The rapid descent of the global economy into what even the International Monetary Fund has begun to call a Depression will see very rapidly rising unemployment in Canada and around the world, likely to the double-digit levels not seen since in Canada the recession of the early 1990s. Given that it takes economic growth of about 2% per year to offset annual increases of about 1% in the working age population and in productivity (output per hour worked), unemployment tends to rise rapidly in downturns, and to take a long time to fall even after a recovery begins.
This crisis is rooted largely in the deregulated or so-called flexible labour markets created by governments in thrall to neoliberal economic doctrines and employer interests. The negative impact of the downturn on Canadian workers will be greatly worsened by the deregulation of labour markets which has intensified since the last major downturn in the early 1990s. This downturn is likely to be deep and long if the labour market is not re-regulated to a significant degree.
The immediate causes of the current crisis lie in the deregulation of finance, especially in the U.S. and the U.K., and a massive regulatory failure to rein in rampant speculation and excessive risk-taking. As of early 2009, the IMF estimated that total bad loans on the books of the global financial system flowing from the U.S. financial meltdown stood at over $2 trillion ($2,000 billion). Part of these toxic assets originated in the explosion of bank lending to finance sub-prime mortgages in the U.S. -- that is, loans to high-risk borrowers. U.S. and U.K. banks also allowed many home-owners to use their houses as ATMs as a housing bubble developed out of cheap credit, further swelling the total volume of household debt to record levels.
The originators of high-risk debt -- mainly the big investment banks -- sliced and diced their loans into complex mortgage and credit-card-backed securities which were in turn sold on to other investors such as banks and hedge funds and pension funds, often with (supposed) guarantees against default. When the housing bubble burst in the U.S., the U.K., and other countries such as Ireland and Spain, the whole house of cards collapsed, leaving most large banks saddled with huge amounts of bad debt which pushed them into or to the brink of insolvency. Even worse, the use of complex financial derivatives such as credit default swaps meant that no one was sure just who in the closely connected global financial system was ultimately on the hook for the bad debt. As a result, in 2008, banks were reluctant to do business with each other, and tightened up greatly on new lending, choking off the economy from its needed oxygen of credit.
The financial crisis was a regulatory failure in the sense that governments generally stood by while financial institutions dealt themselves into insolvency by making highly risky loans, often financed by borrowing huge amounts of other people’s money, and by spreading the risks though new financial products which virtually no one understood. (Luckily, here in Canada, the federal government resisted calls from financial players to allow banks to merge and to reduce barriers to the entry of foreign banks, which kept our financial system relatively safe, even though unexciting to those who wanted to take huge risks.)
Many of the key players who fuelled the crisis, such as hedge funds, were not regulated at all, and more than a few were not so much reckless as out-and-out fraudulent. In the wake of the crisis, there have been many calls for -- and indeed even some action to tighten up --regulatory controls and make sure that it never happens again, even though financial crises caused by the unwinding of speculative bubbles seem to be an enduring feature of capitalist economies.
All that said, and as compelling as the story of the financial crisis is, its roots lie much deeper in the model of neoliberal or deregulated global capitalism as it developed since the last recession. The financial system not only drove speculative booms in real estate and shares (as in the dot-com boom which crashed in 2000), it generally failed to finance real productive investments in the advanced capitalist countries. In Canada, as in the U.S. and much of Europe, investment in productive capacity – new plants, machinery, equipment, and so on – lagged despite record high corporate profits.
Instead, real investment mainly took place in developing countries, especially China and developing Asia. This greatly added to the capacity of the world to produce, while subtracting from the ability of workers to share productivity gains and thus to add to the capacity of the world to consume.
One result of rapid Asian industrial development was the manufacturing crisis and downward pressures on wages in the advanced industrial countries, especially the U.S. The profits of transnational corporations soared to record levels, as did the incomes of the top 1% of the work-force, including here in Canada, but the wages of the great majority rose only because families worked longer hours. Between 1992 and 2004, the incomes of the top 1% of earners rose by 60% in real or inflation-adjusted terms, while the median wage went up by only 9%. Household spending kept the economy growing, but this spending was driven by higher and higher levels of debt (averaging 130% of family income by the end of the boom), rather than higher wages driven by higher productivity, driven in turn by new investments in the real economy.
Perversely, capital flowed not from the rich countries to the poor countries, but from the poor countries to the rich countries, notably the U.S. The huge trade surplus of China (and Japan and oil producers) with the U.S. was recycled into Chinese and other developing country central bank purchases of U.S. financial assets, keeping the lopsided relationship between the two countries going. Japan and to a lesser extent Germany benefited by selling enough sophisticated machinery and equipment and production inputs to the developing low-wage countries to keep their manufacturing trade roughly in balance, and the resource boom helped offset the crisis in Canadian manufacturing. Meanwhile, the U.S. ran a huge and continuing trade deficit of about 5% of its national income over the past decade, keeping the global economy going at the price of ever-rising national debt, much of it held by U.S. households.
So-called free trade and liberalization of investment flows, as noted, put downward pressures on the bargaining power of workers and of trade unions. Adding to this, following the prescriptions of the Organization of Economic Cooperation and Development Jobs Study of the early 1990s and most mainstream economists, many advanced country governments consciously tried to make their labour markets more “flexible” and less inflation-prone by weakening the bargaining power of labour. Trade union rights came under attack. Once relatively insulated parts of the job market such as public services and regulated industries like the airlines and trucking were opened up to lower wage competition through privatization and deregulation. Minimum wages were not increased in line with inflation. Income support programs such as unemployment insurance were scaled back, increasing the pressure on unemployed workers to take pay cuts when offered a new job.
