Once upon a time – not so long ago, really – unemployment was not a thing.
In agricultural societies, even capitalistic ones, most people worked on the land. A smaller number worked in villages and towns – shoemakers and carpenters and so on. Some might go back and forth from the countryside to the town, depending on the availability of work. If your work in town building houses dried up, you might come back to the country for the harvest.
Economist Mario Seccareccia, who loves history, notes that before the Industrial Revolution, it was unthinkable that someone ready and able to work had no job to do.
Questions: If unemployment was once unknown, why do we accept it now?
Where did unemployment come from?
In those pre-Industrial Revolution times, there were paupers, mostly people who could not work for some reason such as a disability. These were deemed deserving of charity. A small number of paupers were considered deviants and treated harshly, perhaps made to labor in public work-houses under vile conditions.
Seccareccia notes that early classical economists like Adam Smith and David Ricardo recognized that able-bodied people could experience temporary joblessness, but not the long-term variety. The word “unemployment” only became widely used in the nineteenth century. As cities grew and manufacturing took off, people living in cities and towns grew apart. Movement between the two places grew less fluid. The agricultural sector of the economy was shrinking.
At first, if you lost your factory job, you could still probably pick up something in the countryside to tide you over. But if you had grown up in the city, as more and more people did, you might not know how to do rural work. By the late nineteenth century, most city dwellers could no longer count on falling back on agricultural work during hard times.
Karl Marx noted that England’s enclosure movement, which gained momentum as early as the seventeenth century, had made things hard for agricultural workers as wealthy landowners grabbed up the rights to common lands that workers had traditionally been allowed to use and were a vital part of their sustenance. Uprooting peasants from the land and traditional ways of life, Marx observed, created an “industrial reserve army” – basically a whole bunch of people wanting to work but unable to find a job during times when industrialists held back investment or when machines took over certain jobs.
Marx saw that this new kind of unemployment was a feature of capitalism, not a bug. Still, a lot of mainstream bourgeois economists thought that the market would somehow sort things out and eventually provide enough job openings to prevent mass unemployment.
It didn’t turn out that way. Exhibit A: The Great Depression.
Especially after World War I, many later economists, most notably John Maynard Keynes, warned that high rates of unemployment were getting to be the norm in the twentieth century. Keynes predicted that a lot of people would go on being jobless unless the government did something. This was very bad for society.
Keynes emphasized that full employment was never going to just happen on its own. Mainstream economists thought that if wages fell enough, full employment would eventually prevail. Keynes disputed that. As wages fell, demand contracted even further, leading to even less business investment and so forth in a never-ending cycle. No, capitalism, with its business cycles led to involuntary unemployment, according to Keynes.
Seccareccia observes that economist Michał Kalecki agreed that the government could make policies to help more people stay employed at a decent wage, but there was just one problem: wealthy capitalists weren’t going to have it. They would oppose state-supported systems to hold demand up so that fear of unemployment checked workers’ demands for better pay and improved work conditions.
For a while, after World War II, the capitalists were on the defense. The Great Depression and the Communist threat got western countries spooked enough to go along with Keynes’s argument that governments should try to encourage employment by doing things like creating big projects for people to work on. Safety nets were created to keep folks from falling into poverty. The goal of full employment gained popularity and many more workers joined unions.
Capitalists v. full employment
Economists have bandied about various definitions of what full employment ought to look like, explains Seccareccia: “A well-known definition came from William Beveridge, who said that what you wanted was as many jobs open as people looking for them – or even more jobs because every person can’t take every type of job.”
In the mid-twentieth century, with the economy doing well, neoclassical economists like Milton Friedman started to push back against the idea of full employment. He discouraged the use of fiscal and monetary policy to support employment, arguing that attempts to push down unemployment beyond what he insisted was its “natural” rate in the economy would simply lead to inflation.
In the 1960s, some of what Friedman warned about did actually happen. Employment was low and prices started to go up mildly, particularly during the Vietnam War era. However, the biggest boost to the credibility of Milton Friedman came with the OPEC cartel oil-price hikes of the 1970s that pushed the inflation rate to double-digit levels while simultaneously pushing up unemployment. So, in the ‘70s, western countries started backing off from encouraging full employment and maintaining strong safety nets. Proponents of the new neoliberal framework were in favor of cutting safety nets, shedding government jobs, and leaving it to the market to decide how much unemployment there would be. They said that it had to be this way to keep inflation from rising, even though the cause of that high inflation of the ‘70s had nothing to do with high public spending and excessive money creation that Friedman and his friends talked about.
Seccareccia points to proof that the neoclassical logic didn’t hold up. In the two decades before the Global Financial Crisis of 2007-8, the rate of unemployment went down, but inflation didn’t go up. That proved that the neoclassical economists were wrong. But unfortunately, policymakers didn’t really digest this before the Great Recession hit. So, they bungled the response badly by putting the brake on public spending too quickly because of fears of excessive budget deficits and potentially higher future inflation that never materialized. They kept insisting that the employment level would return to that “natural” state Friedman had talked about if they just left things to the market.
