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Globalization and Employment
Corporations often repress falling purchasing power and the weak domestic economy by takeovers, foreign investments and exports. The neoliberal myth that increased profits lead to more investments and more jobs must be cleared away.
GLOBALIZATION AND EMPLOYMENT
Myth and Reality: National Economic Policy is changed by International Economic Developments
By Christian Christen
[This discussion paper published on the LabourNet Germany website is translated abridged from the German on the World Wide Web, http://www.labournet.de/diskussion/wipo/globaldeb2.html. Christian Christen is an economist in Berlin.]
Table of Contents
1. Introduction
A. Economic Connections
1. Capital Shortage and Capital Surplus
2. Investments
3. Changed Economic Framework
B. Globalization
1. World Trade and Germany
2. Direct Investments in Low-Wage Countries
C. Domestic Economic Changes
1. Productivity, Growth and Structural Change
2. Labor Markets and Service Gaps: Comparison of Germany and the US
3. Summary
1. INTRODUCTION
Two arguments purport to explain the “employment misery” in an abridged way. In the first, high wages or non-wage labor costs in the industrial countries led to production shifts to so-called low-wage countries and capital flight. This is manifest in growing direct investments abroad. In the second, an enormous rationalization pressure results from higher productivity that combined with development to the service society (tertiarization) causes employment problems. In all economic discussions, these arguments are sooner or later strained to proclaim the end of the work society and/or to describe globalization.
The following text moves in this tension and questions current opinions with the help of real developments. Neither economic interdependence nor productivity advances inevitably necessitate falling wages, increased unemployment or dismantling social security. Nevertheless these opinions on the connection of globalization and social problems are so widespread that ominous global markets are made the cause of all possible economic and social abuses.
Most problems have local and usually political causes and can be referred back to concrete economic decisions. However an economic concept stands behind the killer argument “globalization” that made possible the current economic internationalization. How this was enforced politically cannot be discussed here. [1]
Beside all ideology, one result of economic policy that was and is transferred in the globalization debate is that an economic structure oriented primarily in export benefits certain groups and businesses. Thus there are unequivocal winners and losers, not only regarding distribution conditions. Real changes in the relations of capital and labor and politics and the economy are hidden behind the term globalization. Speaking in an exaggerated way, “The nature of globalization is the overcoming of national and continental boundaries. The positional orientation leads to the increased prosperity for a relatively few and the impoverishment of many people, dividing the economy, society and the (social-) state.” [2]
Globalization is not a new phenomenon and doesn’t offer any unique historical chance as often naively proclaimed. If one looks back on the history of capitalist internationalization, the fairy-tale of the impossibility of stopping globalization is relativized. Globalization was stopped again and again by economic breakdowns, crises and wars. [3]
The worldwide economic crisis at the beginning of the 20th century was only one of the radical turning points where vast populations in all countries paid with massive impoverishment. One logical reaction on the eve of the crisis and in dealing with its consequences was the attempt to regulate capitalism socially. This was always carried out against political resistance. At that time, the social regulation of the economy did not lead to crisis as asserted in the current controversies. Rather regulation was the necessary result of social collapse caused by a radical (liberal) market fundamentalism. [4]
The principled criticism of globalization was not a rejection of the international division of labor, transfer of knowledge and technology or an internationally coordinated economic policy to overcome worldwide inequality. Rather the national and international conceptions underlying globalization irreconcilably oppose the emancipatory goals.
A just worldwide economic order widely discussed after 1945 is hardly heard. Instead globalization is very frequently equated with increased worldwide prosperity. If ways were followed at that time that sought an economic and social development reducing the unequal global distribution, the social marginalization of 80% of the world’s population is silently accepted today. All figures unfortunately show that the globalized world with universal participation only exists in heads. Globalization really means regional concentration of all economic activities in the main industrial countries. The Asian century predicted a few years ago and regarded as a positive example of the export-oriented development strategy in globalization was only a breather. The usual economic cycles and the prospect for a deflationary worldwide development as before 1929 have returned in ever-faster succession.
That unemployment increases, employees’ work volumes grow with increased productivity and wages stagnate is not new. This has nothing to do with the end of the work society because the goal of production was the profitable use of labor and never “full employment”. If this goal is attained with fewer employees, this is not a problem economically. If the society wants something different, it must intervene in the economic process.
The end of work or the end of relatively “well-paid” labor with social security can hardly be proclaimed. [5] In the OECD nations, employment rose 15% on the average, a growth of 50 million jobs. That wages continue falling and the development of a “low-wage sector” coheres with profit explosions and productivity advances has to do with globalization. The dissolution of normal working conditions and the representation of this process as the way to the service society are connected. Deregulation of labor markets and introduction of low-wage sectors occur. [6] Adjustments of inner social and economic conditions are stylized as absolute, inescapable or without alternative.
In the following text, the term globalization will be described more exactly. Several connections will be shown between globalization, economic decisions and their effects on employment development. In the first section, basic economic connections of investment, capital scarcity and surplus and economic changes (export orientation) will be probed. In the second section, globalization will be illustrated with the help of streams of goods and foreign direct investments. Clarifying economic interdependence and explaining what globalization is not will be stressed. Finally in the third section, domestic economic changes will be discussed. The aspects of structural change and productivity development are related to developments on the English and American labor markets that often serve as positive examples for the “negative conditions” in Germany.
The detailed analysis of the connection of globalization and domestic economic development will be corroborated by the literature. Incompleteness seems less a danger than presenting false assertions of present developments and becoming lost in a discourse about the changes and possibilities of globalization. This can happen when one believes one is among the winners and is convinced that the system of economic and social inequality can survive in the long run.
A. BASIC ECONOMIC CONNECTIONS
1. CAPITAL SHORTAGE AND CAPITAL SURPLUS
All statistics show that the total economic output and profits are constantly increasing. Simultaneously wages and salaries are stagnating. Unemployment remains at a high level and social benefits are obviously throttled down. This is not new but corresponds to the functional logic of capitalism for everyone who grapples with the criticism of political economy. Changes result from the process of simultaneous production of wealth and poverty inherent in the capitalist logic. [7] Since the middle of the 1970s, this contradiction has intensified. How are these developments connected? What economic changes have occurred?
A very old problem of every developed economy, under-consumption, is hidden behind the contradiction of the increase of poverty and economic stagnation. Absolute capital shortage is not the problem for further development and growth in modern industrial nations. Rather the relative capital surplus along with political resistance hinders social progress. On first view, this seems paradoxical since it doesn’t correspond to the current opinions on reasons for the economic crisis. This crisis can be explained as deficient investment capital on account of trifling profits or sales.
What can be established in business economics or for structurally weak regions has almost no empirical or theoretical value for the total economy. An unequal development manifest in relative capital shortage of businesses and/or regions has prevailed since the beginning of industrialization. This problem can only be overcome by targeted incentives and economic control as historically attested in the most different forms of industrialization, for example in Germany, Italy, the Soviet Union and the Asian threshold countries.
The same aspects characterizing classical capitalism appear in all cases of equalizing industrialization. The problem of capital shortage must be solved as long as labor productivity and the wage per employee are very low while the need for real capital for equalizing industrialization is very high. Investment control, price administration and state prescribed wage restraint were and are applied. In the favorable case, a high growth and a strong economic dynamic arose as in the Asian threshold. This had nothing to do with a superior Asian culture or other myths of a globalized economy but is a despicable economic logic. A good historical and theoretical knowledge of economic connections protects from the rediscovery of old well-known facts. [8]
The problem of development limits is different where the accumulation of capital is far advanced so there can be no absolute capi8tal shortage any more. Labor productivity rises, the need for capital investments falls relative to existing resources and production conditions prevent a new constant growth of mass consumption. Growth slows despite advances in productivity while investments in real capital decline leading to unemployment. Lack of demand for consumer goods and inadequate transformation of the surplus product in social progress, reduced working hours, better social security and rising expenditures for culture, education and environmental protection are the development limits of the system. Thus modern societies do not live above their means but don’t use their economic and social possibilities and constantly fall behind the achieved socio-economic level…
State deficits for absorbing surpluses are presently regarded as “sins” and combated through budget consolidation. Financing the adjustment of different living conditions or social-ecological reconstruction remains unexplained since these are not the goals of the market. Twenty years ago the following economic platitude was widely accepted. Expenditures of the state refer to functions that go beyond the private economic circle, not to fields covered by private persons or businesses. These functions are not fulfilled if a special institution (the state) does not act. Renunciation on a macro-economic policy to fulfill these tasks does not mean that private actors or the market replace the state and assume these functions. In reality, the tasks are not fulfilled.
