Financialization and Unemployment

The idea of full employment, a central part of the Keynesian policy package in the post-World War II era, almost disappeared in the post-1980 era. These recent decades have seen generally high unemployment rates, but the financial collapse of 2007-08 and the Great Recession sent unemployment rates close to 10 percent. When underemployed and discouraged workers were added to this number the figure was around 16.5 percent. Today, we are still faced with an unemployment rate of 7.8 percent in the U.S. And the idea of full employment is making a comeback, as reflected in Robert Pollin’s latest book Back to Full Employment.

Mainstream macroeconomic theory is conspicuously poor at explaining unemployment. In a free market setting, involuntary unemployment should be zero–as long as workers accept the market-clearing wage rate, and there are no non-market forces such as minimum wage laws or labor unions pushing the effective wage rate above the market-clearing rate.

Heterodox economic approaches, on the other hand, show that capitalist economic systems structurally produce unemployment. One fundamental function of unemployment is to keep the bargaining power of labor low and bring wages to a level that does not hurt capital’s profitability. On top of this, the threat of unemployment is used as a tool to overwork those who are employed. Low bargaining power of labor also serves to keep the working class in check in general. One problem with full employment from capital’s perspective is that it would empower workers, thus potentially threatening capitalists’ control in the workplace (as well as the pace and direction of economic activity and even political institutions of the society).

There are other dynamics that regularly produce unemployment under capitalism. Capitalists are constantly in competition which each other to create profits by lowering production costs. Increasing the productivity of labor is one way of doing this. Rising productivity produces a redundant working population. Labor-saving technological changes and downsizing are examples of this. When profits are not reinvested so as to create enough jobs for those who are left out by these changes, an increase in unemployment rates will follow.

In the last 30 years, financialization has also become a factor that both produces unemployment and undermines workers’ overall living standards. In the era of financialization, the prioritization of the idea of “shareholder value” led to a focus on short term profitability and increased payments to the financial markets. Increased pressure from financial markets and institutions on corporations encouraged massive layoffs, outsourcing, production transfers, and plant closures. In most cases this meant a decline in employment, wages, or benefits, and at times all of them. The relatively low rate of investment, partly caused by financialization, became another reason for the deficit job creation. Moreover, the rise of private equity funds, especially in the 2000s, led to takeovers of firms for the purpose of restructuring. In this restructuring process jobs, health and retirement benefits and other commitments were seen as first costs to be eliminated.

Thus, whether the power of finance can be brought under more control becomes one of the significant issues, together with other structural and political causes of unemployment under capitalism, when thinking about the possibility of sound employment policies.