Here in Canada, the employment rate rose to very high levels in the economic expansion of the past decade, and unemployment fell to very low levels. However, the proportion of the workforce in the most insecure forms of employment remained steady at about one in five workers. (In 2007, 10% of men and 12% of women were in temporary jobs, and 12% of men and 8% of women were in the most insecure form of self-employment, so-called “own account” jobs which are often disguised jobs that offer no security and low pay.) The proportion of workers in low-wage jobs (one-quarter of adult women and one in ten adult men) has remained virtually constant at a level second only to the U.S. in the advanced industrial world. High levels of precarious employment and low pay – especially for women and racialized workers – explain why poverty has not fallen significantly in the supposed good times. Indeed the proportion of adult workers who are in working poor families has risen. Despite low unemployment, many working Canadians were far from secure.
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Canada has now entered a recession – more likely a Depression – not only with a higher proportion of precarious employed workers than in the 1980s, but also with much weaker private sector unions. Minimum wages were raised in some provinces at the end of the expansion period, but remain well below the level of the 1980s when adjusted for inflation. Social assistance benefits were slashed deeply in the 1990s in two provinces, Ontario and Alberta, and have not been raised in line with inflation elsewhere.
Social assistance benefits fall well below the poverty line for almost all family types in all provinces, and can usually only be accessed by exhausting almost all financial assets. And, unlike previous recessions, any increase in provincial social assistance caseloads will have to be paid for by provincial taxpayers, since federal shared-cost sharing was eliminated in 1994.
The Employment Insurance system, the first line of defence for workers losing their jobs, was “reformed” in the mid-1990s. Maximum benefits in 2009 are $447 per week, down from more than $600 per week in today’s dollars before the cuts. The average benefit is much less, just over $300 per week. Access to the system and the length of benefits vary on the basis of a complex grid tied to the local area unemployment rate. Less than half of all unemployed workers – and just one-third of unemployed women – qualify for benefits.
To get in, a worker has to have essentially worked six months at full-time hours in the recent past (the 910-hour hurdle which has to be jumped by new entrants to the workforce such as youth, recent immigrants, and women returning to work after an extended leave), and as many as 710 hours in the period immediately before a claim. The entrance requirement disqualifies many precariously employed workers, including half of all part-timers. Once qualified, benefits last for as few as 19 weeks and as many as 50 weeks, with the maximum being generally applicable only to those who lose full-time permanent jobs in a higher unemployment region.
The key point is that Canada has entered a period of high unemployment, with many more insecurely employed workers than in previous recessions, with a weakened labour movement, and with a significantly reduced social safety net. The prospect is for the economic crisis to lead to a rapid increase in poverty, and widespread economic insecurity. The prospect is also for workers to be forced into intense competition for the jobs that remain, putting much more intense downward pressure on wages and working conditions.
The dangers ahead are economic as well as social. Economists rightly fear the prospect of deflation -- an extended period of falling prices. Since interest rates cannot fall below zero, deflation can mean high real interest rates, reducing the willingness of households and businesses to borrow. And consumers will hold off spending on big-ticket items like cars if they know they can buy them for less in the future, particularly if they fear they may lose their jobs.
If and when wages start to fall, a country can enter a deflationary spiral. That is what happened in the Great Depression of the 1930s. Bank lending and business investment came to a halt. Facing falling sales and falling prices, businesses tried to slash costs, including labour costs. The downward spiral came to an end only when governments began to invest, and only when the labour market found a floor. The fair wage legislation of the New Deal, plus the rise of industrial unions like the auto workers and steel workers set the stage for the recovery. Ultimately, unions helped resolve the crisis by ensuring that wages would rise in line with productivity growth, fuelling consumer spending and then new business investment to meet higher demand.
As of early 2009, Canadian governments did not seem very concerned about the prospect of wage deflation. To the contrary, the federal Budget imposed a limit of 1.5% on federal wage settlements, and government Ministers were calling on the CAW to cut auto sector wages. The “common sense” of much of the media was that workers should tighten their belts in a recession, and accept wage cuts if demanded by employers.
The federal Budget also failed to make significant improvements to the EI system (beyond extending benefits by up to five weeks) and instead doubled the Working Income Tax Benefit which tops up very low earnings. This cushions the working poor against the impact of a downturn to some extent, but also allows employers to pay very low wages. Labour organizations have generally called for supplements to very low wages to be twinned to higher minimum wages.
In the context of a deep economic downturn, the focus should be on stabilizing the job market by reversing a slide into mass unemployment, and also by setting a floor to the job market. This would be best done by raising minimum wages, dramatically improving access to EI benefits as well as the level and duration of benefits, and encouraging unionization, particularly among lower-paid workers (as may yet happen in the U.S. under President Obama.)
In short, labour market issues are highly relevant to understanding the unfolding economic crisis, in terms of its causes, consequences, and solutions.
(Andrew Jackson is National Director of Social and Economic Policy for the Canadian Labour Congress. This is an extract from Chapter One of the forthcoming second edition of his book Work and Labour in Canada: Critical Issues, soon to be published by Canadian Scholars Press.)