Reply #95: The Stigmatization of the Unemployed

[Demeter]

http://www.nakedcapitalism.com/2011/03/the-stigmatization-of-the-unemployed.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

...Many pundits, such as Paul Krugman in his latest New York Times op-ed, have decried the lack of anything remotely resembling adequate responses to the unemployment problem, particularly that of the long-term unemployed. Ronald Reagan, hero of the right, was concerned when unemployment rose over 8% and took a series of corrective measures, including the Plaza Accord, which was a G-5 currency intervention to drive up the value of the yen. So why do we have a nominally Democratic president sitting on his hands in the face of much worse unemployment?

I’d argue that the roots lie in a fundamental change in policy that took place around 1980. The lesson that economists drew from the stagflation of the 1970s was that labor had too much bargaining power. The excessive fiscal stimulus of the later 1960s and the oil price shocks of the 1970s had been amplified by the fact that workers had enough clout to demand and get wage increases when they faces sustained price increases. That of course led to more price increases since higher wages led to higher production costs which led business owners to increase prices of their goods and servicer, thus accelerating the inflation already under way.

The solution, per neoclassical economists, was to use unemployment to keep wage demands in check. Thus having a lower level of employment even in good times and taking other measures, like weakening unions, was key to keeping those pesky workers from ever serving to create a reinforcing inflationary dynamic.

As an aside, there were other convenient (to the capital-owning classes) side effects of this policy. Before, there had been an explicit agreement between unions and employers embodied in the so-called Treaty of Detroit, which was that workers were to share in productivity gains. President Kennedy even warned major corporations that if they did not adhere to this understanding, he’d push through legislation to make sure they did. Since wage growth and productivity growth marched in near lockstep from 1950 to just after 1980, it appears white collar worker benefitted from blue collar bargaining successes...