Political Aspects of Full Employment

Waqas Satti, Miguel Duarte, John Sokol | January 2024 | 20 min read

Political Aspects of Full Employment: The Case of Tourism in Portugal

Introduction

In economic theory, the relationship between states and markets is a central and highly debated topic. While some argue that government intervention in the economy is necessary to address market failures and promote the welfare of citizens, others believe that the market should be left to operate freely, with minimal interference from the state. The Polish economist from the post-war era, Michael Kalecki, is one of the leading figures in the post-Keynesian school of thought, in favor of government taking a more active role in a nation’s economy. In his text on “Political Aspects of Full-Employment” (1943), he offered a unique perspective on this debate. According to Kalecki, the capitalist system is characterized by a fundamental tension between the interests of business leaders, who seek to maximize profits, and the interests of workers, who seek to maximize wages. He argues that business leaders oppose government intervention, especially in the form of spending because of its implication of increasing employment leading to a rise in wages which in turn increases labor costs thereby reducing profits (Kalecki, 1943). Concerning the context of the politics within economic theory itself, Michael Kalecki's unique perspective also pertains to the role of capitalist ethics and the doctrine of 'sound finance' in relation to government expenditure. These concepts, including corresponding theories and models in neo-classical economics are in his view supported by an alliance between business and landlords, who use their influence to recruit economists to argue against government policies that would increase employment. The underlying motivation being the desire to maintain a certain level of unemployment to suppress wages (ibid.). This opposition to government intervention is often justified by appealing to capitalist ethics such as the principle that "you shall earn your bread in sweat," which suggests that individuals should work hard to earn their livelihood. However, as pointed out, these arguments often serve as a cover for the real motivations behind business leaders' opposition to government intervention: the desire to maintain a certain level of unemployment to suppress wages and labor costs (ibid.).

In Kalecki’s view the only way to full employment, while also keeping labor costs low, is an authoritarian government colliding with employers to violently keep workers from being able to use their collective power in bargaining for higher wages, using strikes and protests. This is what he says fascism presents as, in economic terms (ibid.).

This argument is supported by Italian economist Clara Mattei’s research which examines the role economists played in Mussolini’s Italy. As the subtitle of her recently published book “The Capital Order” explains, reading: “How economists invented austerity and paved the way to Fascism” (2022). This is especially interesting as it connects Kalecki’s views on economic theory as an instrument to deliver justifications for low government spending, with his assumption of fascism as the ultimate solution to the problem of full employment increasing wages.

Additionally, we will discuss Andrew Henley's re-assessment of Kalecki’s work on the political aspects of unemployment published in 1988. In it, he gives historical contextual and, critique but also praises to the persisting applicability of the Polish economist's understanding. Notably, he points out, that full employment might have a greater variety of possible outcomes, than presented by Kalecki (Henley, 1988).

Lastly, we will try to present the Growth-Model Perspective (2016) as defined by Lucio Baccaro and Jonas Pontusson. Instead of a conflict between employers and employees, they see a dynamic wherein both sides within a sector form a political coalition to suppress wages and conditions for “outsiders” from other sectors and the unemployed (Baccaro & Pontusson, 2016). A perspective that has been added to by Portuguese Economist Paulo Marques in his Thesis (2015). Marques argues that the segmentation of the labor market has not taken the same shape as in the cases presented by Baccaro and Pontusson, of a split along sectoral lines. Since this was made impossible, due to the strong radical left parties and union-confederations in Portugal, a segmentation has occurred along demographic lines, negatively affecting youth. (Marques, 2015). We have chosen the case of the Portuguese Tourism sector, to examine the theoretical approaches described. We see this to be perfectly exemplified in the sector, which is currently experiencing immense labor shortages. We aim to show, how rather than addressing the problem by raising wages, business owners in the tourism sector have instead lobbied for new legislation that would allow them to recruit cheap labor from outside the EU to increase the pool of workers and maintain unemployment levels (Ferreira, 2019). This essay will continue with a summary of our theoretical approaches, incorporating other research in addition to Kalecki, the idea of wage-led growth (Baccaro & Pontusson, 2017), and demographic segmentation of the Portuguese labor market by Paulo Marques (2015). Next will follow our case study, in which we will argue that the real solution to the labor shortages in this sector would be to raise wages and how this is opposed by the tourism industry. We will end with a short conclusion on the connections made, possibilities for further research, and realistic solutions as well as points of self-critique.

