Tuesday, 30 July 2013

Underemployment as a challenge to orthodox economics

The UK is suffering a total jobs deficit. But it also seems to be suffering from a deficit of jobs that match with the wants and needs of workers. Many in work want and need to increase their work hours and are also prepared to do so for no extra pay, but they are confronted with employers who will not grant them longer work hours. These workers are hours constrained and in technical terms they are to be classified as underemployed.
Here I want to address some key issues concerning the existence of underemployment. These issues will allow me to identify some surprising basic defects in orthodox neoclassical economic theory. I have pointed out some of these defects elsewhere; below I want to show the inadequacy of orthodox economics in terms of understanding the problem of underemployment. This is, I will argue, a vital ground-clearing exercise if we are to provide better theory and better policy recommendations.
The presence of underemployment reflects the relatively weak bargaining power of UK workers. Many workers are faced with the need to work longer hours in order to make ends meet. The reduction in real wages has added to the pressure on workers to extend hours at work. The need to service outstanding debt – a problem magnified by falling real wages – has placed even more pressure on workers to work longer hours. The consolidation of a debt–based culture – linked to the processes of financialisation – has made longer work hours a necessity for many workers. Coercion more than choice is behind the increased willingness of UK workers to work longer hours.
The fact that many workers remain willing to work longer hours without the requirement for an increase in the hourly wage rate may be a reflection of workers wanting to show commitment to employers when times are hard. Workers face the stark choice of being compliant at work or losing their jobs. This fact creates a willingness to work longer hours but it is a willingness based on fear and insecurity.
The constraint on work hours raises important issues for economic theory in the sense that it implies that the labour market is not an idyll of free choice. Orthodox neoclassical economics assumes that workers "choose" the hours they desire based on their preferences. If workers want to work more they can do so. They will also be rewarded for the disutility of longer work hours with higher wages.
This fantasy world of free choice runs contrary to the reality of the labour market that exists in the UK and elsewhere. Workers are not “free to choose" the work they want but instead confront constraints both on their ability to secure paid work and when in work on their ability to work the hours they need and desire. Employers set work hours not workers and often employers will deny workers the work hours they need and desire. Workers can suffer not just involuntary unemployment but also involuntary underemployment.
Neoclassical economics fails to recognise and indeed denies the unequal bargaining power between capital and labour and its influence on labour market outcomes. Contrary to what neoclassical economics assumes, in the real world, workers are not able to realise their preferences at will; rather they face having to take jobs on a take-it-or-leave-it basis. In work, workers must settle for hours decided upon by employers. Employers will not accede to the demands of workers for longer work hours unless they stand to gain higher profits from doing so. They will also be liable to impose longer work hours against the will of workers if they find it profitable to do so. While some workers will be denied longer work hours, others will face being overworked. 
Just as involuntary unemployment poses a challenge to neoclassical economics so too does involuntary underemployment. The latter exposes the fiction of neoclassical economics in relation to its depiction of workers as "free agents" who are able to decide their work hours at will. As a tool for understanding how the labour market operates including the creation and reproduction of involuntary underemployment, neoclassical economics is dangerously mistaken. Only by going beyond neoclassical economics can we grasp the importance of power and the lack of free choice that feature in the actual labour market. There is no shortage of alternative perspectives: institutional, post-Keynesian, feminist and Marxian economics being obvious examples. It is to these alternatives to orthodoxy that we should look in understanding and combating the problem of underemployment.  

Tuesday, 23 July 2013

The Disutility of Work

Why do we work? Just for the money? Or do we also work for other reasons such as the ability to socialise with friends and to use and develop skills? According to recent research, we work simply for the money it brings. When we are at work, our thoughts are on the things we could be doing instead and we long for the time when our work is done. In the language of economics, work is a "disutility" that all of us would prefer to do without.

This view of work as a painful activity raises certain issues, however. There is no doubt that much work is experienced as a pain, but to classify all work as painful seems to be stretching things a little too far. Did the authors of the above research really experience their work as all toil and trouble? Or were there periods when they enjoyed the challenges thrown up by their work? During such periods, work may well have proved more alluring than leisure.