The consumption of higher income persons does not occur for other reasons: a high savings rate through satiation in the consumption of material goods. A (short-term) growth potential only seems to exist in personal services. The discussions about the service gap, the expansion of this sector by means of the combined wage or the general discussion about wage levels reveal the problematic. This policy may lead to more employment for a certain period of time. But whether this increases total economic welfare and whether socially secured jobs arise can be doubted. Instead the stagnation of mass income appears and a new demand shortfall is pre-programmed.
Thus the export sector remains for absorption of the increasing surplus. Economic policy has relied on this sector for more than 20 years. Everything is done to lower wage costs and prevail over competitors on the world markets. [9] Export surpluses must be so high that they compensate for reduced employment at home on account of inadequate purchasing power demand for goods and services. This functions only as long as the price advantages are not neutralized by corresponding measures of trading partners through lower wage costs, improved currency relations, tripling transportation costs etc.
This happens because export orientation is in effect for all nations to overcome the local growth weakness. In the long run, this policy is a zero-sum game. Productivity increases constantly [10] and growth continues declining through the policy of domestic export orientation. The problem of domestic “under-consumption” intensifies and leads to deflationary tende4ncies on the international scale. Mentioning the term “under-consumption in this context rattles an economic taboo because “poverty in developed capitalist countries is presumed avoidable given the state of development of productive power. Criticism in social conditions is arising along with the demand for radical reform.” [11]
2. INVESTMENTS
The question why surplus resources are not used for investments should be clarified. First of all, investment does not generally mean investment in employment or real capital. Production, expansion and replacement investments can be distinguished as well as investments in process- and product innovations. No expansions will occur if the expectations are dismal and existing capacities are not fully used. The main investment motive of German businesses is rationalization followed by replacement investments and profit innovations. All three motives do not lead unconditionally to increased employment, expanded security and investments in environmental protection, on of the assumed growth branches with great employment effects and a low ranking. [12]
In addition, short—term increases of demand will not help with a capacity utilization between 81% (food and semi-luxuries businesses) and 88% (goods-producing businesses). [13] The substitution of machines in this situation only increases productivity so rationalization (staff reductions through process innovations) is possible without developing additional employment in other areas. On the other hand, much capital for developing entirely new products is needed. This capital is not easily available in hard economic times from the credit banks.
What does this mean concretely? The mass production of solar cells would massively lower their unit costs so demand would rise and the produced electricity would be cheap. All in all, this is a great investment project. In all probability, the need for capital would be so high that partial or total financing by the public treasury would be necessary. However this engagement under present conditions is rejected whether through credits or tax revenue bonds. This great project is not initiated by the private economy since the necessary capital can be used in conventional energy production for decades. A corresponding capital devaluation by building alternative energy production that would really have a mass appeal is logically avoided. An industrial policy deserving its name must always grapple with the structural conditions set by the existing form of production. Trust in the market forces does not help us advance.
Let us return to the initial question. The funds remaining in business will obviously be used for more than only rationalization- and substitute investments. Investments in mergers and partnerships, financial investments or opening foreign markets will take the largest share. [14] A central aspect of globalization enters national structures. Employment in the4 homeland must be secured. However the loss of jobs is not cushioned since the active investments are not sufficient to absorb the whole capital stock and transform capital into social progress for everyone. Businesses are furnished with capital resources and daily returns on the financial markets. Reality daily refutes the claim that little funds are available for investment…
Stagnating real wages with increasing labor productivity, redistribution upward from below (increasing savings) and an export orientation produce on one hand capital surpluses that lack profitable investment possibilities and under present conditions reduced employment and social retrogression. This is a primary connection of globalization and employment that should be explored further.
3. THE CHANGED ECONOMIC FRAMEWORK
The economic causes of the problems are on the domestic labor market. Changes resulted from the economic orientation in favor of exports. The turn to the “world market” encourages production for export, intensified competition on the markets, leads to predatory competition and is used domestically as a pressure to change the distribution conditions or dismantle the welfare state and its domestic economic basis. The central criterion of economic policy is that national businesses succeed internationally. These businesses should become global players and/or assert themselves on foreign markets. Strengthening their competitiveness means concretely:
· Radical cost reductions
· A strategic industrial policy to produce, assure and extend competitive advantages
· A national monetary policy that combats inflation
The goals of cost reduction and monetary policy are bound together in a contradictory way. On one hand, export orientation demands that the value of the currency not rise disproportionately because otherwise the products would have higher prices (in relation to foreign currencies) and exports would decline… The employer side is obviously not so dumb to organize its own destruction. However wage reductions or social cuts can always be “sold” more easily on the roundabout way of the vast labor cost discussion than through a direct attack on the wage level.
At the same time a strong currency is necessary and produced by monetary policy so German firms can successfully “buy” abroad. In other words, foreign direct investments of German businesses to open foreign markets or for mergers and firm buyouts require a strong currency to sink the costs for German capital. Through the liberalization of financial markets, the demand for a hard currency (low inflation) and high interests (so foreign capital flows to Germany) is a central element of export-oriented economic policy. The production and trade of goods must be supported and the demands of financial capital satisfied. Conflicts of interest are inevitable. How these conflicts are solved politically depends on the economic power of businesses, institutions and persons.
A third effect of a strong currency is the declining price of imported goods. According to the import intensity of production, that is preliminary products from abroad are needed to manufacture a good, the costs for preliminary material and immaterial works fall in different sectors. These three effects of different currency relations impact the domestic market and the employment development. Other effects cannot be discussed here. [17] Questions about the independence of the central bank, stabilization of currencies and the interest level are essential elements of an export-oriented economic policy.
Businesses are strongly bound to the national location despite expansion abroad and adjustment to export. A complete mobility or absolute internationalization of value creation or production does not exist. Therefore every national policy of an economic structure oriented in export must include the demand for reduced wages, limitation of state expenditures, tax reductions and deregulation or abolition of regulations on environmental-, labor and termination protection. Otherwise the profit expectations and capital profitability cannot be fulfilled on the local market with stagnating purchasing power. However fulfilling profit expectations is not an urgent economic necessity since 70=80% of the gross domestic product is gained on the domestic market. No business can evade this reality.
These internal political regulations increase the attractiveness of the financial location so foreign capital is attracted and native capital is not withdrawn. Investments in the financial system that have grown enormously through liberalized capital transactions and the primacy of shareholder value are strong levers to force a monetary policy for a stable currency through high interests, shortage in the money supply and low taxes. [18] Further liberalization of capital transactions is controversial since this liberalization firstly satisfies the profit expectations and stability of the capital invested in financial ventures and secondly increases capital’s possibilities for migrating (better and) quicker.
Taken together, these were changes in the economic policy pursued up to the middle of the 1970s: away from a domestic economic revival through growth, increased employment, higher mass income and development of social security combined with an active welfare state to the anti-inflation and austerity policy that regards price stability as the highest goal and permanent improvement of competitiveness realized by an activating welfare state. This is the meaning of an export-oriented policy or how globalization is converted into real policy.
B. GLOBALIZATION
1. WORLD TRADE AND GERMANY
The initial thesis about the shift of production to low-wage countries cited again and again as a cause for our increasing unemployment should also be examined with the help of data.
First of all, one myth should be cleared away. A worldwide trading system that is always conjured in the discussion about globalization does not exist…
Trade occurs between the highly developed industrial nations. The developing countries, on the other hand, fall out of world trade. Only a few threshold countries could assert themselves in global trade in the last 30 years and profit from its growth. Why the majority of countries are marginalized becomes clear when one considers the traded products. 90% of worldwide exports consist of industrial products (finished and semi-finished products). Moreover intra-industrial trade amounts to 2/3 of total exports. In other words, trade between equal businesses in different countries and with finished- and semi-finished products is the core of the stream of goods promoted by the international division of labor…
No concrete and unequivocal figures exist on the relation of foreign dependence and gainful employment… Gainful employment tends to shrivel in the economic areas that depend strongly on foreign countries. The export economy cannot be the bearer of a disproportionate growth in employment as long as the surpluses are not transformed into massively increased purchasing power, reduced working hours and hiring. These positive effects for the domestic market are crucial.
