Thursday, February 26, 2009


Here (link) is the availible data on density of trade union membership in OECD between 1960 and 2007. The membership in trade unions has been declining. In 1960, in the United States, 30.9 percent of the employees were engaged in trade union activities. In 2007, only 11.6 percent of employees were members of trade unions. Similar trendline occured in the UK, where the peak in trade union membership was 51,8 percent of the employees in 1978. From 1978 to 2007, trade union membership decline significantly. In 2007, it reached 28 percent of the workforce. In Canada, trade union membership was reversed in 1982 when it reached 36,8 percent of employees. In 2007, 29.4 percent of the working population were engaged in trade union activities. Compared to the U.S, trade union membership in Canada remained fairly steady throughout the period.

There is many empirical evidence arguing why trade union membership declined. In the U.S and UK, the reversal in trade union membership began in 1978 while in the U.S, the entire postwar period encountered a declining trend in trade union membership with a marked exception between 1975 and 1979 when Carter administration fostered pro-union policy measures.

In the UK, Thatcher's economic reforms, nicely summarized by Sir Alan Walters (link), aimed at the deregulation of the labor market which set a natural disincentive for union membership and, at the same time, stimulated productivity growth and reduced unit labor cost resulted from an excessive taxation of personal income and levies such as employer social security contributions. In 1978, for instance, the United Kingdom's overall productivity was 69 percent of the U.S productivity, down from 75 percent in 1960. In 1979, the marginal tax rate could reach as high as 98 percent, composed from 83 percent top tax rates and 15 percent tax surcharge on unearned income.

In continental Europe, trade union membership also declined significantly, showing a positive correlation between productivity growth a declining union membership although the continental European trade unions maintained a strong political power in collective bargaining as well as in economic policymaking. Not surprisingly, the output per capita gap between the U.S and Europe widened, starting in 1970s.

Wednesday, February 25, 2009


Dan Mitchell wrote an article arguing against Obama's spending stiumulus (here and here). Meanwhile, major European economies are suffering from a deep recessionary downturn. German economy is expected to contract by 2.25 percent annually (link), which is the deepest decline in the postwar period. Across the channel, the British economy contracted by 1.5 percent in Q4 while the incoming data on investment, consumption expenditures and industrial output indicate that Britain's economy is unlikely to avert the recession and offset deflationary pressures. BoE has already cut the benchmark interest rate to 1 percent, creating a loop of liqudity trap and strengthening the length of the recovery.

Except for Switzerland and Ireland, European countries are unfamously known for an excessive public sector consuming as much as 50 percent of the GDP while empirical evidence, embodied in Rahn curve (link), show that growth-maximizing share of government in the GDP is less than 20 percent of the GDP. Excessive regulation of labor market and high tax wedge dash out the growth potential in European welfare states. Nevertheless, the deregulation of labor market and lower marginal tax rates on labor supply would ease the macroeconomic impact of the ongoing recession.

Thursday, February 19, 2009


A campaign against tax havens has been launched by the British PM (link).


Source: WSJ (link)


Hannes Gisurarsson's opinion in the WSJ (link) summarized the timeline and details that flipped Icelandic economy into the financial crisis as well as the political turmoil in the country.

"Moreover, Mr. Oddsson is one of the few Icelanders who sounded the alarm bells before the crisis hit the island. At a breakfast meeting of the Icelandic Chamber of Commerce in November 2007 -- a year before the banking collapse -- the governor said: "Iceland is becoming uncomfortably beleaguered by foreign debt. At a time when the Icelandic government has rapidly reduced its debt and the Central Bank's foreign and domestic assets have increased dramatically, other foreign commitments [by private banks] have increased so much that the first two pale into insignificance in comparison. All can still go well, but we are surely at the outer limits of what we can sustain for the long term."


John Steele Gordon wrote an article (link) about the history of U.S. national debt in the twilight of CBO's estimate of $1.2 trillion federal deficit before the stimulus package.

Monday, February 16, 2009


Bloomberg has published an article about the recessionary expectations in Slovenia (link). The article outlined concerns over a potential cooling of export demand and a decline in aggregate investment that could trigger a consecutive output decline or the rise in the rate of unemployment. Earlier, Slovenian Statistical Office reported a 17,5 percent decline in industrial output, 5,5 percentage points more than in earlier quarter. The greatest fear facing the Slovenian economy is an exogenous recessionary shock which is basically a decline in export demand as the Euroarea economy turmoiled a recessionary output decline (link). Germany, which remains Slovenia's largest trade partner, has already encountered the fastest GDP shrink since the last recession in 2001.

