Downsized People: Job Subsidies vs. Income Support

| July 14, 2012 | 0 Comments

By Jonathan Marin (Copyright 1999)

This essay considers several ways of addressing the problems caused by the downsizing of corporate workforces, and evaluates their possible consequences. It recommends the establishment of an income support program, similar to the one which Harry Truman’s Secretary of Agriculture, Charles Brannan, devised as an alternative to farm price supports.

Downsizing has been growing as a social problem for some time, and now threatens to become a major social problem. Fear that increased foreign competition fostered by GATT, NAFTA and other international trade agreements will accelerate downsizing has put the issue on the front page.

Is downsizing really a social problem of general concern? Are its effects really so broad that we should not just let it take its course? Officially reported (undisguised) unemployment is low, after all, and effective demand remains high. Though polarization of incomes has made life harder for the poor, most people have jobs and money to spend. The society-wide problem stems from the fact that “the poor” is not a fixed group. The _possibility_ of poverty a gnawing fear for millions of middle class people – a fear their counterparts of a generation ago never felt. The issue is not whether these people are worse off than their counterparts of a generation ago. It is that so many of them feel like they’re circling the bowl.

Much of the recent downsizing in the U.S has been a corrective to decades of disguised unemployment. Where technological advance has been a factor, it role has most often been indirect. Obsolescence of some jobs acts against the background of a previously tolerated level of disguised unemployment, raising it above a threshold where it begins to attract top management attention. The technological obsolescence acts triggers a broad response that often includes not only the the technological replacement of employees and  the correction of accumulated redundancy, but actual speed-up as well. Where ten people were doing the work of eight, say, now five people do the work of six.

“Disguised Unemployment” and “Underemployment” are important and useful concepts in economics, and are actively employed by economists who study the economies of developing countries. When one person is paid to do nothing, the situation is clear. When ten are paid to do the work of nine or less, the situation is difficult and easily confused.

In poor rural areas around the world, there is a surplus of working individuals. More mouths to feed may mean more hands to work, but more hands working does not necessarily translate to increased output. Where the annual total yield of acreage worked by one hundred people would not decline if the labor input were reduced to, say, sixty people, then forty people are redundant.

This does not reflect negatively upon the effort of any of the hundred workers. The disguised unemployment is a property of the group, not of individuals. They all plow and hoe, water and weed, struggle and sweat. It is not that THESE sixty are productive, while THOSE forty are not, but that ANY sixty are productive, and ANY forty are not. It has proved extremely difficult to address disguised unemployment. Programs meet fierce resistance, and cause massive social dislocation. None of the affected people appears unemployed to others. Everyone on the farm has an income. Unless productive work is available, the effect is to replace disguised with overt unemployment, and to deprive people of income to no purpose, without pretense of fairness.

Disguised unemployment is not limited to the developing world. For decades economists and business analysts have complained bitterly about the bloat in corporate America, particularly middle management and white-collar bloat. In the past few years, changing attitudes on Wall Street, , have caused many American companies to begin reducing the bloat, by terminating “redundant” employees and managers. This is beneficial to companies and their customers, insofar as it enables them to offer better products and services at lower cost, but it is of general benefit only insofar as the redundant are put to producing something of value.

Just as on a third-world farm, bloat in an American corporation is not attributable to individuals, but of the organization. If ten people are doing the job of six, it does not follow that four of them are doing nothing. All are equally part of the problem; none of them are responsible for creating it. The person whom the company chooses to terminate is no more “redundant” than the survivors.

To surviving employees, each downsized person is not only an example of what could happen to them, but is also part of a Marx-like “reserve army” that looms over their sense of security. This partly accounts for the lack of employee resistance in companies which have replaced the eight-hour day with the “professional day” for white-collar and technical personnel. Presented with the choice between being overemployed or unemployed, they accept the speed-up and its attendant erosion in their workplace quality-of-life, and adapt to higher stress levels.

The number of people already affected by recent corporate downsizing and restructuring hints at the extent of our disguised unemployment problem, and at the magnitude of the social dislocation that rampant downsizing could cause. With this in mind, some economists propose that the government subsidize corporations to keep their redundant employees on the payroll.

Their heart is in the right place. They recognize that while downsizing may reduce disguised unemployment, when implemented on a large scale the cure is worse than the disease. It is uncertain how much GNP gain aggressive downsizing can yield. It is unclear how many of the displaced people will find good jobs, or find jobs at all, and of those who do how many will only displace others. Even at its upper limit the gain would not justify derailing the careers and life prospects of hundreds of thousands, or even millions, of people, most of whom did nothing to create the problem. The human and financial costs of downsizing are not borne as an offset, or even shared, by those who gain from it. But job subsidies is not the right solution. We should not institutionalize our disguised unemployment.

A job subsidy program would address the unfairness to the downsized, but only by exchanging one unfairness for others. And those others are potentially explosive. Such a program would create a gulf between people privileged to live in the safe harbor of a guaranteed middle-class income, and those whose only shelter would continue to be unemployment insurance, or subsistence welfare under onerous terms.

The persons whom subsidies would protect are by and large more highly paid and privileged than most of those whose jobs would not be protected. The polarization between protected and unprotected jobs would mobilize the beneficiaries of the program into a large new special-interest political constituency people dependent on government policy for their livelihood. Since every member of a bloated organization is potentially redundant, the constituency would be far larger than the number of jobs actually subsidized. It would possess the numbers, money, and influence to obstruct corrective action effectively. Themselves insulated from economic storms, its members of would deaf to, and their institutions hostile to, changes needed by those outside the safe harbor.