2. ARE THERE DIRECT INVESTMENTS IN LOW-WAGE COUNTRIES?
2.1 DIRECT FOREIGN INVESTMENTS
The development of direct foreign investments (DFI) is important in understanding business shifts, development of transnational corporations (TNCs) and the attractiveness of an investment location…
2.2 MERGERS: DEVELOPMENT AND CAUSES
Transnational corporations do not only invest in building new production sites to open up foreign markets or exploit favorable production conditions. Rather border-crossing mergers, buyouts and joint ventures occur increasingly. Border-crossing investments that expand markets and investments to displace competition (concentration) should be distinguished. In reality, these motives cannot be separated from one another. However the motive of displacement predominates in the current wave of mergers. The contraction of the domestic market, falling prices, relative over-capacities, structural change on account of technological change and rising costs for research and development are the main motives for mergers. Thus concentrating on the core business (diversification was vital in the 1970s and 1980s) and being superior to rivals through cost reduction (dismissals, lean management, outsourcing and just-in-time production) is central. However the general problem of falling worldwide sales possibilities in relation to greater production capacities is not solved.
The rise of border-crossing investments can be explained by the high percentage of investments for mergers and joint ventures (mergers and acquisitions, M & As). In 1998 they amounted to $468 billion and 73% of all worldwide investment flows. [21] The primary branches for M & A are: banks/insurances, chemicals, the pharmaceutical industry and telecommunications. 90% of global merger- and joint venture investments usually occur in a group of industrial countries or corporations. The US, England, France and Germany have the highest share in M & A investments. In 1999, German corporations invested 93 billion Euros abroad. The four largest firm mergers in which German investors participated amounted to 50 billion Euros. [22] Measured by their foreign capital stock, the 100 largest corporations control foreign assets of $1.8 trillion (14% of worldwide foreign capital).
The intensified regional (international) interdependence occurs particularly in the service sector. In the 1990s, the greatest assets were concentrated here in foreign countries, followed by trade (8-25%). Between 55 and 60% of the total annual FDI is in the tertiary sector. This sector is dominated by financial services and insurances. The share of FDI in the service area is closely connected with the liberalization of border-crossing production and trade… The growth of the domestic market (target land of investments) or the sales possibilities on the traditional markets is crucial. Therefore the contraction on the local market always intensifies the tendency to open new markets. What is described elsewhere as under-consumption and appears operationally as a sales problem in business should be solved in a border-crossing way. The wage level or the height of unit wage costs is not the main motive for direct investments. Wage costs play a certain role when international corporations from the producing sector invest beyond their own borders. However this investment motive as a secondary significance. [23[
Despite this motive for investment abroad and the increasing importance of transnational corporations, the corporations’ degree of internationalization and their worldwide mobility are clearly limited. The “home-orientation and the national position” is still the decisive moment of all business activities. This moment includes both the production structure, trade with goods and services, investment activity and the return flows of profits as well as active research and development expenditures. [24]
2.3. THE REGIONAL STRUCTURE OF INFLOWS AND OUTFLOWS
In the last decades, FDI grew worldwide from $500 billion at the beginning of the 1980s to $2 trillion in the 1990s. Despite the most recent crises in the threshold countries, an end of this growth cannot be foreseen. Restructuring in nearly all branches is running at full steam. Like trade, direct investments concentrate in a few OECD states, above all in the US, Europe and Japan. For example, German direct investment abroad rose from $18.4 billion to $141.2 billion from 1976 to 1990… Direct investments always follow the trade streams. Thus marginalization in trade means fewer investments from foreign countries. Developing countries painfully experience this although the personnel costs are minimal in these countries.
The comparative advantage of low labor costs is no longer decisive to attract investments according to the official statistics. Quite the contrary, a comparative disadvantage for the so-called low-wage countries occurs more and more from the lower personnel costs through the enormous development of productivity in industrial countries. The thesis of the massive business shift through globalization is more ideological than real. Nevertheless this argument has been used again and again to force concessions in wages, working hours and social benefits from employees. This strategy usually prevails since the immediate threat of shifting businesses cannot be effectively opposed by the unions, works councils and dependent employees. Ultimately they must accept a business migration…
In 1997 the Ifo-Institute identified the most important reasons why investments are made abroad. The opening of international and national markets is the main argument followed by participation in these growing markets and securing existing sales markets in the target country. Lastly, lower wage costs and lower taxes are always described as main motives in the economic discussion…
If domestic demand is weak owing to a supply-oriented economic policy, transnational corporations try to increase their profits abroad. Increasing production and profits beyond one’s borders is attempted by building production sites and a local presence. Distribution- and service networks support exports from the homelands. The wage level is not decisive since direct foreign investments mostly involve investments in the service area (where export is impossible).
C. DOMESTIC ECONOMIC CHANGES
1. PRODUCTIVITY, GROWTH AND STRUCTURAL CHANGE
…Economic and social structural changes do not result through competition from “low-wage countries” and are not forced through massive business shifts. The general effects, the decrease of employment in the primary sector and the industrial sector in favor of building employment in the service sector, occur with all economic development and have nothing to do with a de-industrialization. Rather the structural change occurs through a changed relation between industrial production and necessary services, greater growth of productivity in the industrial area and the resulting decline in the prices of goods. Substantial changes of employment result primarily from internal causes. [26}
Accordingly the dismantling of industrial jobs does not go back immediately to the North-South trade. Trade between industrial countries is crucial. Permanently increased productivity with the present economic orientation causes the employment problem.
The share of the industrial sector in the gross domestic product (GDP) is declining since consumers are buying relatively few industrial goods. On one side, satiation tendencies exist in certain areas. On the other side, prices fall through increased productivity… The central reality after 1945 was the growing demand for services from the public treasury. Building a comprehensive social security and developing the infrastructure were uppermost. Dismantling the social state and the austerity dictate of financial policy reduce public demand for services and change the range and quality of offered services. Thus the structural change described with the term tertiarization is the result of the expanded services sought by businesses, credit institutes and insurances, services for material production, sales (distribution) of goods and transportation. The increasing computerization of production increases the demand for services in financing, research and development, organization and marketing. Modern industrial production was only possible with just-in-time, lean production and outsourcing. Accordingly productivity increases permanently in the traditional sectors and the service sector…
Simultaneously export orientation and the international division of labor through intra-industrial trade required a changed production structure made possible by the tertiarization of the economy. Transportation, communication, service and organization are increasingly important. The employment figure for the service sector is probably higher than in the official statistics. According to the official 1994 statistics, 54% of employees worked in the service sector. According to the calculations of the German Institute for Economic Research, 72% were classified in the services. According to the 1995 micro-census, 83% of the gainfully employed or economically active in Germany performed services in the broadest sense.
Regardless of the measuring method, industrial production abounds in services. The more the economy develops, the fewer persons are needed for production and the more services are rendered. [29] This is an essential effect of technical progress and productivity development. The principles of industrial production are implemented in the service area. Standardization and rationalization are easily possible in the whole service area and will lead to massive job cuts in the future. A high ability level is required in nearly all areas of industrial services. A relatively high productivity is sought to guarantee competitiveness on the markets…
The trend of productivity development is increased gross domestic product for employee… The so-called job wonder in created jobs coheres with a lower productivity and falling income… With less qualified employees, a disproportionate increase in the unemployment rate compared to the general development has been clear since the beginning of the 1990s. Unskilled and less qualified persons are used less and less in production and services in relation to the past. In the industrial nations, high training requirements are general prerequisites for gaining a socially secured and good paying job. All this has nothing to do with competition from so-called low-wage countries. The advance in productivity and the structural change in the production-service relation are responsible…
2. LABOR MARKETS AND SERVICE GAPS
…Lower wages did not lead to more jobs…
2.1 EMPLOYMENT AND UNEMPLOYMENT IN THE US
The development on the US labor market must be interpreted firstly on the background of a constant population growth (legal immigration) of 2 million persons per year. Secondly, 6 million illegal persons (including 2.5 million Mexicans) are employed whose income is mostly below the legally fixed minimum wage. [33] The long-term increase of workers makes possible an enormous employment growth (in absolute numbers) and defuses the adjustment problems of the inter-sectoral structural change of the US economy. This means concretely that cheap workers existed abundantly to feed the relative employment growth of the US economy that in the last 20 years occurred only in the service sector while the industrial- and agricultural areas shriveled proportionately.
