Who wins and who loses as the forty-year reign of austerity economics comes to an end

A mini-revolution has hit North America and that mini-revolution is the wholehearted embrace of full-employment economics in Ottawa and Washington. The arrival of full-employment economics in the most recent Canadian and U.S. budgets marks the end of a forty-year reign for austerity economics.

As inflation has become more of a historical memory than a present danger, the logic behind the forty-year prioritization of price stability over employment may seem something of a puzzle. However, digging a bit beneath the surface, the gist of the former consensus was simple enough: If unemployment falls beneath its “natural” threshold, then employers will be forced into a bidding war for scarce workers, who will then secure wages in excess of their productivity, which will force businesses to raise prices, which will lead workers to demand yet-higher wages, which will force businesses to raise prices further still, thereby setting off an inflationary spiral that will be difficult to stop. Thus, to save the economy from such destabilization, the government has to reduce economic demand — by raising interest rates, or cutting spending, or both — before unemployment gets too low, even if inflation is not yet apparent.

And it didn’t matter that this scenario never actually unfolded as feared – it was the dominant narrative in business circles and amongst many economists for over four decades and our governments dared not contradict it. To put it a bit differently, for forty years the official narrative obscured the class interests of our governments’ prioritization of low inflation over plentiful jobs. That said, for those who knew where to look, it was always clear whose interests were being served by the policy.

Put bluntly, the wealthy have a far greater interest in price stability than they do in full employment; moderate inflation erodes the value of their bonds and cash holdings, while moderate unemployment has little adverse impact on their finances — and may even increase the value of their stocks by suppressing labor’s bargaining power.

The bulk of workers, on the other hand, have a much greater interest in abundant jobs than ultralow prices. In a full-employment economy — where firms must compete for scarce labor — employers will be more likely to offer opportunities to “low skill” workers, on-the-job training to inexperienced ones, accommodations to the partially disabled, and wage increases to all. Nevertheless, policy-makers spent the bulk of the past forty years preventing the full employment economy from coming into being. In fact, as recently as 2015, the (U.S.) Fed treated preempting the mere risk of modest inflation as a higher priority than the achievement of an unemployment rate below 5 percent.

Then COVID hit, the old consensus broke down, and fiscal policy underwent its mini-revolution.

The American mini-revolution

By the time Joe Biden took office, Congress had already supplied the economy with roughly $3 trillion in fiscal support. That unprecedented stimulus had left U.S. households $12 trillion richer than they had been before the pandemic. Which is to say: The median American family was in better financial shape in January 2021 than it had been at the peak of the Trump “boom.” The economy was already recovering, and vaccines were about to be distributed. And yet Democrats passed another $1.9 trillion stimulus anyway — in the name of accelerating the return of full employment. Plans totaling another $4 billion were soon to follow (the American Jobs Plan and the American Families plan).

On May 27, in Cleveland, Biden made the case for this macroeconomic policy in unusually straightforward terms:

“My sole measure of economic success is how working families are doing, whether they have jobs that deliver dignity. That means we have to focus on wages like we used to. When it comes to the economy, rebuilding rising wages aren’t a bug. They’re a feature. We want to get something that economists call full employment. Instead of workers competing with each other for jobs that are scarce, we want employers to compete with each other to attract work. We want the companies to compete to attract workers. That kind of competition in the market doesn’t just give workers more ability to earn a higher wage. It gives them the power to demand to be treated with dignity and respect in the workplace.”

Biden’s speech was remarkable for its acknowledgment of full employment’s class implications: When jobs are plentiful, workers get leverage over bosses — which is a good thing, since workers cannot reliably secure “dignity and respect in the workplace” unless they have some material power over their employers.

This was especially notable in light of the speech’s context. Over the past month, lamentations of a “labor shortage” have filled the business press in the U.S. (and Canada for that matter) while multiple Obama-administration economists have sounded alarms over inflation. The president’s remarks serve as a tacit rebuke to both of those criticisms. Biden suggests that a scarcity of labor isn’t a blight to be avoided, but a goal to be pursued (after all, a synonym for “labor shortage” is “a dearth of involuntarily unemployed people”). And he also signaled an allegiance to full employment and wage growth over the minimization of inflationary risk.