Although 93 percent of economists believe that tariffs and import quotas reduce general economic welfare (link), ideas to propel protectionism to cure the current economic downturn have recently been proposed. Slovenia is a small and open economy. The gains from free trade with the EU27, European Economic Area and European Free Trade Area have been huge as well as benefits from membership in the European Monetary Union. Following the accession of EU in 2004, robust output expansion was encountered and quarterly output growth rates varied from 3,3 percent in Q3 (2005) to 7,6 percent in Q1 (2007) although some economists noted that the economy will encounter a significant rise in unemployment after the EU accession due to the loss of exchange rate. Tolar/euro exchange rate parity has been problematic mostly because the Bank of Slovenia propelled currency depreciation as an attempt to cure the export industry from a declining competitiveness in regional and global markets. As the basics of monetary economics teach, the main effect of a discretionary currency depreciation is an increase in the rate of inflation which follows the rise in aggregate demand in the absence of productivity shocks that could ease the inflationary impact of currency depreciation. Openness and international trade is one of the main engines of economic growth. It is empirically evident that countries with free trade experience higher economic growth and greater welfare respectively.

The reason for a particularly mild extent of recessionary impact in Slovenia is the fact that there has not been a high-mark decline in consumption expenditure which could deteriorate the stability of output growth. However, the fears of ongoing recession have been highlighted by Gorenje, one of Slovenia's major export companies, which reports a 25 percent slump in demand in Eastern Europe. The company immediately demanded government aid (link).

As every student of introductory macroeconomics can tell, recessions are unavoidable while government interference can only extend the length and pain of the recession as it during the Great Depression of 1930s together with president Hoover's infamous increase of top marginal tax rates and disastrous Smooth-Hawley tariff raise. This year's economic downturn will hopefully crunch the old belief that Slovenian economy is immune to recessions. As I wroted in earlier posts, Slovenia's main ongoing macroeconomic challenge is to sustain stability and set the course of pro-growth policies to pursue stable and sustainable economic growth in the long-term perspective as well as to tackle the issue of aging population caused by PAYG pension system. Probably one of the best possible cures for the recession are productivity shocks. These shocks, such as R&D and innovation, increase the potential output and ease the impact of a rise in aggregate demand on possible inflation during output expansion or recession similar to oil shocks of 1970s. In the last two consecutive periods, Slovenian economy faced deflation.

The Slovenian government recently endorsed subsidies for companies to retain employees and avoid the possible layoff scenario. As an economist I have serious doubts whether the decision to launch subsidies is based on cost-benefit analysis. What subsidies of this kind create is a deadweight loss and diminishing productivity due to the problem of adverse selection caused by collective bargaining and a strong political power of unions. As the history of macroeconomic and financial crises teaches us, follow-up recessions are unavoidable while any kind of distortions levied on the economic activity only prolong the recession and decrease growth prospects in the future. Real convergence, sustainable long-run growth and catching-up to EU15 income per capita is the medium-term objective which could deteriorate if rigid regulation and government spending in the share of GDP increased.

Wednesday, February 04, 2009


WSJ and Heritage Foundation have released the annual 2009 Index of economic freedom (link). This year, countries with high score on economic freedom are Hong Kong, Singapore, Australia, Ireland, New Zealand, U.S and Canada. Out of the most developed transition countries, only Poland lacks behind Slovenia which improved this year's score by 2.7 basis points mostly due to marginal tax cuts, improved business conditions, reduction in corporate tax rate and a moderate improvement in the area of property rights protection. The overall standing (68th in the world and 30th out of 43 countries regionally) reflects Slovenia's high tax burden (top income tax rate is 41 percent which is more than 35 percent world average), high government spending (45.3 percent in 2008), stalled privatization and underdeveloped financial sector and inflexible labor market (link).


Unsurprisingly, Fitch has slashed (link) Russia's credit rating to BBB, just two ranks above the junk grade. The main driver behind lower credit grade is a deteriorating shape of capital markets accelerated by a snip decline in commodity prices which, of course, left an open struggle for the financial sector to refinance the external debt which is a difficult task if the financial sector suffers from unstable macroeconomic environment with high and volatile inflation rate (14.1 percent in 2008) and possible exchange-rate overshooting.


WSJ reports (link) that Ireland intends to curb public spending by €1.4 billion in response to widening budget deficit.


The Economist discussed (link) the macroeconomic issues of emerging Asian economies.