Another factor connected the relative employment growth in the 19702 with the increase of part-time employment and with the rapid long-term increase of gainful women’s work mainly in the 1970s and 1980s. The opposite trend was true for men, particularly the less qualified. Their gainful participation declined. The newly created jobs arose primarily in the service sector with a simultaneous polarization between high-wage and low-wage activities. This was related to a decline of jobs with middle class incomes. The employment growth was concentrated in the low-wage sector in the 1980s and in the high wage sector in the 1990s…
The US Bureau of Labor Statistics predicts job growth up to 2005 almost exclusively in the service occupations. Health care, education, crafts and retail trade dominate. Only a tenth of the new jobs will arise in the greatly praised high-tech sector. The vast majority of the new jobs appear in occupations with traditionally low or negative productivity growth and low incomes. Good pay can only be expected with 20% of the jobs. The predicted numbers on job growth are not proportional to the job cuts in the traditionally higher paying industrial branches. On account of past development, highly productive industrial jobs are lost in favor of less productive service jobs.
Whether unemployment will be overcome should be clarified along with the question where jobs will arise and whether they are socially secured. This sounds paradoxical. The “jobs wonder” should not be confused with an “unemployment wonder”. [35] A high growth in the number of jobs does not mean the reduction of unemployment. The “low-wage employment” sector is threatened by higher unemployment: short-term jobs with low wages and trifling social benefits, high dismissal rates and enormous fluctuation. The hidden unemployment is greatest in this segment. No future claims or very trifling future claims result from the deficient social security in the jobs. Registering as unemployed is not rewarding with unemployment in the low-wage area.
2.2 WAGES AND INCOME IN THE US
The average real wage level stagnated in the 1970s. The wages between the genders diverged in the 1980s and 1990s. With men, the hourly wage and the wage spread were joined with lower real wages while the hourly wage rose and real wage gains were recorded for women. Lower wages with high population growth and falling unemployment figures are regarded as evidence for the adaptability of the US labor market. Rising unemployment and low gainful participation among less qualified persons, particularly among Afro-Americans who earn the lowest wages alongside immigrants indicate that low wages for these groups does not make possible adequate employment.
The causes of the declining real wage or wage spread are: change in the “labor supply”, decline in demand for less qualified workers, structural change up to the service sector, weakening of unions, increase of imports, decline of minimum wages in the low-wage sector and increased immigration. A disappearance of the middle class is bound with the wage spread. The poverty rate, particularly among Afro-Americans, rose correspondingly in the 1980s.
The often-invoked jobs wonder is demystified by two central factors. Firstly and contrary to the worldwide tendency, the average working hours in the US rose 4% between 1980 and 1997. Secondly, the income discrepancy and the concentration of wealth grew. In 1997, 7.3% of the total American income (after taxes) fell to the top 1% of the households. In 1999, this share climbed to 12.9%, the greatest concentration since data on income development was collected. The top 20% of households received 50.4% of the total national income; the middle class households (60% of households) recorded the smallest increase of all time. In 1999, the income disparities increased so far that the richest 1% of the population gained as much income as the lowest 38% of the population. 2.7 million Americans had as much income as 100 million citizens in the lower income groups.
Translated to the industrial realm, these general figures represent an increase of income differences between a factory worker and his boss from 42-fold (1980) to 419-fold in1997. The real earned income at $33,000 per year has not changed in the last decades while the income of the richest Americans (1%) is $786,000 before taxes and $516,000 after taxes. The redistribution results indirectly from the massive changes of the tax law along with the distribution effects occurring directly from the kinds of income in the economic process. Despite special additional legislated burdens between 1990 and 1993, the tax relief for high and the highest incomes led to their percentage share in total tax receipts being lower than the 1977 rate. If the richest 1% of households paid the same tax share as at that time, they would pay an average of $40,000 more per capita. This is considerable in view of the average earned income of $33,000. All the figures show that real family incomes stagnate at the level of the middle of the 1970s. Referred to the employment situation, this means: people work longer at declining wages and with less productivity. To maintain the living standard, savings are used and people become indebted when possible.
In current opinion, the rising indebtedness of private American households is explained by the fact that the economic growth and the stock market boom on Wall Street lead to high consumer expenditures since Americans share in the growth (through wages and income from shares) and see the future positively. This cannot be true for the multitude of households given the real distribution of incomes from securities [36] and the wage development. They do not hold any securities in significant amounts and their wages stagnate on a broad front. Thus the high private indebtedness does not reflect a positive feeling for life but results from negative factors. To maintain their “low” living standard, the American family must spend its saved reserves and become indebted. If one considers the high poverty rate (14% live below the poverty line), nothing wondrous can be discovered in the American economic development. The only clear conclusion is that a job does not protect from poverty in the land of “full employment”. [37] Welcome to the “New Economy” of the 21st century!
The downward trend of real wages in the US is encouraged by the trifling social securities in unemployment, sickness and old age. The social state according to European standards does not exist. Even timid attempts at realizing slight improvements and introducing rudimentary security failed in both terms of the Clinton administration. However other expenditures are rising. The costs for securing property climb in times of increasingly unequal distribution of income. The classical police state machines were built with a tendency to privatization instead of social state instruments. Private security services are booming as a growth branch alongside imprisonment.
2.6 A BRIEF CONCLUSION
Compared to its main rivals on the world market, Germany has the weakest real growth of the gross domestic product. The above-average decline in unit labor costs through rationalization, wage reserve and increased productivity has strengthened the international competitiveness of German businesses and simultaneously made the turn to the foreign market seem vital to survival to many. The growth in German industry and in the service sector is bound with greatly increased productivity. If mass demand lags behind, this high productivity will lead to lower employment. Thus reliance on high tech and high qualifications as access to the world market must be joined with a qualitative growth of the domestic market that has not happened. The consequence is an increasing competitiveness of the German economy and a strong export orientation:
· Economic growth is permanently tied to a strong growth in productivity. The American growth in productivity is only ¼ or 1/5 of the European growth.
· Between 1980 and 1991, the productivity per working hour rose 1% in the US and 2.6% in West Germany. These differences increased after 1991.
This means that growth is very job-intensive in the US while the growth of the average income (the productivity growth in the service sector is near zero) is trifling. The income polarity expands. The laboring poor (poverty despite jobs) become a “mass phenomenon”. A similar “job wonder” in Germany would mean the fall of productivity in relation to growth or that growth would rise in relation to higher productivity. Variant 2 could amount to the abridged goal of only realizing a quantitative growth and thus contradicting ecological necessities. The path in between is only possible through political interventions.
Using permanently higher productivity to gain market shares on foreign markets leads into a cul-de-sac. This should be abandoned in favor of a domestic economic orientation. Demand (private and public) could be increased and productivity gains used for a social-ecological reconstruction. We have arrived again at the beginning. The problem is under-consumption, not globalization or the end of the work society. The problem of under-consumption intensifies in whatever form globalization is implemented. A completely opposite economic goal with a chain of effects could be encouraged.
3. SUMMARY
1. The change of the distribution situation (massive growth of earnings from business activity and assets and tax relief of these earnings) has led to a stagnation of demand on the domestic market.
2. To compensate for the demand shortfall at home, businesses increase their market share on the international markets. On account of its permanent balance of trade surplus, Germany exports unemployment to neighboring countries as long as the growth in these countries is also relatively trifling. At the same time, the international competition increases since businesses from the other nation also want to solve their domestic economic problems through exports. A massive predatory competition begins with a deflationary tendency. The competitive situation forces businesses to develop their competitive position through increased productivity and lower costs. As a result, earned income stagnates despite increased productivity and profit maximization.
3. National economic policy relies on export orientation since a revival of the domestic market, for example through an employment-, structural- and industrial policy, doesn’t seem possible because of the present indebtedness of the state. A tax increase is also excluded since the national position and the financial position must be attractive while they are always threatened by capital flight.
4. Success on the international markets and higher productivity causes the loss of jobs with little training both in production and services. In other words, labor-intensive production on a low-level is not rewarding any more. Only the introduction of a “low-wage sector” seemingly remains for eliminating unemployment since “no” funds are available any longer for a regional economic development and/or a training of employees that is demand-oriented and centered on the domestic market.
5. Subsidizing these jobs can be financed by the taxes and fees from the mass income that amounts to over 80% of total internal revenue. In other words, little money remains with the state for the additional development of social security. The demand situation (state and private consumption) will continue stagnating or deteriorate if no disproportionate growth occurs.
6. Labor projects in the “low-wage sector” are activities in the area of personal services. This demand situation is determined by the domestic market and is not negotiable internationally. The low wages result from the lower demand. To have a mass appeal, there must be a demand from the dependent employees and/or the public treasury. However both sectors have few resources so wages must be permanently kept low. Therefore an increasing income polarization will occur as in the US. The purchasing power on the domestic market will continue stagnating and the game starts at the beginning.
