Unemployment a Gift for Corporations

The rise in unemployment is associated with a fall in effective demand and is an obstacle for an economy and its companies as they attempt to recover. However, in the United States the current phase of recovery has worked in strange ways. In this economy unemployment has led to increased productivity, and therefore profits. Unemployment has been something of a gift for big corporations. That may seem surprising, but the data does not lie.

The global crisis brought a dramatic rise in unemployment. Of course, European countries were also hit by unemployment, but according to data from the OECD, more than half of the jobs lost between 2007 and 2010 in the 31 largest economies in the world were lost in the U.S. This reduction in employment is out of proportion with the decline in output in the U.S. economy.

The data shows that U.S. GDP declined less than it did for the same group of countries between 2008 and 2010. How is this possible? The answer reveals much about the internal dynamics of capitalist economies.

During the past three decades a system of flexibility in the labor market was imposed in the United States. The protection of labor rights, both temporary and permanent, was gradually and inexorably removed. For years, U.S. capitalism could boast that unemployment had dropped when compared to European counterparts because it had established a system in which it was easy to hire and to fire. Of course, while the mirage lasted (especially over the last 10 years) workers endured many hardships and increasingly found themselves in debt.

The pressure on the labor force was also maintained by transferring jobs overseas, thanks to the gigantic international subcontracting process called globalization. Still, this mechanism was not able to reduce the number of U.S. jobs more than 30 percent. Today, transnational corporations still have two-thirds of their workforce in the U.S. (approximately 21.2 million of a total of 31.2 million workers, according to a study by Martin Sullivan), which is why the offensive against United States workers continues to escalate.

When the crisis erupted, U.S. companies were able to cut labor costs more easily than their counterparts across the Atlantic and in Japan. The flexibility in the labor market allowed little resistance to cutting costs and restoring profit margins. Therefore, the U.S. now has one of the worst rates of unemployment in the developed world. Also, if you count the hidden unemployment numbers (people who left the job search or persons engaged in part-time jobs looking for a full-time), the unemployment rate soars to depression levels.

Today, job creation remains weak and does not compensate for the new workers entering the labor market every year. At this rate of job creation, unemployment levels that existed before the crisis (5 percent in 2007) will only be reached again in 2031. In addition, about 27 percent of the jobs created in 2010 were temporary. The vast majority of other new jobs generated by the private sector are poorly paid and without benefits, and almost all are in the service sector.

The disaster in the U.S. labor market has been marked by layoffs and wage reductions. In 2010, wages and salaries paid to workers by companies reached a record low of only 42 percent of U.S. personal income. The pauperization of the working class is now a structural feature of the U.S. economy.

Job cuts did lead to increases in productivity (fewer people produce the same amount of goods), which resulted in a significant increase of earnings from 2008 to 2009. Although there was a modest reduction in the first quarter of 2011, the data shows that corporate profits are about 11 percent of national income.

While investment in production assets stalled, large corporations in the United States saw growth in their cash flow. In the non-financial sector, this improvement in cash flow liquidity allowed a direct increase in resources available to repurchase stock, new stock market investments, mergers, and acquisitions (typical features of a capitalist crisis).

In addition, the treasuries of the major transnational Americans are drowning in liquidity, which has allowed them to increase their investments through the portfolio of so-called emerging countries. This is unsustainable. The worst part is that the relapse of the U.S. economy will have serious implications for global capitalism.