Heterodox Economist

Health Care Insurance and Wage Dependence

The US system of employer-based health care is inefficient. Yet the fact that workers in the US often depend on their employer for health care insurance enhances employer power. If you lose your job you lose (low-cost) access to health care insurance. Many people stick with lousy jobs simply because that's the only way they can afford health care insurance. Otherwise they'd quit in a minute.

The US is unique in having employer-based health care insurance as the dominant means of providing health care to citizens. Folks in the US think employer-provided health care insurance is the natural way to do things; folks in other countries think the US system is bizarre.   

I'll throw out a hypothesis: the existence of employer-provided health care in the US (partly) explains the decline of unions. Employer-provided health care increases wage dependence and the cost of job loss. This enhances employers' power. Employers use this power to aggressively implement anti-union activities and workers, being dependent on their employers, must often go along with the employer's agenda. The threat of shutting down a business (rather than accept a union) is more powerful if workers depend on the employer for health care insurance.

Good Life Outside of Work --> Greater Worker Power within Workplace

Eleanor insightfully comments on wage dependence:

This suggests that employers need to destroy social goods such as affordable health care and education, social security, public parks, free entertainment and so on, in order to increase workers dependence on employment. This strikes me as an interesting idea. I have wondered for some time why the upper classes were so intent on making life hell for working people.

The concepts of "wage dependence" and the "cost of job loss" explicitly link social programs to the relative power of employers and workers. In particular, the better are public education, social security, and unemployment insurance, the smaller is wage dependence and/or the cost of job loss and the greater is worker power.

The better life is away from workplace, the more power workers have within the workplace.

Conservatives often claim that unemployment insurance is relevant only to the unemployed. In this narrative, the unemployed are slackers and have no right to sit around all day drinking, watching TV, and playing video games when real people are out working for a living. So employed workers should oppose a good unemployment insurance system. Unemployment insurance is just not fair to employed workers.

In fact, a good unemployment insurance system enhances worker power within the workplace.

Extreme example: suppose you could get unemployment insurance benefits equal to what you now earn. Your boss tells you to do something you don't want to do. You might just pause and think about whether you will actually do it as ... hey ... if you refuse and get fired your material standard of living would be unaffected. A good unemployment system reduces the cost of job loss and, so, increases your ability to say "no" to the boss.

Conservatives, however, have convinced many that it is in workers' interest to attack unemployment insurance. Conservative narrative victory? False consciousness? Gramscian hegemony? Your pick!

A more minor case: if public lands can be enjoyed by all for free, anyone can go hike, play, swim, and picnic. It's free for all. But if a "user fee" is imposed then you need income to use public land. Many unemployed people might find a $10 user fee is just too much to spend for recreation. Lose your job; lose your access to public land.

William Butler Yeats on the New Social Contract

I favor the establishment of a new "social contract" within the US that would bring more of the material benefits of capitalism to ordinary people. I'm not sure, however, that any such contract would be long-lasting.

I'll introduce a new term:

Capitalist Entropy n. A process through which any well-meaning ethical order established within a capitalist country quickly disintegrates in the face of the actions of capitalists to boost their profits.

Or, as Yeats wrote, things fall apart.

Consider US labor law. The 1935 Wagner Act was intended to promote unionization in the US. But soon this body of law was weakened significantly (by Taft-Hartley in 1947). Later amendments further weakened federal labor law. By the 1970s US labor law was a mush more tasty to businesses than to unions.

Independently of the erosion of labor law, creative businesses found ways to violate the letter and intent of these laws and yet face few repercussions beyond scowls and harsh words ("shame on you!").

A well-meaning body of law (federal labor law) that benefited the public was quickly neutralized by greater forces. Capitalist entropy in action.

So...I'm in favor of a new social contract for the US. But we have no reason to suppose that even if such a thing was established in the US that it would be long-lasting. It might help people for a couple of years (which might be enough to justify aiming for it), but beyond that things will fall apart.

