Michael ReichUniversity of California, Berkeley

Capital on Trial conference September 30, 2011

TEW 1979: Combined demand-side gaps and cost-side profit squeezes to identify causes of crises.

Found: Profit-squeeze explained mid1970s crisis, mainly because of RSL.

Caveat: RSL was mainly about rising labor share, not rising labor strength.

In current period, Rising Strength of Management (RSM), especially since 2000.

RSM since 1980s-- decline in union strength-- changes in employment contract- toward more short-term and less commitment--changes in management incentives toward

more short term share price

What are the consequences? (Note: will ignore globalization, deregulation

of finance, etc.)

Main question: Does RSM generate higher UE rates and jobless recoveries?

RSM and changes in incentives to lay off workers

Pieces of the puzzle– in U.S. and Europe

Cycle and trend: estimated changes in Okun’s Law

Data and findings: In Europe, large change in cyclical effect. In U.S., small change in cyclical component, larger change in growth trend

Conclusions

Does RSM generate higher UE rates and jobless recoveries?

Intuition--Unions have declined--LTERs are less common (Farber 2008)-- Increase in short-term, dead-end low-paid

jobs = greater labor market dualism--Therefore: more disposable workers and

slower productivity growth

Cost-cutting business model: In 1980s and 1990s, share prices increasingly fall less, and rise more, following layoffs (Farber & Hallock 2009)

Consistent with disposable worker thesis of Uchitelle 2006; Gordon 2010, 2011

But in 2000-2007, share price behavior reverts to 1970s pattern (Hallock 2010)

Pattern since 2007?

Temporary contracts = about 10-15 percent of all workers, 35 percent in Spain. Implies 80-90 % of all new hires.

Workers on temp. contracts are paid less, not trained, rarely move to permanent status. (Reich 2009)

Result: more employment variability with business cycle– change in Okun’s Law

Figure 2 Trends in temporary (fixed-term) contracts in Europe, 1983-2010

Notes: Annual observations. Source: Bertola, Giuseppe 2009. “Labor markets on the verge of a regulation crisis.” Vox-EU.

-50

51

0

-10 0 10 20 -10 0 10 20

1964-1985 1986-2010

Change in U.E.

GDP Growth Rate

To obtain the Okun’s Law cycle and trend coefficients I estimate the equation

itUE iit

iitY

Yba

(1)

where itUE equals the change in the state unemployment rate,

and itY

Yit equals the growth rate of state GDP. The cyclical (short-run)

component of Okun’s Law is the estimated b. To get the estimated trend

of GDP growth, set itUE = 0. This condition implies

b

a

Y

Y

*

(2)

Table 1. Okun’s Law, 50 U.S. states, 1964 to 2010

Change in UE rate (1) (2)

GDP percent change -0.198*** -0.213***

(0.019) (0.021) Constant 0.680*** 0.699***

(0.070) (0.059)

N 2,253 2,253

R-squared .324 .352 State fixed effects X

Table 2 Okun’s Law, 50 U.S. states, two time periods

1964 to 1985 1986 to 2010

Change in UE rate (1) (2) (3) (4)

GDP percent change -0.214*** -0.236*** -0.175*** -0.195***

(0.024) (0.026) (0.017) (0.020)

Constant 0.798*** 0.965*** 0.563*** 0.499***

(0.098) (0.088) (0.062) (0.047)

N 1028 1028 1225 1225

R-squared .376 .413 .256 .300

State fixed effects X X

Table 3 Okun’s Law, 50 U.S. states, three time periods

1964 to 1979 1980 to 1989 1990 to 2010

Change in UE rate (1) (2) (3)

GDP percent change -0.205*** - 0.282*** -0.216***

(0.027) (0.030) (0.020)

Constant 0.908*** 0.667*** 0.631***

-0.104 -0.073 -0.045

734 490 1029

N

R-squared 0.337 0.516 0.335

State fixed effects X X X

Table 4 Okun’s Law, 50 U.S. states, 1964- 2010, by extent of union decline

Change in UE rate Union decline >

median Union decline

< median

(1) (2)

GDP percent change -0.201*** -0.188*** (0.031) (0.046)

Constant 1.188*** 0.304***

(0.152) (0.072) N 552 506 R-squared .331 .266

State fixed effects X X

Table 5 Okun’s Law, by time period and extent of union decline

1964 to 1985 1986 to 2010

Union decline

> median Union decline

< median Union decline

> median Union decline

< median

(1) (2) (3) (4)

GDP percent change -0.245*** -0.208*** -0.172*** -0.180***

(0.030) (0.061) (0.041) (0.043)

Constant 0.587*** 0.310*** 0.097 0.160*

(0.060) -(0.057) (0.061) (0.079)

N 252 231 300 275

R-squared 0.452 0.298 0.254 0.254

State fixed effects X X X X

Conclusions I-- Europe

RSM has generated more labor market segmentation and led to more volatility in UE

(France- Spain comparison, Bentolila et al. 2011)

Many European labor economists propose:

Eliminate the sharp distinction between permanent and temporary contracts, i.e. move to the U.S. model (Boeri et al. “The Scourge of Dual Labor Markets,” 2010)

But would the U.S. model be an improvement?

Conclusions II– RSM in the U.S.

Small effects on cyclical part of Okun’s Law

Perhaps because of an anomaly in 2009, when credit channel freeze may have increased unemployment (Gabe Chodorow-Reich, forthcoming)

Larger effect on reducing trend growth rates.

--Evident in long period of employment slack from 2000 to 2007 and in high UE in the Great Recession and the jobless recovery