The idea of work as a disutility has figured not just in economics but also in Christian and Classical thought. The Bible represents work as the punishment for the original sin of Adam. Ancient Greek philosophy sees exemption from physical work as the route to human fulfilment. These views support the idea that work is to be seen and experienced as a purely instrumental activity devoid of intrinsic satisfaction.

In economics, the disutility of work has at least three separate meanings: (1) the pain of work itself (both Adam Smith and Jeremy Bentham regarded work as an inherent pain); (2) the opportunity cost of work time (in neoclassical economics, the cost of work (time) is defined in terms of the lost opportunity for leisure time: here, paradoxically, the disutility of work is defined without consideration of work itself – instead, it acts as a proxy for the utility of leisure time); (3) the natural laziness of workers (modern principal-agent theory assumes that workers are effort-averse by nature: this definition of the disutility of work shifts attention away from the nature of work and towards the allegedly faulty genes of workers). Each of these meanings carries different implications, but all assume that workers must be goaded to work by some kind of extrinsic reward.

The point I would make is that work means more to us than just the money it brings. Work can be a source of creative expression and a route to self-realisation. Even where work lacks creativity it can still bring the benefits of social interaction. The problem with seeing work as just a disutility is that it fails to capture the dual-sided nature of work in human life. It misses the worth of work both as a means to an end and an end in itself.

To be sure, work is often endured by workers but this does not reflect anything intrinsic to work as such, rather it reflects on the way that work is organised. To see work as just a disutility is to abstract from the influence of the structure and organisation of work on the way that work is experienced by workers. To see workers as incorrigible “shirkers”, likewise, misses the endogenous roots of work resistance. It also lets employers off the hook by blaming workers for low productivity.

There is a deeper issue here with regards to the conception of human nature. The portrayal of work as a disutility presents humans as consumers with no interest in work other than as a means to consumption. It misses the needs of humans as producers. The fact that as human beings we have creative capacities that can be met through the activity of work is not recognised. But it is evident from our own life experiences that work can be so much more than just a way to earn a living. Our fear of unemployment stems in part from the loss of opportunity to participate and contribute in work. Our desire to keep working is related in part to non-monetary factors such as the need to be productive and creative. This speaks to the deeper importance of work in human life. It also highlights the necessity to create and widen opportunities for people to experience their work as fulfilling, rather than as just a disutility. If we accept that work is a disutility, we risk creating a counsel of despair that ultimately undermines the case for progressive work reform.

In sum, work has a profound influence upon the quality of our lives. To reduce work’s importance to a feeling of pain is to miss the fundamental role of work in the fulfilment of our needs both as consumers and producers. The finding that work makes us “unhappy” may be headline-grabbing, but it does not speak to the role that work can and ought to play in human life. 

Wednesday, 17 July 2013

Labour, Financialisation, and the Nature of Contemporary Capitalism

Frances Coppola has written a thought-provoking piece drawing an eye-catching parallel between wage labour and slave labour to help describe the contemporary phenomenon of “The Financialisation of Labour”. Here I will argue that the major trends noted but not fully explained by Coppola – such as deteriorating labour conditions and the failure of corporate investment – are due to the very nature of contemporary capitalism as a whole, that I will describe as financialised capitalism. I will argue that we need to see the “big picture”, the specific nature of contemporary capitalism, if we want to explain the reality that Coppola keenly observes in her piece, and this big picture is best understood through the notion of “financialisation”.

The term “financialisation” originates in political economy and is used to describe in a systematic way the dramatic rise of financial activities and financial institutions within economy, society, and culture. Financialisation has been a secular and global process over the past 30 years or so, recently encompassing the global financial crisis and ensuing period of austerity in capitalist societies. It has been fuelled by deregulation policies and it has occurred often at the expense of the real economy. Financialisation has been particularly associated with rising levels of household indebtedness and higher levels of inequality. Workers have borne the brunt of financialisation, suffering lower pay, higher unemployment, and worse terms and conditions of employment.

