QUALITY EMPLOYMENT: CHALLENGES FOR THE FUTURE

1. QUALITY EMPLOYMENT: CHALLENGES FOR THE FUTURE Joseph E. Stiglitz Bilbao, April 20, 2007

2. Why Quality Employment is so Important • Individuals spend large fraction of their lifetime on the job • The quality of the job thus is one of the most important determinants of the quality of life • Job affects life outside the workday • Economic security

3. The Many Aspects of Quality Employment • Quality of job • Workplace environment • Opportunity for individuals to participate in relevant decision-making • democratic workplace • More inclusive governance • Beyond shareholder maximization to stakeholder participation • No theoretical basis for “shareholder maximization” • Security of employment • Individuals are risk averse, and care about security • High levels of unemployment mean that there is a risk of long term unemployment • When individuals lose their job, standard of living is threatened

4. Quality Employment: Decent work…but more than decent work • Flexibility of employment • Meeting family needs • Balance between work and other aspects of life • Compensation • Inclusiveness • Equal opportunity for all • But true equality of opportunity may require “affirmative action” • Special programs to integrate new members of labor force Objective: Overall improves in Quality of Life Caution: do not confuse means with ends

5. Efficiency Wage Theory • It pays to treat workers well • Work harder • Less turnover • Invest more in job-related human capital • But does that mean we can just leave it to the market? • Will the market balance out various aspects of jobs

6. Why the market can’t be relied upon • Markets may exploit especially vulnerable groups with limited opportunities • Migrants • Unskilled • Modern corporations may be especially short sighted • Focus on this year’s (this quarter’s) bottom line • May mean that they are not concerned with long term profit maximization • Problems exacerbated by stock options and changing mores • Social externalities (“spillovers”) • Especially important in creating a cohesive society • Markets focus on lowering labor cost (e.g. through labor saving innovation) • Any resulting unemployment viewed positively as exerting downward pressure on wages • Social returns to innovation markedly different • Dynamic externalities even more important • Learning • Societal benefits of getting new entrants into the labor force integrated into the market

7. Problems may be getting worse • Increased focus on short term profits • Change in corporate culture • Globalization is putting more pressure on firms • And weakening bonds of social solidarity • Management of MNC shifting from one plant to another • Loyalty to corporation more than community • In many parts of the world weakened unions

8. But the problems are not inherent in globalization • Globalization does result in downward pressure on wages of unskilled workers • Increasing inequality in advanced industrial countries • In U.S., debate is about loss of jobs • But U.S. has been able to maintain a high level of employment • But at a large cost-- wages at bottom have been declining • But in many places, globalization is being used as an excuse for further weakening job protections, lowering wages

9. Scandinavian countries have responded differently • Heavy investments in education and job retraining • High levels of employment • High levels of investment in technology • High levels of success • Economically • In penetration of new technology • Socially • Higher scores on Human Development Indicator than U.S. (broad measure of individual well being) • All of this in spite of high taxes • Or more accurately, because of high taxes and high levels of investments and social services that those taxes financed

10. But responding to globalization does require changes • Changes in the provision of social support • From the firm to the community (country) • In U.S., automobile companies may go bankrupt because of health care costs • In U.S., when individuals lose their jobs, they also lose their health insurance—more than 50 million Americans without health insurance • Dynamic economy requires flexibility • Workers will need to move from job to job • Portability of pensions and other insurance • But cost to society of firing worker is different than cost to firm • Cost is greater than zero • Implying that some severance pay may be desirable • “Provident Fund”—individuals can use for a variety of purposes, e.g. helping them through short period of unemployment • Combining good incentives with risk reduction

11. Changes in the structure of the economy • Increased role of tertiary (service) sector • But service sector jobs can be “good jobs” • Even better than manufacturing sector jobs • Both in terms of compensation • And in terms of quality of employment

12. May require a larger role for government • In providing social support • In helping individuals adjust, move from job to job • Through processes of life-long learning • And educational systems that focus on learning to learn • In helping new individuals get integrated into the labor market • E.g. through training programs and through earned income tax credits • In helping create a more dynamic society and economy, through investing in education, technology, knowledge • Knowledge is a public good • Many of U.S. successes based on heavy government investment • Internet • Even Browser • Biotech • Many mechanisms • Direct investments • Partnerships • Subsidies to education, technology, research, certain types of employment

13. Europe has been getting some things rights • Most countries have better health care systems • More security • Better outcomes • At much lower costs • In some countries, high rates of productivity growth • Americans work far more hours per year • Enjoying less leisure • And even though average incomes have been increasing faster than in Europe, most Americans today are poorer than they were 5 years ago • Median income down • All gains have gone to the rich

14. But there are problems • High rates of unemployment • Less innovation(?) • Lower rates of overall growth Explaining problems • Macro-policies • Central bank focusing excessively on inflation • Growth and stability pact limiting the use of countercyclical deficit policy • Central banks “blame” structural rigidities • Are important in some places • But cannot explain marked changes since 2000 • Rigidities have not become worse

15. Explaining Problems • Long term concern • Free capital mobility may limit ability to impose taxes on capital • Real problem asymmetry between mobility of labor and capital • Forcing burden of taxation to labor • Undermining welfare state • Race to bottom in competition for capital/jobs • But advantages of a well designed and well run welfare state mean that, even with these handicaps, it can still compete • Evidenced by successes of Scandinavian countries • But imperative to design and manage welfare state well

16. Corporate Social Responsibility • Can CSR address the problems? • Can make things better • But in a globally competitive market place, firms may not have adequate scope to do all that they would like • Need for appropriate regulatory/legal framework, to limit race to bottom • CSR can help promote the appropriate framework

17. Role of international institutions • Asymmetries (e.g. in capital and labor market liberalization) have exacerbated problems • Even more so in developing countries • Where loan conditionalities may even impose impediments to implementing even core labor standards • IMF/World Bank put more emphasis on labor market flexibilities than on enforcing labor standards and enhancing security • Single minded focus on inflation results in too little attention to problems of unemployment and quality of work • And more emphasis on inflation than on unemployment • Attempts to restrict abilities of governments to pursue affirmative action programs and other programs designed to promote inclusive growth • Including through bilateral investment agreements

18. But it doesn’t have to be that way • Trade agreements could reduce race to bottom • By restricting tax competition • And by enforcing core labor standards • (But cautionary note on U.S. approach—requiring countries to enforce their own labor laws—which may lead to lowering of standards) • Surveillance could look not just at inflation but at unemployment and quality of work • Jointly done by IMF and ILO

19. Concluding Remarks • Full employment is the most important social program • Quality employment is necessary to achieve high standards of living • And essential for creating a cohesive society • Aspects of well-being not well captured by standard measures, like GDP per capita

20. Markets by themselves will not necessarily produce the kind of quality employment that society needs and deserves • There is an important role of government • At every level—from the local community to the international • Working with the private sector • Through a variety of mechanisms

21. Globalization • Has heightened the challenges • Without effective responses and concerted action there is a risk of a deterioration of the quality of employment • Globalization does not mean that social protections should be reduced • On the contrary, globalization has increased the need for a strong welfare state • But it has made it even more imperative that there be careful thought to what the government does and how it should do it

22. The kind of dialogue that this Congress is meant to encourage is essential • With this dialogue, and with the actions which hopefully will ensue, I believe that we can achieve a labor market which provides high quality employment—in the broadest sense of the term—for all • This is essential if we are to achieve the cohesive society and high standards of living for all that we are striving to achieve