The corporate beneficiaries of a job subsidies program, for whom it would generate significant windfall revenues, include many of the wealthiest and influential corporations. These companies, with their political power and media access, acting together with their protected employees, would be an irresistible political force for maintaining and expanding the program.

Inevitably, the beneficiaries of the subsidy plan will lay claim to the political immunities historically enjoyed by jobs programs. For this reason alone, it is better to call a dole a dole. An income support program, which would permit companies to downsize as they please, and would pay directly to the downsized a high percentage of their previous earnings, would limit the size of the constituency to those receiving compensation.

“White welfare” is an issue which has the potential to inflame the tensions between minorities and middle-class whites. Whereas a subsidy program once in place would stay in place, and would tend to institutionalize caste and credentialism, an incomes program would be self-limiting, and tend to correct them.

Whether the cost is absorbed by corporations or subsidized by the government, when ten are doing the work of nine or less, and all are paid, there is “white welfare”. Unlike the clients of the much maligned welfare system who are maintained at mere subsistence, recipients of white welfare enjoy for the most part a middle-class or upper-middle-class standard of living, by virtue of acquired credentials and their ability to fit into corporate culture.

Per capita real income in the U.S. has not declined over the past twenty-five years. Real income at the median has remained almost the same. The real income of the lowest 20% in 1997 was down by 25% from 1972, so statistically, it is the poor, but only the poor, who are seriously poorer. Yet when people with a college degree and a closet full of suits get to sit in a front row for the balance of their working lives despite having become superfluous, while single mothers who work daily at the very important task of rearing their broods to adulthood are relegated to a back row, financially strapped and socially shunned, something is clearly wrong. This wrong was mostly invisible, and immune to correction, as long as it was done by and paid for within the private sector.

The private sector is no longer willing to support it. A job subsidy program would squander the opportunity this presents. It would re-establish the wrong through the public sector, and create the political force to perpetuate it. The farm price support program was an indirect subsidy program implemented during the Roosevelt administration, by Secretary of Agriculture Henry Wallace. It was well entrenched by 1948, when Harry Truman’s Secretary of Agriculture, Charles F. Brannan, began his unsuccessful five year effort to dismantle it and replace it with an income support program. Price supports survived another fifty years, causing serious misallocation of resources and sullying the political process. Through the lifetime of the program, farms became fewer but larger. The largest farms (and agribusiness operations) got larger while most farmers, together with the people who comprised the support infrastructure, got displaced. The number of farms went down five-sixths, as millions of American farmers sold out, gave up, or were foreclosed. The consequences of the price support program are still not nearly played out. An income support program would only temporarily continue the wrong, and by making it visible would help mobilize the political force to correct it.

Bloat is a problem, but it is also symptomatic of deeper problems. A job subsidy program would obscure key information, masking the symptom. Companies will seek to maximize their subsidies, and will overstate their redundancy. The lack of accurate information will markedly increase the difficulty of assessing those problems, and of devising sensible economic and social policy to address them.

A job subsidy program would distort the labor market. People will demand a premium to leave guaranteed jobs for unprotected ones, if they will leave them at all. By restricting the pool of people available for new managerial and white collar jobs, it would heighten the already formidable barriers facing small companies and new ventures.

The primary function of a business is to produce goods and services that people want, and to produce them efficiently. It is almost impossible for a firm to maintain the work ethic necessary to achieve this, once a sense of make-work takes hold. The civil service is a notorious demonstration of what happens when the connection between effective performance and promotion is eroded. The unambitious have little to do, and do little. For the ambitious, skill at office politics and bureaucratic intrigue largely determines who gets ahead. As such people gradually fill senior positions, the possibility of restoring efficient operation is progressively reduced, and eventually lost.

The extent to which a national economy is unable to productively and profitably employ its people is a gauge of serious, fundamental problems. If the economy is in equilibrium at a high level of unemployment (visible plus disguised)  or misemployment, then profound structural changes may be necessary both to avoid gross misallocation of resources, and to limit the development of social distortions. To intelligently evaluate proposed changes, decision-makers and the experts who advise them must know the extent to which the economy can safely invest in labor-saving capital, say, or outsource work to off-shore facilities. Disguising disguised unemployment seriously skews the information available to inform critical policy decisions.

The imbalances that now exist developed more or less accidentally, and have been maintained by inertia, informal personal ties, and a lack of incentives to make operations more efficient. Is there a structural excess of available workers? A shortage of good, productive jobs? If so, then the economy might be made both more equitable and more efficient by at least partly separating distribution of the fruits of that economy from people’s current employment. As businesses expose and eliminate waste and inefficiency, it may be that it no longer makes sense to tie a person’s economic position entirely to his job, or that the number of hours worked in a week, or that the number of a weeks worked in a year need to be reduced.

Of the three approaches to downsizing, which is best? To let it simply proceed is to allow the organizations which created the problem solve it at the expense of persons who did not. The hands-off approach would acquiesce to great harm to a great many people, with little to show for it. A “Subsidy in Jobs’ Clothing” would cloud important data, be vulnerable to abuse and expensive to control, create a caste of protected mandarins as a political force able to render needed change politically impossible.

A direct income suport program would provide the same protection to the downsized and to those stressed by fear of being downsized. It would achieve this without upsetting the political process, and without costly “leakage” to abuse and expensive controls. It would silhouette the disguised unemployment problem, making rational assessment and decision-making possible, and would create an environment that would foster, rather than obstruct, important reforms. It is the right road to take.

Copyright(C) 1999 Jonathan Marin


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