As QE Wanes, Real Costs of Employment Subsidies Surface

Erinç Yeldan

Global finance centers have been holding their breath for almost a year by now: will the U.S. Federal Reserve (the “Fed”) finally start “tapering” off from its monetary expansion programs, known as quantitative easing (QE)?  By way of three QE operations, the Fed had amassed a total of $3 trillion worth of assets from the financial markets over a course of less than four years. This was equal to roughly 20% of U.S. GDP. In turn, interest rates fell all around the globe to virtually zero.  While short-term low-risk interest rates in the United States fell to zero, interest rates in some countries remained much higher, so large interest rate spreads emerged between the United States and other countries. Notable “carry trade” emerged, for this reason, between the U.S. and Brazil; and yet, unemployment only slowly fell back to the pre-recession period, despite the fact that the labor force participation rate declined sharply to its 1970s level.

Now, seeing the expansion of the monetary base barely made a dent in stimulating real productive activity (see my January 2015 Triple Crisis blog post), the Fed declared in early Spring that “from now on it will be patiently waiting to start raising its policy interest rate and quitting QE operations.” This means bad news for global finance capital, which was drugged with the inflow of cheap liquidity, with zero credit costs.

Now that the financial smoke is clearing, we are in a better position to see the real costs of public programs aimed of stimulating employment and real activity.

As a response to rising global unemployment during the Great Recession, many countries introduced direct and indirect incentive packages to cover labor costs. These often took the form of reducing and covering the employer share of social security taxes, tax breaks, publicly financed reduced-hours programs, and other public support programs. The costs of these employment subsidies were measured in multi billions dollars, and yet their beneficiaries had been mostly big corporations such as McDonalds and Walmart, which already profited handsomely from low wages. In return, employment gains had been meager at best, while the subsidy costs were borne by the public sector.

The needy are not necessarily unemployed, or marginally employed in the informal sector. Ken Jacobs, chair of the U.C. Berkeley Center for Labor Research and Education, reports, for instance, that over the course of the Great Recession, public support for working families accounted for 52% of state spending on health and cash assistance. Accordingly, public support programs to compensate for the low wages of workers in the formal corporate sector cost as much as $153 billion a year to American taxpayers. Among the needy are those employed in home care and service sectors, where 48% of all workers rely on public assistance—food stamps, Medicaid, and other forms of support.  Jacobs reports that this extends even to some of the most educated people in the United States: a quarter of part-time faculty at colleges and universities are in need of public support.

Similar employment-subsidy programs were enacted in all over the globe. Turkey, situated at the periphery of the global value chains, introduced a complex web of employment subsidies at a cost of US$7.5 billions a year, or about 1% of its GDP. Data reveal that while these programs sponged as much as 3% of total fiscal expenditures, with a meager return of only 0.1% of additional employment. The real gainers were large enterprises in the formal sector. Low wages were sustained by public support programs, as real costs were taken over by the public sector.

The U.C. Berkeley Report further corroborates the now well-known finding that from 2003-2013, inflation-adjusted wages fell for the entire bottom 70% of the U.S. workforce. As the global crisis lingers on and has given way to a period of stagnation, and the Fed is preparing for “victory” over its QE operations, it is becoming more and more clear for the working class that the gradual growth in employment does not necessarily mean growth in wages.

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