The world economies and the Employment of Labour

The current state of the world’s economies, from great to small, shows a change that appears to have been missed by the economic planners.  It appears that the change is likely to be permanent, and by not understanding the significance of it, the political leaders and, more particularly, the financial leaders of the economies are tending to use tools of economic management that are outdated and increasingly ineffective.

The economic history of the recession that started in 1989 is a clear indicator of what is now happening on a world scale.  The basic cause of that recession tends to be overlooked or, perhaps, misunderstood.  The collapse of Communism in Europe gave West Germany the opportunity to reunite, the fulfilment of an aspiration held as a prime objective of West Germany since the end of the Second World War.  That reunification brought with it an intensive investment effort, to bring the 15 000 000 East German people up to the economic standard of the wealthy West Germany population of 65 000 000.  The Government commenced pumping huge amounts of money into East Germany, taking the funds first from its own Budget, then imposing a tax levy on the West German people.  They responded with characteristic German discipline, and the investment proceeded.  Soon, the Government found that even that huge source of funding was insufficient to remedy the destruction of the once-thriving East German economy that had been wrought by Communist policies.  The German Government turned to the world financial markets, using the strength of the German economy to borrow huge amounts of money.  These funding efforts drained the world economy of free funds, depriving the capital markets of the ability to supply the credit needed by the world to support international trade and investment.  The world economies faltered, and, as in the recent situation of reduced lending by the world’s banks, the general economy went into a nosedive.  In West Germany, the results were dramatic.  Faced with reducing demand and a rising cost of supporting their borrowings, the industrialists cut costs in whatever way was possible, attempting to maintain their legendary quality while reducing prices in order to remain competitive and thereby to hold sales at a survivable level.  Inevitably, the factor of labour was a prime field for the cost-cutting efforts.  Within a matter of months, the number of unemployed started rising, going from about 2 000 000 to over 12 000 000.  Where a factory had previously employed two men per machine, they now automated their production processes, using one man to tend five machines.  Where the work could not be automated sufficiently to cut costs by the desired amount, those manufacturing processes were exported, to China, Vietnam and the other low-labour cost countries.  Although Germany lost hundreds of previously profitable companies, these actions saved the bulk of the German manufacturing base, now in a much stronger state than before the recession, and better able to face the changing world that had emerged from the ruins of Communism and the distortions that the Cold War had brought.  The picture of German industry changed dramatically with a few years, going from having large numbers of highly-skilled workmen, to few workers and many automated machines.

The financial crash of 2008, that followed the excessive lending of the banks in the pursuit of profits for the shareholders, the drive for ever-growing quarterly profit improvements with concomitant share price growth, and incredibly high bonuses for the bankers in control of the policies of their companies, resulted in a recession that bears remarkable similarities to the experience of Germany following 1989.

The (artificial) shortage of loan funds to businesses and consumers has resulted in a dramatic and massive loss of jobs and failure of otherwise capable businesses.  The efforts of the world’s central banks, by means of reducing interest rates, sometimes to 0%, and by increasing the supply of money in the economy, to drive funds to these markets have been largely unsuccessful.  The world’s economies remain stubbornly sluggish, and the number of unemployed remains high.  Where growth in employment has taken place, the numbers have been small, and the economic growth has not been commensurately reflected in a reduction of unemployment.  There is even a suspicion that at least some of the economic growth has, in fact, reduced the numbers employed in those sectors.  Even China, the recipient of many of the labour-intensive industrial activities exported from Germany and other Western countries after 1989, has developed a cost structure that now forces its previously high growth in GDP down towards the minimum level necessary to appease its citizens and hold an anti-Communist revolution at bay.  Yet the major economies of the world appear to be oblivious to the central fact of the modern industrial economy, a fact that is illustrated clearly by the brilliant economic performance of German, the only country, apparently, that has learned the lesson of the past. 

