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A hire power

Workers benefit when firms must compete aggressively for them
Jul 30th 2016 | From the print edition

2016-7-31 09:54:59 上传

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JOSEPH SCHUMPETER gave the name “creative destruction” to the process by which new and innovative firms displace stodgy ones, thereby driving long-run economic growth. The Schumpeterian sort of economic reinvention is out of fashion at the moment. Unhappy workers are casting their lot with populist politicians, who are in turn looking to rein in the disruption caused by everyone from tech unicorns in Silicon Valley to sellers of cut-price steel in China. Economists understandably worry that this backlash will lead to sweeping new regulations, taxes and protections for firms and workers. But red tape and tax are not the only things that can gum up the economy’s operation. Evidence increasingly suggests that some of what looks like sclerosis across rich countries is in fact rooted in the unequal distribution of gains from growth.

When old industries are swept aside by new ones, economists reckon that the resulting gains ought to be large enough to make everyone better off, including the displaced workers. Living standards should rise as new, better and cheaper goods and services become available. Just as importantly, as people change the kinds of goods and services they purchase, new industries should expand to hoover up jobless workers. In a well-functioning economy, firms ought to provide plenty of labour demand: new job openings to coax workers out of unemployment or away from jobs in declining cities and sectors.

This process is far from automatic, however. It can depend on the geographic distribution of income growth, for instance, as recent research reveals. A paper by Terry Gregory and Ulrich Zierahn, of the Centre for European Economic Research in Mannheim, and Anna Salomons, of Utrecht University, examines the effect of technological change across 238 European regions between 1999 and 2010, focusing on the propensity of new technologies to push workers out of jobs doing routine sorts of work and into jobs that cannot be done as easily by computers and robots. They estimate that the direct displacement of workers by technology reduced employment across Europe by nearly 10m jobs during the period studied (see chart). Yet technological change also created new opportunities. Automation of some jobs reduced costs, squashing prices and leading to increased product demand. That, in turn, led to the creation of nearly 9m jobs in newly efficient firms in Europe. Those gains, the authors reckon, ought to have spilled across local labour markets as the extra wages and profits were spent at restaurants and shops.

This “multiplier” effect is potentially the most potent of all. But its contribution depends on where the profits generated by the new technology are earned. The authors calculate potential new employment growth from this multiplier would be close to an extra 12m jobs (or about half of total European job growth over the period) on the assumption that all profits were retained within Europe. Yet if they assume that all profits flow abroad, growth in labour demand is far more modest: net job creation shrinks to less than 2m. Only when profits are recycled locally does automation lead to lots of opportunities for displaced workers.

Analysis of the American economy suggests the distribution of economic power matters as well. In a new paper Mike Konczal and Marshall Steinbaum of the Roosevelt Institute, a left-leaning think-tank, examine the worrying decline of business dynamism in America. Since 2000, the share of employment in the oldest and largest firms has grown at the expense of employment in younger and smaller establishments. The startup rate of “transformational” firms—the young, fast-growing companies that represent new kinds of businesses—has declined. The trend seems to be linked to a change in the habits of American workers, especially the young adults for whom early-career job changes are an important contributor to long-run success. They have become less likely to switch jobs and move to new cities.

It is possible that regulations keep Americans from jumping to new jobs or places, thereby jamming the process of economic reinvention. Some research has indicated that the growth of occupational licensing, which makes it harder to enter many service-sector industries, constrains labour mobility. Other work points to high housing costs—a consequence of overly strict land-use rules—as a force repelling workers from productive places. But Messrs Konczal and Steinbaum reckon these explanations cannot fully account for America’s doldrums.

If red tape were the main constraint on the economy, then workers who do successfully move from one job to another are likely to be moving to one that pays them a lot more. And places with lower levels of economic turnover ought to enjoy higher wage growth, as firms struggle to attract scarce workers. But job changes seem not to provide much of a wage fillip, the authors find, suggesting that people are staying put because other firms are uninterested in hiring new workers and feel little pressure to offer high wages. Similarly, places in America where dynamism is very low tend to suffer unusually weak growth in pay.

Too comfortable for comfort
Messrs Konczal and Steinbaum argue that firms do not need to compete for workers because, increasingly, they do not need to compete at all. America’s corporate world has grown top-heavy, thanks to the dominance of large firms and a wave of mergers. Reduced competition keeps profits high; in recent years, profit as a proportion of GDP has lingered near the highest level in half a century. In a more competitive market, upstart firms would hire labour and pressure big firms to use their cash for job-creating investments. If wages grew faster than profits, that might further raise labour demand, as workers spend their gains in the local service economy. Red tape no doubt prevents some firms from making growth-boosting investments. But bigger gains might come from creating an economy in which firms found themselves needing to compete to attract workers.

From the print edition: Finance and economics