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Friday, November 25, 2005

The Old Deal is Broken

Globalization of economic activity makes national borders less important to the worldwide distribution of economic activity. As the global marketplace emerges, businesses face increasing competition and the ability to compete effectively in this environment requires reducing costs however and wherever possible. Since labor is the largest cost for most goods, it is an obvious target for cost reduction.

Costs can be reduced by enhancing labor's productivity through training, better equipment and tools, and so on. Costs can also be reduced by replacing people with machines. Yet another way to reduce costs is to pay labor less. All of these strategies have been pursued by businesses in recent years, both through adjustment of existing businesses and through location decisions, but I want to focus on the pay labor less option.

Labor compensation can be reduced by limiting or eliminating benefits. Firms often put forth a stark choice in this regard: Either agree to give up benefits or we will go bankrupt and you won't have a job at all. Other countries don't face these costs and if we are to compete we must shed them as well. What's a worker to do?

The problem is that the old deal is broken. Firms no longer feel, due to the pressures of international competition, a long-run obligation to their workers. And even if they do, competition makes such obligations difficult to fulfill. They need flexibility, the ability to expand and contract quickly and efficiently, to relocate, to retool, to change prices, and so on, to meet the competitive challenges they face.

In this world of increasing flexibility, workers as opposed to jobs need protection. If workers are expected to flexibly change employment, they need health care that travels with them from job to job. If they are expected to show flexibility and relocate as necessary, workers need institutions that support and ease such transitions. We can be flexible and still be decent to those who are affected.

Flexibility is a safe increase in volatility. An employee who comes to work every day and works hard to support a family, a model employee perhaps, can suddenly be left jobless as a company pursues the flexibility to adapt to changing conditions. The worker has done nothing wrong but choose the wrong job or the wrong major in college.

That worker, not the worker's job, needs protection from the risk brought about by enhanced flexibility and there are questions as to whether the private sector can provide efficient levels of insurance to workers against these risks. In addition to the efficiency question, there may not be a private insurance carrier large enough to assume the sheer magnitude of risk that would be required. The Great Depression was like a hurricane hitting the entire economy and the ability of private insurance carriers to withstand such a large shock is questionable.

The efficiency question has been widely discussed and adverse selection and moral hazard problems, as usual in insurance markets, are the barriers to efficient provision of insurance against economic risk. Government regulation and intervention into the markets is a solution to this problem. In addition, the federal government is perhaps the only carrier capable of assuming such a large magnitude of risk.

Workers need unemployment compensation, they need health care that follows them from job to job, they need support for moving to find new jobs, they need support for retraining, they need to know their children are safe if both parents work, that their children can still attend college if their parents are unemployed, this type of support will also make workers more flexible and aid in the ability of the economy to respond quickly and efficiently to changing economic conditions.

As the long-term mutual obligations between workers and firms break down under the pressures of globalization, it's time to think about protecting workers and their families in a different and better way than we have in the past. Capitalism is a societal choice to organize ourselves in a way that efficiently provides goods and services. Because of that, the economic risks associated with the economic system we choose are a societal obligation as well. For capitalism to work well, it needs as much flexibility as possible from all sides, but workers need protection from the risks that capitalism thrusts upon them.

We can start down this path by rethinking how we provide health care. The current system is not functioning for either side. Workers are not receiving the care they need, I don't think there is much doubt about that, and we have to also acknowledge that firms are increasingly burdened and disadvantaged in the international marketplace by health insurance costs. 

For those worried about flexibility, it is not obvious that such steps make workers or the economy less flexible. Worker's job choices can be distorted by health care considerations both in the jobs they choose and in how long they stay. Have you ever heard people talk about working for the government or a large business because of health coverage considerations, or hold onto a job they hate just to keep health care? That's not efficient.

We can do better, but we must be willing to admit that the existing system isn't working, and be willing to consider the full range of solutions, including a national health care system. The old deal is broken and its time for a new and better deal to take its place.

    Posted by on Friday, November 25, 2005 at 03:18 PM in Economics, Health Care, Market Failure, Policy, Social Security | Permalink  TrackBack (1)  Comments (50)

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