“But it didn’t work out that way,” says Seccareccia. “Unemployment skyrocketed and it took a decade to return to pre-crisis levels.
Which brings us to the COVID-19 crisis.
A crisis is a terrible thing to waste
Seccareccia says that we have to understand the difference between the current situation and the Global Financial Crisis. This time, it really is different.
“The earlier crisis started in the financial sector and spread to the real economy,” he explains. “But in 2020, when the Coronavirus emerged, the financial and industrial sectors got hammered at the same time.” This meant that people in both sectors stopped spending. Households couldn’t spend even if they wanted to because traveling, dining out, and other activities were off-limits. Businesses cut investment as uncertainty loomed and exports declined due to restrictions at borders. Unless you were Home Depot or an e-commerce company, you couldn’t sell anything.
The COVID-19 crisis also saw workers pulled out of activities thought to be too high risk for spreading the virus. Across the country, non-essential workers were sent home and told to stay there. Most, especially in sectors like leisure and hospitality, can’t do their work from home. A lot of these people lost their wages, and because most of them were low-wage to begin with, they could least afford the hit. Many were only able to maintain their incomes through government unemployment insurance. Businesses, meanwhile, were kept afloat with subsidies.
Seccareccia notes that unemployment had an interesting twist in the pandemic because it was both the problem and the initial cure for the health crisis. Unemployment kept the virus from circulating. It saved lives.
Fast-forward to late spring, 2021. As America and other western countries seek to put the pandemic behind them, the economy is opening back up. Employers are wanting to hire, and they are even competing with each other for workers. But many job seekers are waiting to go back to work. There are a lot of reasons why: caregiving for kids is still a huge burden, and people are still worried about getting sick. Transit routes have been disrupted making it harder for people to get to work. It’s also possible that some workers may be resisting jobs on offer which come with low pay and inadequate benefits.
Employers have started complaining they can’t find workers and blame the social safety net as the problem. Some employers, like those in the hospitality industry, are offering higher pay to lure workers back.
Just as Kalecki predicted, the wealthy capitalists are getting uneasy. The Chamber of Commerce, for example, has pushed the U.S. to stop expanded unemployment insurance benefits so that people will be forced to return to low-wage jobs. Some Republican-dominated states have jumped on board with this idea. Economist Larry Summers, for his part, is warning about inflation and telling the Federal Reserve to raise interest rates so that wages don’t go up. He complains that when he walks outside, all he sees are people eager to fill job vacancies. It’s unclear where he was living when he said that, or which people he is talking about.
Others argue that expanded unemployment insurance isn’t the problem, but the crappy jobs on offer. Seccareccia believes that it’s a good thing if employers raise their wages, even if that means a little bit of inflation.
Rising inequality, he emphasizes, is unsustainable in a healthy society, and it’s about time ordinary people had a little power to improve their lot. “When employers are worried about people quitting,” he says, “that’s when you know you’re getting close to full employment. And in a capitalist society, it’s an extremely rare situation when the number of quits begins to exceed the number of new hires as an economy nears the peak of a business cycle.”
In Seccareccia’s view, “there’s a balancing act between workers ‘fearing the sack’ and employers ‘fearing the quit.’” He observes that capitalists are very good at making sure that the former situation is more common, and they’ve been spectacularly successful in the last 40 years. “This is why you have flat wages and runaway inequality,” says Seccareccia. “Productivity goes up but the workers don’t share in it.” Profits pile up at the top.
Right now, inflation has been creeping up in some areas. In a couple of sectors, like used cars, it’s rising a lot. The question is, beyond a couple of unique cases, what will happen to inflation overall? And will be temporary? A lot of economists think that inflation will be short-lived and will not get very high, so it’s nothing to get excited about. Some economists, like Antonella Palumbo, think the worry about inflation is overdone. She notes that with unemployment still high and vast numbers of people who formerly worked but are still out of the labor force, the ranks of the famous reserve army of unemployed are still huge. As the economy restarts, all kinds of short-run bottlenecks are cropping up, but that reserve army is not going anywhere fast and will continue to limit wage increases.
Seccareccia points out that wealthy capitalists trying to stop workers from getting paid better and conservatives complaining about laziness fail to mention that meanwhile, the stock market is soaring, making the rich richer. Plus, the housing market is booming because the more affluent people lucky enough to have kept their jobs over the pandemic now have extra money saved to spend on big-ticket items. “Is it really fair,” he asks, “to complain about a few hundred dollars a week received by those at the bottom of the economic ladder? Especially how much the economy is already titled in favor of the haves?”
So, what exactly should the government do about unemployment? Should it do anything at all? For Seccareccia’s part, he thinks this is a perfect time to reconsider the idea of full employment, which has been so long abandoned by policymakers in favor of some “natural” unemployment rate. “Policymakers need to understand why COVID may offer a chance not seen since the end of WWII,” he says. “We could actually make the economy fairer for ordinary people.”