Markets and Niagara Falls

One of my favorite descriptions of market behavior, circa 1855:

[Miss Bird] was determined to view of [Niagara] Falls from Goat Island, and now, on this second visit in 1855, she found she could travel by hack across Roebling’s newly opened bridge to the American side without hazarding the rocky ferry crossing. That, however, meant another infernal squabble with a crowd of some twenty ragged hack drivers, all clamoring for a fare. She and two other guests … were scarcely out the door when the drivers all began shouting various prices.

The first offered to do the rounds for five dollars. A second dropped to four dollars and a half and was immediately attacked as a thief and a blackguard, whereupon “a man in rags” offered to take them to Goat Island for three. When she accepted, the first hackman offered to meet the three-dollar price, insisting that his rival was drunk and his carriage wasn’t fit for a lady.

A fist fight followed, with much shouting and squabbling, until the ragged man succeed in driving up to the door. Only then did Miss Bird realize, with a sinking heart, that the hack really wasn’t fit for ladies—the stuffing was quite bare of upholstery, the splashboards were held together by pieces of rope, and the driver was at least half drunk.

Off they went, bumping along the Niagara gorge, 250 feet above the green flood, with no protective parapet to offer security.

From Pierre Berton, Niagara: A History of the Falls, New York: Penguin, 1992, page 73.

Added: I've been a busy bee the last few days hence the above minimum-effort posting.

Longer Unemployment than in The Good Ol' Days

Some unemployed people find jobs relatively quickly. Others search for months before finding a job. Some never find a new job.

The graph below gives estimates of the percent of workers who exit unemployment in 10 weeks or less (the green line) and the percent of workers who are still unemployed at the one year mark (the red line). The two numbers don't add up to 100% because the graph ignores folks who exit unemployment between 10 weeks and a year. The data is for U.S. workers in the post-war period.

The black vertical line indicates the start of a recession. As you can see, a recession causes a higher percentage of workers to be unemployed for a long time and reduces the percent of workers who are unemployed briefly. When the red line moves up in the graph you can generally presume that a recession started. No great surprise to find this cyclical pattern: jobs are harder to find during a recession.

In the mid-1970s, the percent of workers still unemployed at the year mark (red line) seems to have settled into a pattern: moving between about 10% and about 20% depending on the state of the economy. Before the mid-1970s long-term unemployment was less important.

The green line (10 weeks or less unemployment) trends downward: short-term unemployment became less common over the post-war era. At one point in the 1950s more than 60% of unemployed workers exited unemployment by the 10 week mark. In the early 2000s, this number dipped to almost 30%. That's a big change.

Losing your job became more of a big deal over the post-war period.

(The data behind the graph above comes from the Bureau of Labor Statistics. For the sake of simplicity, I've ignored here the many complexities encountered when using BLS unemployment duration data. A long post would be necessary simply to explain how the BLS defines "exiting unemployment.")

The Rhetoric of Being Stuck in a Rut

Max looking for light beach reading opens McCloskey's The Rhetoric of Economics.

The Rhetoric of Economics examines how many orthodox economists merely pretend to do "science" but actually do something else. And, McCloskey argues, this something else is more interesting than science! But it is poorly done. It is poorly done because economists fail to recognize the role that rhetoric plays in economic persuasion. Economists, McCloskey says, should be willing to open up the discipline to other perspectives and other means of persuasion than that provided by modernism/"scientific" rhetoric.

She calls for an expanded "conversation" as economists (collectively and individually) construct their understandings of the economy, without claiming to have discovered "objective truth."

In short, McCloskey is a postmodernist.

That's all well and good. Coming of age in the 1970s, I once accepted that society/reality was a subjective construction. The truth was NOT out there. "Science" was only a rhetorical stance that many, sadly, saw as the only way to construct stories about reality. I had never heard the word "postmodern." Yet in the 1970s I--along with many of my friends--was a postmodernist.

Then I moved on.

As early as 1981, Hilary Putnam wrote,

But in time, both in philosophy and politics, new ideas become old ideas; what was once challenging, becomes predictable and boring; and what once served to focus attention where it should be focused, later keeps discussion from considering new alternatives. This has now happened in the debate between the correspondence views of truth and subjectivist views.

