FOCUS□ LABOURRIGHTSANDTHE GLOBALECONOMY A Strained Relationship: Worker Rights and Financial Crises The Governments major global financial economy have and stepped is in economic the in throes to stabilise crisis. of a major financial and economic crisis. Governments have steppedin to stabilise credit markets through additional liquidity, lower interest rates,and new bank capital.Gradually, policymakers have realisedthatthesestabilisationmechanisms willnotbe enoughto resuscitateeconomicgrowth and local labourmarkets. Policymakers mustthusconsidercountercyclical fiscalpoliciesto helpeconomicand job growth recover. While stabilisation and stimulusdiscussions willlikelyhelp prevent worseincomelosses in manycountries intheshort run,theywilldo littletoimprove thelong-term outlookforincomes and growth.Manycountrieshave seen rising incomeinequality amidslow incomegrowth for low-income and moderate-income workersfor severaldecades. Strengthening workers' income growth through better worker rights is an important ingredient tocreatestrong andstablegrowth inthelong-term. Policymakers also needto pay attention toworker rights during a timeofcrisis, whenprofits areunderpressure, whichcantranslate into pressuresto reduce workerrights. Weakerworker rights, however, would make it harder for income, demand and economic growth to resume.A resolution to a majoreconomiccrisistherefore requires a sensiblepolicy approachto strengthening workerrights, even thoughprivatesectorpressures will emergeto weakensuchrights atthesametime. Overthecourseof2008,thefinancial crisis that started in the UnitedStatesspreadaroundthe globe. But why should workersin particular worryabout massive financialwealth losses? MostUSworkers, wherestockownership iscomparatively widespread, do notevenholdstocks. Workers areimpacted bya financial crisis when thelossesoffinancial assetstranslate intolosses in the real economy.In 2008, thishappened through severecredit contractions thatled many firms to postponeplannedprojectsand lay off workers. FederalReservedata show thatin the secondquarter of2008,credit market borrowing financed35.2 percentof fixedinvestment by non-financial corporateUS businesses,down from 80.1 percent a yearearlier. The remaining investment mustbe financed out of companies' profits, whichdecreaseina weakening economy, thusleavingbusinessesto cut expansionplans and jobs. Moreover, sharpdropsin assetvalues often erodeinvestor confidence, leadinglenders to pullbackfrom extending loans,thusfeeding intotheongoingcredit crunch, economicslowdownandjob losses.Theseblowscameinadditionto theongoingUS labourmarket weakness thatstarted when the housingbubble burstin early 2006.Inshort, thefinancial crisis fedintoan existing economicweaknessto createa largescale economiccrisis. Asbusinesses try torecover their losses,shrinkingcorporate resources willbecomeincreasingly contested. After peakingin thethird quarter of 2006,the ratioof after-tax profits to totalnonfinancial corporate assetsin theUS fellsteadily, so that bythesecondquarter of2008,itwas 28.9 percent belowitspeak. In thisenvironment ofshrinking revenues and profits, corporations will likelyseek to boost profitability by loweringwages. Over the past thirty years, US corporationshave gradually assertedtheirclaims for corporateeconomic resources moreaggressively, whileworkers' protections havedeclinedas theroleofunionshas diminishedand globalisationhas allowed for greatercapital mobility. Businessesformalised their claimson corporate resources bychanging the corporate governance structure.These changesincludeamendments to the Employee Retirement Income Security Act of 1974 that made pensionfundinvestors morefocusedon short-term portfolio performance, theriseofinstitutional investors, increased shareholder activism, and greater use of 'pay for performance' schemes, particularly stockoptions, forcorporate executives. Consequently,corporatedecision makersnow have strongincentives to boost a company'sstockpriceby all means necessary. Profits forUS non-financial corporations reached historic highsduring thebusinesscyclethat started in March2001,and a larger shareof profits was used fordividend pay-outs and sharerepurchasesthaninanyprevious businesscycle. The corporateresourcesnecessaryforthese redistributive policieswere oftengeneratedby lowering thewage billthoughoutsourcing and hollowing out.JoshBivensand Christian Weiler demonstrated in 'The 'Job-Loss' Recovery:Not New,JustWorse',whichwas publishedin the JournalofEconomicsIssues in 2006, thatthis strategy was possiblebecause of the shrinking presenceofunionsintheUS overthepastthree decades,whono longer serveas a countervailing forceto theshort-term profit seekingbehaviour ofcorporate decisionmakers. Jobsand compensation thuswillcome under increasedpressure inthecurrent crisis. Whether thiswilltranslate intoadditional job losses,lower wagesandfewer benefits willdependon a number of factors, includingthe level of worker rights. In comparison, good workerprotections limit theimpact ofan economicandfinancial crisis on people's incomesand thuson consumptionand growth. Forexample,inSouthKorea,a comparatively quickrecovery after thefinancial crisis inthelate1990swas often attributed tothe factthat workers enjoyedbetter protections than A resolutionto a WJM majoreconomic crisis requiresa sensible policy approach to strengthening workerrights, even though privatesector pressures will emerge to weaken such CHRISTIAN E. WELLER isSenior Fellow and AMANDA M. LOGAN isResearch Associate at the Center for American Progress. Page 3 Volume 16Issuel 2009 INTERNATIONAL union rights I stabilising have having reduce imbalances Labour They more the a ever long-term long-term economic to amounts inherent tend borrow people effect. one larger rights to of have a long-term stabilisingeffect. Theytendto reduce one of the inherent long-term economic imbalances morepeople havingto borrow ever larger amounts their counterparts in Indonesiaand othercrisisstricken economies. Thefaster jobsandcompensationdecline ,theharderitwillbe fortheUS economyand theglobaleconomyto recoverin theshort run. Anothershort-term stabilisingfunctionof worker rights emanates from thetraditional automatic stabiliser functions ofsocialsafety netsand progressive taxation. Intheory, demandon social safety netsincreases during an economicdownturn , limitingthe downward pressures on...