.
Myth and Reality: National Economic Policy is changed by International Economic Developments
By Christian Christen
[This discussion paper published on the LabourNet Germany website is translated abridged from the German on the World Wide Web, http://www.labournet.de/diskussion/wipo/globaldeb2.html. Christian Christen is an economist in Berlin.]
Table of Contents
1. Introduction
A. Economic Connections
1. Capital Shortage and Capital Surplus
2. Investments
3. Changed Economic Framework
B. Globalization
1. World Trade and Germany
2. Direct Investments in Low-Wage Countries
C. Domestic Economic Changes
1. Productivity, Growth and Structural Change
2. Labor Markets and Service Gaps: Comparison of Germany and the US
3. Summary
1. INTRODUCTION
Two arguments purport to explain the “employment misery” in an abridged way. In the first, high wages or non-wage labor costs in the industrial countries led to production shifts to so-called low-wage countries and capital flight. This is manifest in growing direct investments abroad. In the second, an enormous rationalization pressure results from higher productivity that combined with development to the service society (tertiarization) causes employment problems. In all economic discussions, these arguments are sooner or later strained to proclaim the end of the work society and/or to describe globalization.
The following text moves in this tension and questions current opinions with the help of real developments. Neither economic interdependence nor productivity advances inevitably necessitate falling wages, increased unemployment or dismantling social security. Nevertheless these opinions on the connection of globalization and social problems are so widespread that ominous global markets are made the cause of all possible economic and social abuses.
Most problems have local and usually political causes and can be referred back to concrete economic decisions. However an economic concept stands behind the killer argument “globalization” that made possible the current economic internationalization. How this was enforced politically cannot be discussed here. [1]
Beside all ideology, one result of economic policy that was and is transferred in the globalization debate is that an economic structure oriented primarily in export benefits certain groups and businesses. Thus there are unequivocal winners and losers, not only regarding distribution conditions. Real changes in the relations of capital and labor and politics and the economy are hidden behind the term globalization. Speaking in an exaggerated way, “The nature of globalization is the overcoming of national and continental boundaries. The positional orientation leads to the increased prosperity for a relatively few and the impoverishment of many people, dividing the economy, society and the (social-) state.” [2]
Globalization is not a new phenomenon and doesn’t offer any unique historical chance as often naively proclaimed. If one looks back on the history of capitalist internationalization, the fairy-tale of the impossibility of stopping globalization is relativized. Globalization was stopped again and again by economic breakdowns, crises and wars. [3]
The worldwide economic crisis at the beginning of the 20th century was only one of the radical turning points where vast populations in all countries paid with massive impoverishment. One logical reaction on the eve of the crisis and in dealing with its consequences was the attempt to regulate capitalism socially. This was always carried out against political resistance. At that time, the social regulation of the economy did not lead to crisis as asserted in the current controversies. Rather regulation was the necessary result of social collapse caused by a radical (liberal) market fundamentalism. [4]
The principled criticism of globalization was not a rejection of the international division of labor, transfer of knowledge and technology or an internationally coordinated economic policy to overcome worldwide inequality. Rather the national and international conceptions underlying globalization irreconcilably oppose the emancipatory goals.
A just worldwide economic order widely discussed after 1945 is hardly heard. Instead globalization is very frequently equated with increased worldwide prosperity. If ways were followed at that time that sought an economic and social development reducing the unequal global distribution, the social marginalization of 80% of the world’s population is silently accepted today. All figures unfortunately show that the globalized world with universal participation only exists in heads. Globalization really means regional concentration of all economic activities in the main industrial countries. The Asian century predicted a few years ago and regarded as a positive example of the export-oriented development strategy in globalization was only a breather. The usual economic cycles and the prospect for a deflationary worldwide development as before 1929 have returned in ever-faster succession.
That unemployment increases, employees’ work volumes grow with increased productivity and wages stagnate is not new. This has nothing to do with the end of the work society because the goal of production was the profitable use of labor and never “full employment”. If this goal is attained with fewer employees, this is not a problem economically. If the society wants something different, it must intervene in the economic process.
The end of work or the end of relatively “well-paid” labor with social security can hardly be proclaimed. [5] In the OECD nations, employment rose 15% on the average, a growth of 50 million jobs. That wages continue falling and the development of a “low-wage sector” coheres with profit explosions and productivity advances has to do with globalization. The dissolution of normal working conditions and the representation of this process as the way to the service society are connected. Deregulation of labor markets and introduction of low-wage sectors occur. [6] Adjustments of inner social and economic conditions are stylized as absolute, inescapable or without alternative.
In the following text, the term globalization will be described more exactly. Several connections will be shown between globalization, economic decisions and their effects on employment development. In the first section, basic economic connections of investment, capital scarcity and surplus and economic changes (export orientation) will be probed. In the second section, globalization will be illustrated with the help of streams of goods and foreign direct investments. Clarifying economic interdependence and explaining what globalization is not will be stressed. Finally in the third section, domestic economic changes will be discussed. The aspects of structural change and productivity development are related to developments on the English and American labor markets that often serve as positive examples for the “negative conditions” in Germany.
The detailed analysis of the connection of globalization and domestic economic development will be corroborated by the literature. Incompleteness seems less a danger than presenting false assertions of present developments and becoming lost in a discourse about the changes and possibilities of globalization. This can happen when one believes one is among the winners and is convinced that the system of economic and social inequality can survive in the long run.
A. BASIC ECONOMIC CONNECTIONS
1. CAPITAL SHORTAGE AND CAPITAL SURPLUS
All statistics show that the total economic output and profits are constantly increasing. Simultaneously wages and salaries are stagnating. Unemployment remains at a high level and social benefits are obviously throttled down. This is not new but corresponds to the functional logic of capitalism for everyone who grapples with the criticism of political economy. Changes result from the process of simultaneous production of wealth and poverty inherent in the capitalist logic. [7] Since the middle of the 1970s, this contradiction has intensified. How are these developments connected? What economic changes have occurred?
A very old problem of every developed economy, under-consumption, is hidden behind the contradiction of the increase of poverty and economic stagnation. Absolute capital shortage is not the problem for further development and growth in modern industrial nations. Rather the relative capital surplus along with political resistance hinders social progress. On first view, this seems paradoxical since it doesn’t correspond to the current opinions on reasons for the economic crisis. This crisis can be explained as deficient investment capital on account of trifling profits or sales.
What can be established in business economics or for structurally weak regions has almost no empirical or theoretical value for the total economy. An unequal development manifest in relative capital shortage of businesses and/or regions has prevailed since the beginning of industrialization. This problem can only be overcome by targeted incentives and economic control as historically attested in the most different forms of industrialization, for example in Germany, Italy, the Soviet Union and the Asian threshold countries.
The same aspects characterizing classical capitalism appear in all cases of equalizing industrialization. The problem of capital shortage must be solved as long as labor productivity and the wage per employee are very low while the need for real capital for equalizing industrialization is very high. Investment control, price administration and state prescribed wage restraint were and are applied. In the favorable case, a high growth and a strong economic dynamic arose as in the Asian threshold. This had nothing to do with a superior Asian culture or other myths of a globalized economy but is a despicable economic logic. A good historical and theoretical knowledge of economic connections protects from the rediscovery of old well-known facts. [8]
The problem of development limits is different where the accumulation of capital is far advanced so there can be no absolute capi8tal shortage any more. Labor productivity rises, the need for capital investments falls relative to existing resources and production conditions prevent a new constant growth of mass consumption. Growth slows despite advances in productivity while investments in real capital decline leading to unemployment. Lack of demand for consumer goods and inadequate transformation of the surplus product in social progress, reduced working hours, better social security and rising expenditures for culture, education and environmental protection are the development limits of the system. Thus modern societies do not live above their means but don’t use their economic and social possibilities and constantly fall behind the achieved socio-economic level…
State deficits for absorbing surpluses are presently regarded as “sins” and combated through budget consolidation. Financing the adjustment of different living conditions or social-ecological reconstruction remains unexplained since these are not the goals of the market. Twenty years ago the following economic platitude was widely accepted. Expenditures of the state refer to functions that go beyond the private economic circle, not to fields covered by private persons or businesses. These functions are not fulfilled if a special institution (the state) does not act. Renunciation on a macro-economic policy to fulfill these tasks does not mean that private actors or the market replace the state and assume these functions. In reality, the tasks are not fulfilled.
