Economics, Politics, and Religion: Social Justice

The U.S. has been going through an economic malaise for over 4 years—so too have other countries.  While we seem to be on a positive trajectory, it is unlikely that we will return to our long-term natural rate of unemployment of around 4 percent in the next 2 years, at least.  Both the federal government and the Federal Reserve have been struggling to bring down the unemployment rate.  Congress seems incapable of adopting ANY policy measure to steer this country in SOME direction, while the Fed seems to haverun out of policy options to further exercise its mandate of reducing unemployment (and maintaining inflation).  However, let’s assume that a miracle happens tomorrow and that we have a political agreement in Congress, the EU crisis is resolved, the stock of existing homes matches the number of buyers, and that all bad loans are resolved.  Will the economy return to its long-term natural unemployment rate?  Based on the media reports, this would seem likely. I am less convinced.

In the wake of financial crisis, the economic mantra of the Bush and Obama governments has been that the US cannot be the global consumer of goods.  As other countries benefit from the American market, they too should open their doors to American goods.  From the surface of it, this sounds like a logical and a common-sense idea: American trade deficit goes down by means of our increase in exports; manufacturing jobs increase; a semblance of financial, manufacturing, and service industries is struck; and the world is a happier place.

However, this argument fundamentally rests on the idea of competitive advantage.  If the US is going to give up some industries, then it must make up for those lost industries by exporting others.  Since the US does really well in high-end technology, we want other countries to ease restrictions on our imports from this industry.  Undoubtedly, this will increase our exports, but what does this mean for the labor structure of our economy?

The push towards a more technologically oriented economy has significant implications for the capital-labor relationship.  Based on economic theory, this technological growth shouldn’t only make us more competitive, but it should also increase the wages of our workers based on the increase in prices that would result in an upward shift in the aggregate-demand in the short-run, based on the lower prices of goods, and an increase in aggregate-supply based on the lower cost of production.  Since technological growth is faster—exponential—than the growth of the population (hence of labor, over a range of time)—linear—this should also increase the real wage of the labor (the median wage).  While I am not a Washington insider, I assume this is the theory propounded to rationalize the export oriented policy that the government is pushing.

There is an interesting conundrum that seems to take place as a result of technological growth.  Improvements in technology reduce the marginal cost of production and hence, increase efficiency per labor.  This in result requires fewer numbers of laborers to produce the same number of goods.  The only way to grow labor at the rate of technology is if aggregate demand or supply would adjust at the same rate as technology.  Since, technological growth is never negative and seems to be exponential (as compared to increases in AD or AS), it outpaces growth in aggregate demand or aggregate supply. Assuming, the growth rate of labor is pretty much constant, increases in aggregate demand and/or supply won’t be high enough to increase the demand for the labor force.

The solution posed by the Obama administration (and many other administrations before his) is that we must train the economically displaced so that they can adjust to the advances and changes in technological progress.  However, based on the above reasoning, if technological progress constantly outpaces any resulting shifts in the total demand and supply of goods, there will always be residual unemployed labor, regardless of the skill-set of the average labor force.  Furthermore, over time, this unemployment rate will only increase since the nature of technological growth is much faster than changes in shifts in total demand and supply of goods.

I do not mean to suggest that humans will be replaced by machines in the long-run. Instead, I hope to highlight the gap between the total need of labor vis-à-vis aggregate demand and supply, and technological growth.  In order to maintain theminimum natural rate of unemployment, the solution is that a laborer works fewer hours per laborer: i.e. the average work week is reduced.  Since technological improvements increases labor efficiency, an average worker can do the same amount of work in less time than before.  Why is it that the production factors of the economy are so dramatically changing, but the labor-entrepreneur contract has remained the same since the late 19th century (8 hours work-day movement)?

By merely reducing our average work day by .5 hours (7.5 hours), the U.S. economy can add 70 million daily work hours, which equals roughly 9 million new jobs (employment figures based on Nov, 2011 DLS). Obviously, this is a very simple and a naive calculation; however, the point here is to highlight the drastic effect a small reduction in daily work hour can have on the whole economy.  Economic growth should lead to a better lifestyle, no?  After all, it is economic theory that suggests that higher incomes lead to a better quality of life.

It seems problematic that instead of having a dialogue about working less, there seems to be a pattern of increasing work-hours per laborer and increasing the retirement age of our workers (for example, attacks on public unions and suggestions for increasing the retirement age to save Social Security).  Improper management of social security is not an excuse for increasing minimum retirement age.

Over the last 30 plus years, the only way we have been able to mask the unemployment rate, I argue, is that provisioning of historically very, very high credit lines to the labor force.  Since the real-wage has gone down, credit has been used to substitute the gap between what wages ought to be and the actual wages (based on the growth of the real GDP over time).  It is this provisioning of credit that has led to the increases in aggregate demand needed for growth in the GDP.

While I don’t have data to support this argument, my experience and knowledge of high-tech and high paying and technical service industry has shown me that workers in these industries work a lot more than the an average work week.  If we are going to shift to an even more technologically driven society, then, merely training more workers in technical fields is not going to solve our economic woes.  There also has to be a shift in how we view work. 

Reducing the average work week will provide more people with higher paying jobs (as a result of the reduction in work hours of those currently employed) and raise the real wages of these people.  This may not only lead to a more equal society, but also one that does not need to mask its high standard of living by credit.

(Source: yousuf)