North America remains a long way away from full employment, of course. But both Canada and the U.S.’s  enhancement of unemployment benefits through to the end of September — combined with the savings that past relief checks have helped households accumulate — has given Canadians and Americans a preview of how an economy that provides “good jobs for all who want them” would operate.

And not everyone likes it.

As the New York Times reports:

“Even workers with less formal education, who have experienced the worst job losses and still face high unemployment rates, have seen pay accelerate this year as economies reopen and employers struggle to hire … Reports of labor shortages in service jobs that are newly reopening abound, and surveys show businesses and consumers becoming more confident that employee earnings will increase. Job openings have been surging, and the rate at which workers are quitting suggests that they have some room to be choosy.

Many employers, particularly in hospitality, have blamed generous unemployment benefits — now set at an extra $300 per week — for encouraging workers to stay home and making it harder for them to hire. More than 20 states, all led by Republican governors, have moved to cut off (federally funded) pandemic unemployment programs before their scheduled September end date.

Republicans have warned that as employers lift pay to attract scarce workers, they may be forced out of business or pass along added labor costs in the form of higher prices.”

Note: The fundamental complaint from both Republicans and American employers here is not that unemployment benefits are too generous, but that labor is too scarce. Federal unemployment benefits might be causing that scarcity today but abundant jobs would cause such scarcity by definition. The actual policy position that Republicans and business owners are endorsing, however tacitly, is that employment opportunities must be restricted so that cheap labor is always easy to find.

Which sounds a bit scandalous. In a democratic society, in which a large majority of the public works for a living, politicians generally don’t declare themselves hostile to the goal of plentiful employment. But a numerically significant, and disproportionately powerful, segment of North Americans are actually extremely hostile to that objective – and always have been.

The truth of the matter is that wages are rising in the U.S. at a rate not seen in years, and low-wage workers are benefitting the most. The details were recently spelled out by the economist Jason Furman, who headed the White House Council of Economic Advisers under Barack Obama. In a blog post written with Wilson Powell III, his colleague at Harvard’s Kennedy School, Furman pointed out that the adjusted wages for production workers and those in non-supervisory roles grew at an annual rate of 9.1 per cent in April and May, which is “faster than in any pre-pandemic two-month period since the early 1980s.” Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote on Twitter that, in the low-wage hospitality-and-leisure sector, the annualized rate of wage growth over the past three months has been seventeen per cent. Between March and May, the average hourly wage for non-supervisory workers in this part of the economy rose from $15.26 to $15.87, according to the jobs report. There were also notable wage pickups in retail and in transportation and warehousing.

After decades of slow and unequal wage growth, these developments are welcome indeed. Canada and the U.S. haven’t seen anything approaching full employment in many decades. In the wake of the 2008 crisis — and the low-wage recovery that followed — multibillion-dollar companies like Uber and Amazon were built atop the presumption that there would always be a large population of workers desperate for irregular, ill-paid employment. Countless small businesses — whose profit margins depend on low wage rates — came into being. And millions of upper-middle-class consumers became accustomed to various services whose affordability was contingent on the hyper-exploitability of those who provided them. Last year, one-quarter of American workers earned less than two-thirds of the nation’s median wage. In no other developed country was the share of “low wage” workers so high.

The mini-revolution in Canada

Transitioning from an economy in which workers compete for employment — to one in which employers compete for workers — is a more radical change than many care to admit. If workers win high wages and “dignity in the workplace,” many low-road, low-productivity employers will go out of business, and some middle-class consumers may have to go out a bit less. Which isn’t to say that workers’ gains will be zero sum. A high-wage economy will also be one replete with demand for businesses that don’t depend on cheap labor to make ends meet. And it will also encourage more investment in automation and thus advances in productivity.

In other words, supporters of a full-employment economy will need to weather escalating pushback from employers and others who were well served by the old, anti-full-employment consensus. The truth of the matter is that to bring worker exploitation down to a tolerable level, the standard of living of the average Canadian rentier will have to decline – and they will not like it one bit.

Not one damn bit.