Over 25 years ago, the correspondence view (modernist science) and the subjectivist view (e.g., postmodernism) were already locked in stale battle. In "predictable and boring" battle.

Despite that, many today see McCloskey as a cutting-edge thinker. And she might have been that in 1980...but it's now 2007.

Writers such as Hilary Putnam, Martha Nussbaum, Amartya Sen, and many others have moved the conversation beyond the stale battle that McCloskey's still fighting.

Wage Dependence

It's always nice to have empirical measures for important theoretical concepts.

If you divide a worker's annual employment compensation by his/her annual standard of living you get a measure of wage dependence. For instance, if a worker's compensation is $40,000 while his total standard of living is $60,000, then his wage dependence is ($40,000/$60,000) = 0.67. Here, the worker's standard of living has two components: $40,000 employment compensation and $20,000 in contributors to the worker's standard of living that comes independent of employment.

An increase in wage dependence increases the importance of employment compensation to workers. Everything else remaining equal, this will increase employers' power over workers. If wage dependence is 0.95 workers will be very attentive to the demands of employers. If it is 0.41 workers might be inclined to tell the boss they are leaving early today.

It's hard to calculate wage dependence. It requires estimating the value to workers of the many things that contribute to their standard of living that are gained independent of employment. Included might be: public school, access to parks, flood control infrastructure, postal subsidies, public roadways, public health programs, state pensions to the elderly (that reduce what workers might transfer to elderly relatives), and so on. Estimating the value of such things requires lots of data and lots of assumptions.

But if the value to the workers of such things could be estimated, we could determine how dependent the average worker is on his/her employer. Is wage dependence 0.9 or 0.6?

It would also be interesting to see how wage dependence has changed over time: have workers become more, or less, dependent on employers as the US moved from the 1950s, to the Great Society of the 1970s, to the era of government retrenchment that started in the 1980s?

Why We Must Give People What They Want

In capitalism, socialization and advertising shape what people want. Many of these wants are not natural; some of them are not even necessarily beneficial.

Yet we should not deny people what they want. Even if we know people are misguided. It's fine to try to convince people to change their minds but we can't use coercion and we can't deny them what they want simply because we happen to have such power.

Why? Because respect for people requires we take their own perception of their wants seriously and grant these wants a special status. (This is just rephrasing John Stuart Mill's On Liberty.)

This is different from saying that people should get what they want because that will give them the best life possible. Giving people what they want does not guarantee that they will live the best life possible. (This is implicit in Mill's Utilitarianism.)

A second reason exists for not denying people what they want. As much as someone believes they have the interests of others in mind, it is a mistake to permit this person to impose--say by the use of state power--what he/she thinks is appropriate wants on other people. Using state power in such as way will only lead to mischief. The acquisition of "true" knowledge about what is good for people is unlikely to occur simultaneously with the acquisition of state power. Or so history teaches us.

So, respect for people and fear of state mischief require that we not deny people what they want. But giving people what they want is not enough. A good economy and good society must go beyond that.

The Decline of Unions

Wachter writes a paragraph that bugs me:

The subsequent 46 years have seen [unions] decline slowly.... Why the decline, and why has it been so slow? The simple answer is that it has taken a long, drawn-out process to dismantle the U.S. corporatist economy. Various economic controls remained popular through the 1960s, industry-specific regulation from the New Deal was not significantly rolled back until the 1980s, and -- most fundamentally -- policymakers had to transition their thinking from the belief that society benefits from corporatism to the belief that society benefits from competition between suppliers of goods and services, including labor.

This fails to tell us what happened and who did it. He writes, "it has taken a long, drawn-out process to dismantle the U.S. corporatist economy." Wachter does not say whether the government, businesses, "the public," or Santa's elves did this dismantling or what their motivation was in doing this dismantling. It just happened.

He continues, "policymakers had to transition their thinking from the belief that society benefits from corporatism to the belief that society benefits from competition...." Wachter fails to say why policymakers had to do this and who in "society" benefited from this change. (I also send Wachter to the penalty box for using "transition" as a verb.)

So while I like Wachter's general framework (seeing an economy as embedded in a set of institutions), his discussion of institutional change is maddeningly vague. Further, his suggestion that union decline is inevitable/necessary is apparently premised on the (incorrect) belief that what actually happens is inevitable and necessary.

