There is an old theory of unemployment that says employers benefit from high unemployment because it keeps workers under control. They are less inclined to strike, to quit their jobs to look for a better ones, and unable to demand wage increases. This holds down employer costs and increases their profits.
But there are two sides to the coin. While lower wages and high unemployment may make labor more docile and reduce business costs, they also reduce the demand for business output. Thus, while costs may fall, profits don’t necessarily rise because sales don’t increase since potential consumers have no money to spend due to low wages and high unemployment.
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The originator of the “reserve army” hypothesis was Frederick Engels in his 1845 book, “The Condition of the Working Class in England in 1844.” In his chapter on competition, he said, “English manufacture must have, at all times save the brief periods of highest prosperity, an unemployed reserve army of workers, in order to be able to produce the masses of goods required by the market in the liveliest months.”
I used to think this was a nonsensical theory because individual businesses cannot decide by themselves to hire fewer workers or hold down wages. They must compete for labor in the free market and pay whatever wages they must pay to get the workers they need. I did not see any way businesses could act in concert to hold down wages and raise unemployment to increase their profits.
I no longer believe this. What I forgot is the business cycle. From time to time, growth stalls and declines. Unemployment inevitably rises, creating a beneficial reserve army for employers. It is during such times that they are able to act collectively to keep unemployment optimally high and hold down wages.
Businesses do this by opposing government policies that would create jobs. It is very easy because there are always many people who believe that all government spending is wasteful; that reducing the deficit, which always rises in recessions, should take precedence; that it’s immoral and improper for government to interfere with the “free market” in any way whatsoever; because it will be inflationary and many other expedient reasons.
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We have seen since the beginning of the recession under George W. Bush in December 2007 that the business community, through its corporate spokesmen, trade groups such as the U.S. Chamber of Commerce, and allied conservative groups have lobbied heavily against any stimulus spending, government job creation or monetary expansion by the Federal Reserve. When such measures could not be stopped, the business community lobbied to end them as soon as possible, opposed any extension, and used the deficit to permanently cut benefits for poor people wherever possible. For example, the new farm bill slashes food stamps to pay for continued subsidies to politically conservative farmers.
Lower benefits for the poor and cuts in unemployment compensation aid businesses because it prevents workers from holding out for better jobs at higher wages and forces them, from necessity, to take whatever they can get, often at the minimum wage. Of course, conservatives also oppose an increase in the minimum wage.
Back in 1943, the economist Michal Kalecki identified this phenomenon – that conservatives always use economic slumps to permanently disable labor and cut government spending. As he wrote
“In the slump, either under the pressure of the masses, or even without it, public investment financed by borrowing will be undertaken to prevent large-scale unemployment. But if attempts are made to apply this method in order to maintain the high level of employment reached in the subsequent boom, strong opposition by business leaders is likely to be encountered. As has already been argued, lasting full employment is not at all to their liking. The workers would 'get out of hand' and the 'captains of industry' would be anxious to 'teach them a lesson.’”
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But as I noted, there is a flip side to this position. If workers are unemployed and those with jobs have their wages squeezed, they have less income with which to buy goods and services. Thus business sales are constrained, which eventually eats into profits.
In the short run, employers can work their employees harder and raise productivity. And given low interest rates, they can borrow to buy labor-saving machinery and equipment. Many have outsourced their labor to low-wage countries such as India. As a result, businesses have been able to raise profits even in the face of flat sales by raising productivity and cutting costs.
But there is a limit to how far this can go when the aggregate income to consumers doesn’t rise because of low wages and high unemployment, not to mention shrinking aggregate demand resulting from a sharp decline in government spending and the budget deficit. New
Related: Sharing the Gains of Economic Growth
Congressional Budget Office data show that the deficit has fallen from $1.4 trillion in fiscal year 2009, Bush’s last, to $513 billion this year – a decline of almost two-thirds – and spending has fallen from 24.4 percent of the gross domestic product in 2009 to 20.5 percent this year, a 16 percent reduction.
In another report released this week, the CBO said that slow economic growth and high unemployment were linked to the same factor: weak growth in aggregate demand:
“To a large degree, the slow recovery of the labor market reflects the slow growth in the demand for goods and services, and hence gross domestic product (GDP). CBO estimates that GDP was 7½ percent smaller than potential (maximum sustainable) GDP at the end of the recession; by the end of 2013, less than one-half of that gap had been closed. With output growing so slowly, payrolls have increased slowly as well—and the slack in the labor market that can be seen in the elevated unemployment rate and part of the reduction in the rate of labor force participation mirrors the gap between actual and potential GDP.”
As yet, I see no evidence that businesses are demanding fiscal or monetary stimulus to raise aggregate incomes, reduce unemployment, restore purchasing power to the masses and raise economic growth. But the recent sell-off in the stock market suggests that their ability to raise profits by cutting costs has reached an end. Perhaps when profits have stalled long enough and businesses realize they need more consumers with more money to spend in order to grow, they will finally support some sort of government jobs program. But I’m not holding my breath.
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