"Asia has never before deployed its monetary and fiscal weapons with such force. Every country across the region has cut interest rates and announced a fiscal stimulus. In previous downturns, Asian governments were often constrained by dire public finances or the need to support currencies. But most countries entered this downturn with small budget deficits or even surpluses. All the main Asian emerging economies apart from India have relatively low ratios of public debt to GDP. Though the true size of the fiscal stimulus in some countries, notably China, is probably less than the headline-grabbing figures suggest, they are still impressive. After correcting for double counting and unrealistic measures, China, Singapore, South Korea and Taiwan will all enjoy a fiscal stimulus of at least 3% of GDP in 2009. China has signalled that more measures may follow over the next couple of months; it can certainly afford to spend more. On January 22nd, Singapore’s government announced a package of measures equivalent to 8% of GDP. For the first time, this will be financed partly by dipping into the government’s vast reserves...."

Tuesday, February 03, 2009


Moody has maintained Iceland's negative outlook on economic and financial crisis (link).


Carmen M. Reinhart and Kenneth Rogoff discussed the consequences of financial crises and the impact on output, prices and employment (link):

"Perhaps the most stunning message from crisis history is the simply staggering rise in government debt most countries experience. Central government debt tends to rise over 85% in real terms during the first three years after a banking crisis. This would mean another $8 trillion or $9 trillion in the case of the U.S. Interestingly, the main reason why debt explodes is not the much ballyhooed cost of bailing out the financial system, painful as that may be. Instead, the real culprit is the inevitable collapse of tax revenues that comes as countries sink into deep and prolonged recession. Aggressive countercyclical fiscal policies also play a role, as we are about to witness in spades here in the U.S. with the passage of a more than $800 billion stimulus bill."


After an intensive debate about fiscal stimulus that would be utilized to cure the recessionary downturn of the current year, there is a wide debate whether President Obama would extend the role of unions in the U.S. While President Obama agreeably supports the extension of the role of labor unions (link), there are several doubts that need to be discussed.

First, there is a significant panel of empirical evidence showing that high level of unionzation tarnishes the growth of potential productivity which is essential to the long-term increase in the standard of living. In countries of the Continental Europe such as Austria, Germany and France, there is an obvious and firm evidence showing strongly negative correlation between the level of unionization and the rate of unemployment. The cost of unionzation is usually beared by grimmy prospects of future youth employment. Data provided by Eurostat (link) fosters the hypothesis that a somewhat negative correlation between unionization and employment rate exists. On the other hand, in Anglo-Saxon countries, where labor markets are more flexible and elastic, the rate of unionization is lower than in Norway, Sweden and Netherlands and the rate of unemployment is lower in all age groups. The difference can be explained by the fact that in Continental and Nordic countries, government fosters the bargaining network between government, employer associations and trade unions while there is significantly less government engineering of labor market in Anglo-Saxon countries such as the U.S., Canada and the UK. The OECD data (link) on hourly earnings are a strong evidence respectively.

Second, the bargaining framework of union negotiation depends on the elasticity of labor supply. If the labor supply curve is more inelastic, it is also more likely that unions will gain an advantage in seeking an anticipated rent and regulate the market for particular professions by restricting the entry and raising the wage ceiling. If unions bargain the rent, lower rate of employment will be an inevitable result of this act.

And third, president Obama says that "you cannot have a strong middle class without a strong labor movement." Unionization is indeed the long-term consequence of higher unemployment because higher union wages exceed competitive market wage rates which causes job losses and unemployment which is higher than hypothetical one. Larry Summers nicely outlined the consequences of unionization regarding welfare, employment and wages (link). It is also important to know the union membership has been declining. The union power of United Auto Workers in the U.S auto manufacturing industry is significant and it also contributes to the bailout problem given high labor cost. Since 1970s, the membership of UAW declined by more than one third. Consequently, foreign investors rather located the production activity in non-union plants in Southern U.S. Recently, professor Becker discussed the issue and perspectives of union membership (link). However, it should be noted that globalization and the rising mobility of labor has been slashing the bargaining power of unions significantly. Interestingly, union membership peaked in 1954 when it reached 28 percent of total employment and has had declined ever since with no reversal after president Reagan won the battle with PATCO (link).

Even though, president Obama's pro-union efforts may reverse the union membership trend, globalization and competitive regional and global labor markets will nonetheless diminish the power of domestic unions. While, in fact, there is no doubt that the long-term cost of unionization is higher rate of unemployment and employment rigidity that gives more economic power to the unions and derails productivity growth and freedom to choose.