***

An agentless "long, drawn-out process" didn't undercut unions. U.S. businesses did. They discovered--and perfected--tactics to defeat unions within the framework of U.S. labor law.

Anecdote: in the late-1980s I was part of the bargaining team for a union negotiating its first contract. By then businesses had discovered that if they could drag negotiations out for a long time, union bargainers would get worn down and union members would become dissatisfied by the slow progress made by their leadership. After months of painfully slow progress toward a contract, management found they could get a more favorable contract than otherwise would be the case.

Management found that new unions (still without a contract such as mine) were particularly weak. After a long and nasty unionization battle, the new union members want to see results. New unions that fail to get a contract quickly often find that many supporters turn against it in frustration. In the face of diminished member support, new unions can lack the political power to get a first contract. After failing to get a contract, the union fades away and the business can revert to near non-union status.

This was the agenda of those I saw on the management side of the bargaining table.

A standard part of union contracts is a non-discrimination clause: management and the union agree not to discriminate. This should have been a 15-minute discussion. But management stretched it out for weeks. Every union proposal for language for a nondiscrimination clause was rejected by management as "unacceptable." They never said why it was unacceptable; they just demanded we bring something better to the next session.

Finally, we sent over to management nondiscrimination language lifted directly from their own employee manual. Predictably, management dismissed it as unacceptable. When we pointed out they had just dismissed their own policy, the management negotiators just smiled and asked that we come up with something more acceptable. Sigh.

Is the above good-faith bargaining as required by law? It depends on your perspective. Labor courts have decided that "good-faith bargaining" involves little more than showing up at bargaining sessions, displaying a thoughtful countenance when the other side slips you their newest proposals...and then saying "no." And saying "no" for as long as you want.

Pro-business folks see this as "hard bargaining." But the line between hard bargaining and failing to bargain can be hard to draw. The courts, however, drew it too much in management's favor.

***

Why have unions declined over the past few decades? Management found that it could neutralize unions through tactics perfected over the years. This was not, contra Wachter, inevitable or necessary nor an agentless process.

Capitalism Embedded in Particular Institutions

The Washington Post published a short article by Wachter on the decline of unions in the US. The argument:

There is a single cause for this decline: the United States' change from a corporatist-regulated economy to an economy based on free competition. Unions are central to a corporatist regime and are peripheral in a liberal pluralist regime.

I can quibble with many of the details in this article, but I like Wachter's basic framework: seeing an economy as a set of interconnected institutions. The decline of unions is not an isolated fact, but is part of a more complex set of institutional changes in the US economy that must be considered together.

The social structure of accumulation school (pdf) says the same thing. According to this school, capitalism is necessarily embedded in a set of social/political/economic institutions. As a result, all capitalist economies are different: US capitalism is different from Japanese capitalism. Further, US capitalism in 1900 is different from US capitalism in 2000.

Although each is capitalist, they operate in different ways as each contains a different set of historically contingent institutions. Although the set of institutions regulating an economy might be relatively stable over time, they do change. But this change is not continual and does not always occur in small steps. Some periods see widespread dramatic institutional change while other periods see small and generally unimportant changes.

The classic statement of the social structure of accumulation approach is Edwards, Reich, and Gordon's Segmented Work, Divided Workers: The Historical Transformation of Labor in the United States.

Because of the connections between the institutions within a country, a change in one institution might induce changes throughout the social/political/economic institutional framework within the country. For instance, as noted by Wachter and others, the increased openness of the US economy over the past couple of decades likely contributed to wholesale institutional changes. US economic/political hegemony might have been a key part of the US social structure in, say, 1960. When this hegemony eroded, the other institutions within the US might not have "worked well" and many have been replaced by different institutions. Today, we have a set of institutions that is different from what existed before.

In the social structure of accumulation framework, you can't analyze a particular economy by considering some abstract mathematical model (as is done in the orthodox paradigm). Each capitalist society/economy is unique and a theory of a particular economy must be based on a consideration of its unique historically-created institutional structure.