These outcomes reflect the fact that financialisation has weakened the bargaining power of labour. At one level, firms have become more flexible in their investment decisions. They have invested not just in real assets but also in financial assets and have looked to invest beyond the shores of their home country. This increased flexibility has enabled firms to drive much harder bargains with labour: threats of plant closure have been used by footloose capital to check the pretensions and aspirations of workers. At another level, the nature of corporate governance has changed. The claims of shareholders have come at the expense of the interests of workers. The so-called “shareholder value” model has put pressure on firms to treat labour as a cost rather than as an asset. Wage cuts, job losses, reductions in pensions, and the casualisation of work, have been demanded in order to maximise shareholder returns.

The result of these shifts, at the macroeconomic level, has been a decline in the wage share in capitalist economies. Financialisation has been shown to be the key reason for this decline. Those who have benefited from financialisation have been among the 1 per cent at the very top of the income distribution. At the microeconomic level, work has become more insecure and more precarious with the increase in temporary work and latterly “zero-hour” contracts. Involuntary part-time work and enforced self-employment have also risen in recent times. These outcomes are a benefit to capital whereas they represent a clear burden to labour.

Of course, unequal bargaining power between capital and labour is endemic to any form of capitalism, as Coppola explains. But the balance of power has shifted further in favour of capital under financialisation. Capital has gained power in part by creating a workforce that is debt-ridden. Borrowing to consume has become a way of life for many. This has occurred partly due to slowly rising or falling real wages; however, it also reflects on the wider marketing of credit and loans. The demand for and supply of credit has risen giving rise to an explosion of consumer debt. This increase in debt has further eroded the power of labour.

There is also the impact of the financial crisis and the policy responses to it. Workers have faced increased job insecurity and also increased unemployment. They have also had to accept lower real wages to stay in work. The assault on labour has been magnified by austerity policies that have taken away welfare benefits or made them more difficult to access, raising anxiety about unemployment for those in work and increasing the economic hardship of those who are unemployed. Workers did not create the financial crisis, but they are suffering the most from its aftermath.

The fact that life is so hard for the modern “free” labourer reflects on the financialisation of capitalism. A financialised capitalism is both brutal and ruthless towards labour. Firms want to get workers on the “cheap” to maximise shareholder value and prefer not to enter into long-term employment relationships. Many of course are forced to do so, but they face continual pressure to remove entitlements, reduce pay, erode terms and conditions of employment, and shed jobs, in the name of shareholder value.

So, while the processes that Coppola describes in her piece do reflect pressures inherent to capitalism as such, what is novel is the way that these pressures have been intensified under financialisation. It is financialised capitalism that has turned firms into demanders of expendable labour. It is financialised capitalism that has made firms focus on the short-term and neglect the long-term. It is financialised capitalism that has made firms demand that governments enforce austerity policies even if their effect is to reduce economic growth.

If “the major problem with the UK economy” is “a failure of corporate investment”, as Coppola suggests, then the underlying cause is a failure of a financialised system of capitalism. Financialisation has encouraged financial speculation over real investment and has made firms increasingly subject to the maximisation of shareholder value which has biased corporate policies away from the pursuit of long-term productivity and profitability. Any significant revival in corporate investment would require no less than the reversal of financialisation; a prospect that seems highly unlikely at the present time.

The processes of financialisation must be put at the centre of the explanation of the changes in labour in modern capitalism. Employment protection has been eroded and “unstable, insecure and short-term jobs” have risen in number, specifically due to the financialisation of the economy. There is a powerful connection to be made between the processes of financialisation understood in the broadest sense and the immiseration of labour outlined in Coppola’s piece.

Financialisation is not just pernicious but also contradictory. For its ultimate effect is to reduce the prospects for sustainable economic growth and for enhanced well-being. The stress on the financialisation of labour, in short, raises the broader need to challenge and overcome the financialisation of capitalism.

***This post was orginally posted on Pieria. It was then reposted on the Work in Progress blog of the American Sociological Association's Organizations, Occupations, and Work Section.