It is simple:  in the modern world economy, high-labour-cost low-labour-productivity economies must expect a declining level of employment or, at best, a stagnant rate of employment.  Economic growth in these countries will take place, when it happens, with only a minimal growth in the number of people employed.

The lesson to be learned is equally simple.  A high level of employment, in the absence of an increasing level of labour productivity, is a target that cannot be achieved without a means of holding the labour bill at the same level.  That means that the total cost of employment, including the wages, the cost of safety and welfare measures, the cost of administration related to employment in its widest sense, the cost of hiring and firing of people in response to changes in market conditions, must, in total, be reduced if the number of people to be employed is to increase.  An automated machine is an expensive investment in terms of capital, but, once it is installed, it does not require more than a minimal cost of maintenance.  It does not require annual wage negotiations with, often, above-inflation demands supported by strikes, it does not require a pension fund or a medical aid contribution, it does not require a lengthy negotiation or large compensation payment if it is put out of service for a month or a year.  It stands in its allocated position and produces on demand to its full capacity, without long tea breaks or annual leave, without strikes in support of other ‘machine unions’ making demands that cannot be met by employers who must earn a sufficient net profit to remain in business.  It is, in short, an ideal employee!

Governments may make statements about the ‘obligation’ of businesses to support Government policies, to provide employment for this class or that, to make investments that will create jobs, to provide in some way for people who have not earned that provision.  These demands may be effective in the short term.  Coercion does work, in the short term.  However, in the long run, the market will determine where businesses are established and where they will continue to operate.  It will determine where jobs are created, and where they are destroyed.  It will determine how much, in total, is paid for a particular job, and whether that job will be done by a human employee or by a machine.  A business is not a factory or a labour force.  It is a human who sees a potential, and who will go to wherever that potential can best be realised, and set up the organisation that will achieve that potential in the way that is most beneficial to the businessman.

The market is able to be manipulated in the short term, but it will prevail in the long term.  It is very large and very powerful.  Britain once spent huge amounts of its reserves to prop up its currency against a speculation that it would fall.  Britain, one of the major economies, failed to win that competition.  The market won. 

In the current world situation, only one industrial economy has consistently continued to maintain strength, facing the same conditions as all the other economies.  Germany learned the lessons of the 1989 recession, and came out of that trial stronger and more efficient.  The industries became hyper-efficient and the workers upskilled to become one of the best-educated and most highly productive workforces in the world.  The other economies of the world must now learn the same lesson.  They must choose to be labour-based or to go the route of technology.  They cannot afford to sit on the fence.  They cannot afford to believe that mediocre education is sufficient.  They cannot afford to be influenced by the Trade Union movements, whose motivations are based on higher wages and lower output by more members.  Those motivations are internally inconsistent.  You can have higher wages for fewer employees, or lower wages for more employees, given a consistent productivity.  You cannot have more expensive benefits paid by the employer without a sacrifice in terms of a lower wage paid to the employee.  In the end, a higher total cost of labour must be at least balanced by an equally higher production by the labour force and, if the labour force is to remain at the same level, the increase in production must exceed the increase that would be brought about by increased employment of machines.  The businessman is coldly rational, driven by the imperative to produce a profit each year sufficient to warrant the investment made in the business.  Ultimately, the world is not very far from totally automated factories, and the drive of the trades unions to increase the net benefits to their members is acting as a powerful driver towards that state.  If you doubt this, look at the work now being done to automate mining and agriculture, two of the seemingly most impregnable bastions of the large labour force.  These developments are disguised under the banner of safety, but, ultimately, it is the total cost of labour that is driving them.

If the Governments of the world wish to increase employment or, better still, to increase economic activity, or to postpone the time when almost no labour will be employed, they must act now, not to prevent businesses from driving towards a reduction of labour, but to make the employment of labour a more favourable option.  The carrot is the only way.  The stick, a favoured method of many Governments, will only serve to drive the businessmen to jurisdictions which are smart enough to learn the lessons that the Germans did two decades ago.  The world is a large place, and globalisation dictates that the market will prevail.