The consumption of higher income persons does not occur for other reasons: a high savings rate through satiation in the consumption of material goods. A (short-term) growth potential only seems to exist in personal services. The discussions about the service gap, the expansion of this sector by means of the combined wage or the general discussion about wage levels reveal the problematic. This policy may lead to more employment for a certain period of time. But whether this increases total economic welfare and whether socially secured jobs arise can be doubted. Instead the stagnation of mass income appears and a new demand shortfall is pre-programmed.
Thus the export sector remains for absorption of the increasing surplus. Economic policy has relied on this sector for more than 20 years. Everything is done to lower wage costs and prevail over competitors on the world markets. [9] Export surpluses must be so high that they compensate for reduced employment at home on account of inadequate purchasing power demand for goods and services. This functions only as long as the price advantages are not neutralized by corresponding measures of trading partners through lower wage costs, improved currency relations, tripling transportation costs etc.
This happens because export orientation is in effect for all nations to overcome the local growth weakness. In the long run, this policy is a zero-sum game. Productivity increases constantly [10] and growth continues declining through the policy of domestic export orientation. The problem of domestic “under-consumption” intensifies and leads to deflationary tende4ncies on the international scale. Mentioning the term “under-consumption in this context rattles an economic taboo because “poverty in developed capitalist countries is presumed avoidable given the state of development of productive power. Criticism in social conditions is arising along with the demand for radical reform.” [11]
2. INVESTMENTS
The question why surplus resources are not used for investments should be clarified. First of all, investment does not generally mean investment in employment or real capital. Production, expansion and replacement investments can be distinguished as well as investments in process- and product innovations. No expansions will occur if the expectations are dismal and existing capacities are not fully used. The main investment motive of German businesses is rationalization followed by replacement investments and profit innovations. All three motives do not lead unconditionally to increased employment, expanded security and investments in environmental protection, on of the assumed growth branches with great employment effects and a low ranking. [12]
In addition, short—term increases of demand will not help with a capacity utilization between 81% (food and semi-luxuries businesses) and 88% (goods-producing businesses). [13] The substitution of machines in this situation only increases productivity so rationalization (staff reductions through process innovations) is possible without developing additional employment in other areas. On the other hand, much capital for developing entirely new products is needed. This capital is not easily available in hard economic times from the credit banks.
What does this mean concretely? The mass production of solar cells would massively lower their unit costs so demand would rise and the produced electricity would be cheap. All in all, this is a great investment project. In all probability, the need for capital would be so high that partial or total financing by the public treasury would be necessary. However this engagement under present conditions is rejected whether through credits or tax revenue bonds. This great project is not initiated by the private economy since the necessary capital can be used in conventional energy production for decades. A corresponding capital devaluation by building alternative energy production that would really have a mass appeal is logically avoided. An industrial policy deserving its name must always grapple with the structural conditions set by the existing form of production. Trust in the market forces does not help us advance.
Let us return to the initial question. The funds remaining in business will obviously be used for more than only rationalization- and substitute investments. Investments in mergers and partnerships, financial investments or opening foreign markets will take the largest share. [14] A central aspect of globalization enters national structures. Employment in the4 homeland must be secured. However the loss of jobs is not cushioned since the active investments are not sufficient to absorb the whole capital stock and transform capital into social progress for everyone. Businesses are furnished with capital resources and daily returns on the financial markets. Reality daily refutes the claim that little funds are available for investment…
Stagnating real wages with increasing labor productivity, redistribution upward from below (increasing savings) and an export orientation produce on one hand capital surpluses that lack profitable investment possibilities and under present conditions reduced employment and social retrogression. This is a primary connection of globalization and employment that should be explored further.
3. THE CHANGED ECONOMIC FRAMEWORK
The economic causes of the problems are on the domestic labor market. Changes resulted from the economic orientation in favor of exports. The turn to the “world market” encourages production for export, intensified competition on the markets, leads to predatory competition and is used domestically as a pressure to change the distribution conditions or dismantle the welfare state and its domestic economic basis. The central criterion of economic policy is that national businesses succeed internationally. These businesses should become global players and/or assert themselves on foreign markets. Strengthening their competitiveness means concretely:
· Radical cost reductions
· A strategic industrial policy to produce, assure and extend competitive advantages
· A national monetary policy that combats inflation
The goals of cost reduction and monetary policy are bound together in a contradictory way. On one hand, export orientation demands that the value of the currency not rise disproportionately because otherwise the products would have higher prices (in relation to foreign currencies) and exports would decline… The employer side is obviously not so dumb to organize its own destruction. However wage reductions or social cuts can always be “sold” more easily on the roundabout way of the vast labor cost discussion than through a direct attack on the wage level.
At the same time a strong currency is necessary and produced by monetary policy so German firms can successfully “buy” abroad. In other words, foreign direct investments of German businesses to open foreign markets or for mergers and firm buyouts require a strong currency to sink the costs for German capital. Through the liberalization of financial markets, the demand for a hard currency (low inflation) and high interests (so foreign capital flows to Germany) is a central element of export-oriented economic policy. The production and trade of goods must be supported and the demands of financial capital satisfied. Conflicts of interest are inevitable. How these conflicts are solved politically depends on the economic power of businesses, institutions and persons.
A third effect of a strong currency is the declining price of imported goods. According to the import intensity of production, that is preliminary products from abroad are needed to manufacture a good, the costs for preliminary material and immaterial works fall in different sectors. These three effects of different currency relations impact the domestic market and the employment development. Other effects cannot be discussed here. [17] Questions about the independence of the central bank, stabilization of currencies and the interest level are essential elements of an export-oriented economic policy.
Businesses are strongly bound to the national location despite expansion abroad and adjustment to export. A complete mobility or absolute internationalization of value creation or production does not exist. Therefore every national policy of an economic structure oriented in export must include the demand for reduced wages, limitation of state expenditures, tax reductions and deregulation or abolition of regulations on environmental-, labor and termination protection. Otherwise the profit expectations and capital profitability cannot be fulfilled on the local market with stagnating purchasing power. However fulfilling profit expectations is not an urgent economic necessity since 70=80% of the gross domestic product is gained on the domestic market. No business can evade this reality.
These internal political regulations increase the attractiveness of the financial location so foreign capital is attracted and native capital is not withdrawn. Investments in the financial system that have grown enormously through liberalized capital transactions and the primacy of shareholder value are strong levers to force a monetary policy for a stable currency through high interests, shortage in the money supply and low taxes. [18] Further liberalization of capital transactions is controversial since this liberalization firstly satisfies the profit expectations and stability of the capital invested in financial ventures and secondly increases capital’s possibilities for migrating (better and) quicker.
Taken together, these were changes in the economic policy pursued up to the middle of the 1970s: away from a domestic economic revival through growth, increased employment, higher mass income and development of social security combined with an active welfare state to the anti-inflation and austerity policy that regards price stability as the highest goal and permanent improvement of competitiveness realized by an activating welfare state. This is the meaning of an export-oriented policy or how globalization is converted into real policy.
B. GLOBALIZATION
1. WORLD TRADE AND GERMANY
The initial thesis about the shift of production to low-wage countries cited again and again as a cause for our increasing unemployment should also be examined with the help of data.
First of all, one myth should be cleared away. A worldwide trading system that is always conjured in the discussion about globalization does not exist…
Trade occurs between the highly developed industrial nations. The developing countries, on the other hand, fall out of world trade. Only a few threshold countries could assert themselves in global trade in the last 30 years and profit from its growth. Why the majority of countries are marginalized becomes clear when one considers the traded products. 90% of worldwide exports consist of industrial products (finished and semi-finished products). Moreover intra-industrial trade amounts to 2/3 of total exports. In other words, trade between equal businesses in different countries and with finished- and semi-finished products is the core of the stream of goods promoted by the international division of labor…
No concrete and unequivocal figures exist on the relation of foreign dependence and gainful employment… Gainful employment tends to shrivel in the economic areas that depend strongly on foreign countries. The export economy cannot be the bearer of a disproportionate growth in employment as long as the surpluses are not transformed into massively increased purchasing power, reduced working hours and hiring. These positive effects for the domestic market are crucial.
