., firing or quits). Unionization reduces turnover, making it more likely that employees will develop valuable job-specific skills and more likely that employers will invest in long-term training, both of which contribute to productivity growth.
The evidence shows that these growth-enhancing effects of worker rights are strong. Palley (1999) showed that, in the case of 15 developing countries, the adoption of CLS was positively related to higher rates of economic growth. Buchele and Christensen (2003; 2001) found that worker rights within the Organization for Economic Cooperation and Development (OECD) were positively associated with economic performance. A recent World Bank report (Aidt and Tzannatos 2003) showed that most studies on the issue find that coordinated collective bargaining was associated with improved macroeconomic performance in the 1970s and 1980s (evidence for the 1990s was mixed).http://www.epinet.org/content.cfm/issuebriefs_ib192 - 26k
Global economic growth is anemic. The United States and the European Union are both expected to grow less than 3.0% in 2003, and Japan’s projected growth is only 1.1% (IMF 2002). Considering that productivity growth remains strong in all industrialized economies, these growth rates are too low to measurably lower unemployment.
The reason for this lackluster economic growth is too much global capacity. Faced with too few customers, firms increase profits by holding down wages and benefits, outsourcing work, and relocating to countries with weak worker protections and low labor costs. Often firms may even forego profits in the short-run, just to keep their existing capacities in use (e.g., by giving generous discounts or offering low cost financing). Ultimately prices begin falling (as has been the case in Japan for most of the last decade) and consumers and businesses become reluctant to shop or to invest as debt burdens grow and profit opportunities vanish.
The lack of customers is at least in part a result of national policies that often weaken worker rights. In Europe, the European Central Bank has kept interest rates high to the detriment of growth, while simultaneously pushing publicly for the reduction in labor protections. In Japan, savings rates remained high as households faced increasing uncertainty with the end of lifetime employment contracts. In the face of fewer safeguards for workers, rising unemployment dampened consumption, as did deflation. And in the United States, workers—facing a recession exacerbated by growing trade deficits—saw essentially no gains in employment and wages over the past 18 months. To compensate for this poor wage growth, households increased their borrowing. Now burdened with growing debt, households ultimately have curtailed consumption to avoid bankruptcy.
The lack of demand is not limited to industrialized economies. The frequency and severity of financial crises in emerging economies grew with increased liberalization (Weller 2001). Many emerging economies have implemented a mix of deflationary macro policies, often to appease lenders such as the World Bank and IMF, in the wake of financial crises. These policies consist of higher interest rates, the elimination of budget deficits, and structural changes (especially the deregulation of many markets, including labor). Increased labor market flexibility tends to lower labor income, leading to less consumption. In turn, this slowed consumption often exacerbates the problems created by the financial and economic crises, keeping economies from growing faster for lengthy periods of time.
Labor standards and economic growth
The bulk of the economic research on worker rights shows that these labor standards are associated with significant increases in economic growth in the nations that have implemented and enforced them. In particular, child labor, forced labor, labor market discrimination, and legislation barring unionization or collective bargaining all inhibit productivity growth.
In theory, child labor and forced labor increase the supply of cheap or free labor within a country, driving down wages for everybody. Easy access to cheap labor removes incentive for firms to lower their costs by developing or adopting new technologies. Consequently, productivity growth is slowed. Furthermore, the fact that children are working in low-wage jobs instead of attending school will impede the growth of a nation’s stock of human capital in the future, potentially inhibiting long-term productivity growth as well (Maskus 1997).
Economic theory also suggests that labor market discrimination may impede effective matching in the labor market between employers and workers. Economies are much more productive when jobs are allocated on the basis of skills and ability instead of ethnicity, gender, or caste (Acemoglu and Shimer 1999).
From a theoretical perspective, the right to form labor unions and bargain collectively has the greatest potential impact on economic growth. Unions give workers a direct voice to management, making it more likely that conflicts will be resolved through discussion rather than through employee separations (i.e., firing or quits). Unionization reduces turnover, making it more likely that employees will develop valuable job-specific skills and more likely that employers will invest in long-term training, both of which contribute to productivity growth.
The evidence shows that these growth-enhancing effects of worker rights are strong. Palley (1999) showed that, in the case of 15 developing countries, the adoption of CLS was positively related to higher rates of economic growth. Buchele and Christensen (2003; 2001) found that worker rights within the Organization for Economic Cooperation and Development (OECD) were positively associated with economic performance. A recent World Bank report (Aidt and Tzannatos 2003) showed that most studies on the issue find that coordinated collective bargaining was associated with improved macroeconomic performance in the 1970s and 1980s (evidence for the 1990s was mixed).http://www.epinet.org/content.cfm/issuebriefs_ib192 - 26k