2. ARE THERE DIRECT INVESTMENTS IN LOW-WAGE COUNTRIES?
2.1 DIRECT FOREIGN INVESTMENTS
The development of direct foreign investments (DFI) is important in understanding business shifts, development of transnational corporations (TNCs) and the attractiveness of an investment location…
2.2 MERGERS: DEVELOPMENT AND CAUSES
Transnational corporations do not only invest in building new production sites to open up foreign markets or exploit favorable production conditions. Rather border-crossing mergers, buyouts and joint ventures occur increasingly. Border-crossing investments that expand markets and investments to displace competition (concentration) should be distinguished. In reality, these motives cannot be separated from one another. However the motive of displacement predominates in the current wave of mergers. The contraction of the domestic market, falling prices, relative over-capacities, structural change on account of technological change and rising costs for research and development are the main motives for mergers. Thus concentrating on the core business (diversification was vital in the 1970s and 1980s) and being superior to rivals through cost reduction (dismissals, lean management, outsourcing and just-in-time production) is central. However the general problem of falling worldwide sales possibilities in relation to greater production capacities is not solved.
The rise of border-crossing investments can be explained by the high percentage of investments for mergers and joint ventures (mergers and acquisitions, M & As). In 1998 they amounted to $468 billion and 73% of all worldwide investment flows. [21] The primary branches for M & A are: banks/insurances, chemicals, the pharmaceutical industry and telecommunications. 90% of global merger- and joint venture investments usually occur in a group of industrial countries or corporations. The US, England, France and Germany have the highest share in M & A investments. In 1999, German corporations invested 93 billion Euros abroad. The four largest firm mergers in which German investors participated amounted to 50 billion Euros. [22] Measured by their foreign capital stock, the 100 largest corporations control foreign assets of $1.8 trillion (14% of worldwide foreign capital).
The intensified regional (international) interdependence occurs particularly in the service sector. In the 1990s, the greatest assets were concentrated here in foreign countries, followed by trade (8-25%). Between 55 and 60% of the total annual FDI is in the tertiary sector. This sector is dominated by financial services and insurances. The share of FDI in the service area is closely connected with the liberalization of border-crossing production and trade… The growth of the domestic market (target land of investments) or the sales possibilities on the traditional markets is crucial. Therefore the contraction on the local market always intensifies the tendency to open new markets. What is described elsewhere as under-consumption and appears operationally as a sales problem in business should be solved in a border-crossing way. The wage level or the height of unit wage costs is not the main motive for direct investments. Wage costs play a certain role when international corporations from the producing sector invest beyond their own borders. However this investment motive as a secondary significance. [23[
Despite this motive for investment abroad and the increasing importance of transnational corporations, the corporations’ degree of internationalization and their worldwide mobility are clearly limited. The “home-orientation and the national position” is still the decisive moment of all business activities. This moment includes both the production structure, trade with goods and services, investment activity and the return flows of profits as well as active research and development expenditures. [24]
2.3. THE REGIONAL STRUCTURE OF INFLOWS AND OUTFLOWS
In the last decades, FDI grew worldwide from $500 billion at the beginning of the 1980s to $2 trillion in the 1990s. Despite the most recent crises in the threshold countries, an end of this growth cannot be foreseen. Restructuring in nearly all branches is running at full steam. Like trade, direct investments concentrate in a few OECD states, above all in the US, Europe and Japan. For example, German direct investment abroad rose from $18.4 billion to $141.2 billion from 1976 to 1990… Direct investments always follow the trade streams. Thus marginalization in trade means fewer investments from foreign countries. Developing countries painfully experience this although the personnel costs are minimal in these countries.
The comparative advantage of low labor costs is no longer decisive to attract investments according to the official statistics. Quite the contrary, a comparative disadvantage for the so-called low-wage countries occurs more and more from the lower personnel costs through the enormous development of productivity in industrial countries. The thesis of the massive business shift through globalization is more ideological than real. Nevertheless this argument has been used again and again to force concessions in wages, working hours and social benefits from employees. This strategy usually prevails since the immediate threat of shifting businesses cannot be effectively opposed by the unions, works councils and dependent employees. Ultimately they must accept a business migration…
In 1997 the Ifo-Institute identified the most important reasons why investments are made abroad. The opening of international and national markets is the main argument followed by participation in these growing markets and securing existing sales markets in the target country. Lastly, lower wage costs and lower taxes are always described as main motives in the economic discussion…
If domestic demand is weak owing to a supply-oriented economic policy, transnational corporations try to increase their profits abroad. Increasing production and profits beyond one’s borders is attempted by building production sites and a local presence. Distribution- and service networks support exports from the homelands. The wage level is not decisive since direct foreign investments mostly involve investments in the service area (where export is impossible).
C. DOMESTIC ECONOMIC CHANGES
1. PRODUCTIVITY, GROWTH AND STRUCTURAL CHANGE
…Economic and social structural changes do not result through competition from “low-wage countries” and are not forced through massive business shifts. The general effects, the decrease of employment in the primary sector and the industrial sector in favor of building employment in the service sector, occur with all economic development and have nothing to do with a de-industrialization. Rather the structural change occurs through a changed relation between industrial production and necessary services, greater growth of productivity in the industrial area and the resulting decline in the prices of goods. Substantial changes of employment result primarily from internal causes. [26}
Accordingly the dismantling of industrial jobs does not go back immediately to the North-South trade. Trade between industrial countries is crucial. Permanently increased productivity with the present economic orientation causes the employment problem.
The share of the industrial sector in the gross domestic product (GDP) is declining since consumers are buying relatively few industrial goods. On one side, satiation tendencies exist in certain areas. On the other side, prices fall through increased productivity… The central reality after 1945 was the growing demand for services from the public treasury. Building a comprehensive social security and developing the infrastructure were uppermost. Dismantling the social state and the austerity dictate of financial policy reduce public demand for services and change the range and quality of offered services. Thus the structural change described with the term tertiarization is the result of the expanded services sought by businesses, credit institutes and insurances, services for material production, sales (distribution) of goods and transportation. The increasing computerization of production increases the demand for services in financing, research and development, organization and marketing. Modern industrial production was only possible with just-in-time, lean production and outsourcing. Accordingly productivity increases permanently in the traditional sectors and the service sector…
Simultaneously export orientation and the international division of labor through intra-industrial trade required a changed production structure made possible by the tertiarization of the economy. Transportation, communication, service and organization are increasingly important. The employment figure for the service sector is probably higher than in the official statistics. According to the official 1994 statistics, 54% of employees worked in the service sector. According to the calculations of the German Institute for Economic Research, 72% were classified in the services. According to the 1995 micro-census, 83% of the gainfully employed or economically active in Germany performed services in the broadest sense.
Regardless of the measuring method, industrial production abounds in services. The more the economy develops, the fewer persons are needed for production and the more services are rendered. [29] This is an essential effect of technical progress and productivity development. The principles of industrial production are implemented in the service area. Standardization and rationalization are easily possible in the whole service area and will lead to massive job cuts in the future. A high ability level is required in nearly all areas of industrial services. A relatively high productivity is sought to guarantee competitiveness on the markets…
The trend of productivity development is increased gross domestic product for employee… The so-called job wonder in created jobs coheres with a lower productivity and falling income… With less qualified employees, a disproportionate increase in the unemployment rate compared to the general development has been clear since the beginning of the 1990s. Unskilled and less qualified persons are used less and less in production and services in relation to the past. In the industrial nations, high training requirements are general prerequisites for gaining a socially secured and good paying job. All this has nothing to do with competition from so-called low-wage countries. The advance in productivity and the structural change in the production-service relation are responsible…
2. LABOR MARKETS AND SERVICE GAPS
…Lower wages did not lead to more jobs…
2.1 EMPLOYMENT AND UNEMPLOYMENT IN THE US
The development on the US labor market must be interpreted firstly on the background of a constant population growth (legal immigration) of 2 million persons per year. Secondly, 6 million illegal persons (including 2.5 million Mexicans) are employed whose income is mostly below the legally fixed minimum wage. [33] The long-term increase of workers makes possible an enormous employment growth (in absolute numbers) and defuses the adjustment problems of the inter-sectoral structural change of the US economy. This means concretely that cheap workers existed abundantly to feed the relative employment growth of the US economy that in the last 20 years occurred only in the service sector while the industrial- and agricultural areas shriveled proportionately.
Another factor connected the relative employment growth in the 19702 with the increase of part-time employment and with the rapid long-term increase of gainful women’s work mainly in the 1970s and 1980s. The opposite trend was true for men, particularly the less qualified. Their gainful participation declined. The newly created jobs arose primarily in the service sector with a simultaneous polarization between high-wage and low-wage activities. This was related to a decline of jobs with middle class incomes. The employment growth was concentrated in the low-wage sector in the 1980s and in the high wage sector in the 1990s…
The US Bureau of Labor Statistics predicts job growth up to 2005 almost exclusively in the service occupations. Health care, education, crafts and retail trade dominate. Only a tenth of the new jobs will arise in the greatly praised high-tech sector. The vast majority of the new jobs appear in occupations with traditionally low or negative productivity growth and low incomes. Good pay can only be expected with 20% of the jobs. The predicted numbers on job growth are not proportional to the job cuts in the traditionally higher paying industrial branches. On account of past development, highly productive industrial jobs are lost in favor of less productive service jobs.
Whether unemployment will be overcome should be clarified along with the question where jobs will arise and whether they are socially secured. This sounds paradoxical. The “jobs wonder” should not be confused with an “unemployment wonder”. [35] A high growth in the number of jobs does not mean the reduction of unemployment. The “low-wage employment” sector is threatened by higher unemployment: short-term jobs with low wages and trifling social benefits, high dismissal rates and enormous fluctuation. The hidden unemployment is greatest in this segment. No future claims or very trifling future claims result from the deficient social security in the jobs. Registering as unemployed is not rewarding with unemployment in the low-wage area.
2.2 WAGES AND INCOME IN THE US
The average real wage level stagnated in the 1970s. The wages between the genders diverged in the 1980s and 1990s. With men, the hourly wage and the wage spread were joined with lower real wages while the hourly wage rose and real wage gains were recorded for women. Lower wages with high population growth and falling unemployment figures are regarded as evidence for the adaptability of the US labor market. Rising unemployment and low gainful participation among less qualified persons, particularly among Afro-Americans who earn the lowest wages alongside immigrants indicate that low wages for these groups does not make possible adequate employment.
The causes of the declining real wage or wage spread are: change in the “labor supply”, decline in demand for less qualified workers, structural change up to the service sector, weakening of unions, increase of imports, decline of minimum wages in the low-wage sector and increased immigration. A disappearance of the middle class is bound with the wage spread. The poverty rate, particularly among Afro-Americans, rose correspondingly in the 1980s.
The often-invoked jobs wonder is demystified by two central factors. Firstly and contrary to the worldwide tendency, the average working hours in the US rose 4% between 1980 and 1997. Secondly, the income discrepancy and the concentration of wealth grew. In 1997, 7.3% of the total American income (after taxes) fell to the top 1% of the households. In 1999, this share climbed to 12.9%, the greatest concentration since data on income development was collected. The top 20% of households received 50.4% of the total national income; the middle class households (60% of households) recorded the smallest increase of all time. In 1999, the income disparities increased so far that the richest 1% of the population gained as much income as the lowest 38% of the population. 2.7 million Americans had as much income as 100 million citizens in the lower income groups.
Translated to the industrial realm, these general figures represent an increase of income differences between a factory worker and his boss from 42-fold (1980) to 419-fold in1997. The real earned income at $33,000 per year has not changed in the last decades while the income of the richest Americans (1%) is $786,000 before taxes and $516,000 after taxes. The redistribution results indirectly from the massive changes of the tax law along with the distribution effects occurring directly from the kinds of income in the economic process. Despite special additional legislated burdens between 1990 and 1993, the tax relief for high and the highest incomes led to their percentage share in total tax receipts being lower than the 1977 rate. If the richest 1% of households paid the same tax share as at that time, they would pay an average of $40,000 more per capita. This is considerable in view of the average earned income of $33,000. All the figures show that real family incomes stagnate at the level of the middle of the 1970s. Referred to the employment situation, this means: people work longer at declining wages and with less productivity. To maintain the living standard, savings are used and people become indebted when possible.
In current opinion, the rising indebtedness of private American households is explained by the fact that the economic growth and the stock market boom on Wall Street lead to high consumer expenditures since Americans share in the growth (through wages and income from shares) and see the future positively. This cannot be true for the multitude of households given the real distribution of incomes from securities [36] and the wage development. They do not hold any securities in significant amounts and their wages stagnate on a broad front. Thus the high private indebtedness does not reflect a positive feeling for life but results from negative factors. To maintain their “low” living standard, the American family must spend its saved reserves and become indebted. If one considers the high poverty rate (14% live below the poverty line), nothing wondrous can be discovered in the American economic development. The only clear conclusion is that a job does not protect from poverty in the land of “full employment”. [37] Welcome to the “New Economy” of the 21st century!
The downward trend of real wages in the US is encouraged by the trifling social securities in unemployment, sickness and old age. The social state according to European standards does not exist. Even timid attempts at realizing slight improvements and introducing rudimentary security failed in both terms of the Clinton administration. However other expenditures are rising. The costs for securing property climb in times of increasingly unequal distribution of income. The classical police state machines were built with a tendency to privatization instead of social state instruments. Private security services are booming as a growth branch alongside imprisonment.
2.6 A BRIEF CONCLUSION
Compared to its main rivals on the world market, Germany has the weakest real growth of the gross domestic product. The above-average decline in unit labor costs through rationalization, wage reserve and increased productivity has strengthened the international competitiveness of German businesses and simultaneously made the turn to the foreign market seem vital to survival to many. The growth in German industry and in the service sector is bound with greatly increased productivity. If mass demand lags behind, this high productivity will lead to lower employment. Thus reliance on high tech and high qualifications as access to the world market must be joined with a qualitative growth of the domestic market that has not happened. The consequence is an increasing competitiveness of the German economy and a strong export orientation:
· Economic growth is permanently tied to a strong growth in productivity. The American growth in productivity is only ¼ or 1/5 of the European growth.
· Between 1980 and 1991, the productivity per working hour rose 1% in the US and 2.6% in West Germany. These differences increased after 1991.
This means that growth is very job-intensive in the US while the growth of the average income (the productivity growth in the service sector is near zero) is trifling. The income polarity expands. The laboring poor (poverty despite jobs) become a “mass phenomenon”. A similar “job wonder” in Germany would mean the fall of productivity in relation to growth or that growth would rise in relation to higher productivity. Variant 2 could amount to the abridged goal of only realizing a quantitative growth and thus contradicting ecological necessities. The path in between is only possible through political interventions.
Using permanently higher productivity to gain market shares on foreign markets leads into a cul-de-sac. This should be abandoned in favor of a domestic economic orientation. Demand (private and public) could be increased and productivity gains used for a social-ecological reconstruction. We have arrived again at the beginning. The problem is under-consumption, not globalization or the end of the work society. The problem of under-consumption intensifies in whatever form globalization is implemented. A completely opposite economic goal with a chain of effects could be encouraged.
3. SUMMARY
1. The change of the distribution situation (massive growth of earnings from business activity and assets and tax relief of these earnings) has led to a stagnation of demand on the domestic market.
2. To compensate for the demand shortfall at home, businesses increase their market share on the international markets. On account of its permanent balance of trade surplus, Germany exports unemployment to neighboring countries as long as the growth in these countries is also relatively trifling. At the same time, the international competition increases since businesses from the other nation also want to solve their domestic economic problems through exports. A massive predatory competition begins with a deflationary tendency. The competitive situation forces businesses to develop their competitive position through increased productivity and lower costs. As a result, earned income stagnates despite increased productivity and profit maximization.
3. National economic policy relies on export orientation since a revival of the domestic market, for example through an employment-, structural- and industrial policy, doesn’t seem possible because of the present indebtedness of the state. A tax increase is also excluded since the national position and the financial position must be attractive while they are always threatened by capital flight.
4. Success on the international markets and higher productivity causes the loss of jobs with little training both in production and services. In other words, labor-intensive production on a low-level is not rewarding any more. Only the introduction of a “low-wage sector” seemingly remains for eliminating unemployment since “no” funds are available any longer for a regional economic development and/or a training of employees that is demand-oriented and centered on the domestic market.
5. Subsidizing these jobs can be financed by the taxes and fees from the mass income that amounts to over 80% of total internal revenue. In other words, little money remains with the state for the additional development of social security. The demand situation (state and private consumption) will continue stagnating or deteriorate if no disproportionate growth occurs.
6. Labor projects in the “low-wage sector” are activities in the area of personal services. This demand situation is determined by the domestic market and is not negotiable internationally. The low wages result from the lower demand. To have a mass appeal, there must be a demand from the dependent employees and/or the public treasury. However both sectors have few resources so wages must be permanently kept low. Therefore an increasing income polarization will occur as in the US. The purchasing power on the domestic market will continue stagnating and the game starts at the beginning.
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