Theoretical Approaches

"The Political Aspects of Full Employment" is an article written by Polish economist Michal Kalecki in 1943. As is briefly mentioned in the introduction to this essay, Kalecki views the policy problem of full employment as threefold. There is an economic and a socio-political aspect to it, as well as one concerning the intricacies of shifting paradigms in economic theory itself.

Firstly, and most obviously, full employment, formerly a major goal in Keynesian economics, represents a peculiar situation for capitalism. It carries with it the short-term consequence of a stark rise in the bargaining power of workers. This is because as unemployment is close to zero, workers have greater leverage to negotiate the terms of their employment. As labor is sparse, employers are forced to keep the workers they have at any cost, and conversely, workers are not afraid of having to lose their jobs, as they will likely find employment elsewhere (Kalecki, 1943). So far this coincides with the approaches on the labor market, found in the neoclassical models (Blanchard & Fisher, 1998). Kalecki goes much further however and claims that if the situation of full employment remains, this must, in the long term lead to an overall shift in power within the capitalist system, which would conclusively end up in a system where either capital and workers are on completely equal footing, or, even more devastatingly for employers, the economy becomes dependent on workers’ interests effectively constituting Marxist socialism, the control of workers over production (Kalecki, 1943; Marx, 1887). This, quite understandably, constitutes a socio-political revolution and a worst-case scenario from the perspective of employers, which they seek to prevent at all costs.

From this arises the last aspect of full employment emphasized by Kalecki, which is the opposition against any form of policy, which could lead to full employment. For this purpose, springs an unholy alliance between employers and landlords, themselves fearing a shift in the distribution of property, power, and wealth. This alliance in turn possesses the resources to recruit enough economists, not just to create theoretical justifications against government spending, but to even be able to dominate the scientific discourse in economics (Kalecki, 1971). This analysis seems especially pertinent if one looks at the triumphant advance of the neoliberal Hayekian paradigm in the 1980’s, which included a strict turn away from Keynesian economics and its objectives, including that of full employment. Instead, the focus was put on the goal of price stability, meaning a stable rate of inflation, which has had its negative effects on employment. Ideologically to idea of "you shall earn your bread in sweat," has also experienced a renaissance and lead to an image of workers as naturally lazy (Evans & Sewell, 2013).

In this currently dominant strain of economics, neoclassical models are employed such as that of the IS-LM model of interest, savings, labor, and money. This is then extrapolated to the so-called Phillips-Curve describing the relationship between inflation and unemployment, which in simple terms represents a mathematical, but strongly reductive model of the effects of levels of employment on labor costs, described above. The Phillips Curve also holds the assumption of close-to-full employment increasing inflation. The result is the so-called Non-Accelerating Inflation Rate of Unemployment (NAIRU), which denotes a minimum level of unemployment at around 5-6% to keep inflation stable at around 2%. (Blanchard & Fisher, 1998).

There are several other approaches, that either support, accentuate, or contradict Kalecki’s insights. For example, British economist Andrew Henley (1988) re-assessed the theory of political aspects of full employment (1988). He points out, that these political insinuations by Kalecki, were made in the background of post-World War II Europe. At that time governments were trying to achieve increased levels of employment among their populations to evade the social disorder during the interwar period. Henley notes that Kalecki`s theory was not complete without its criticism. He says that some at the time argued that full employment would simply lead to an increase in household consumption, because businesses would have to increase prices, to accommodate for higher labor costs. To make an argument that full employment would also lead the way to less productivity, he says that, as the workforce saw employment as guaranteed, they would have less motivation. Henley also states, that although Kalecki`s theory remains significant; it is also especially important that full employment can have a variety of political implications and that these are not fixed and can differ, depending on the overall political discourse and situation in a society (Henley, 1988).

Henley’s reconsideration of the ideas of the economist does constitute some viable contextualization, but it seems inescapable to see how they also represent an argument favored by the neoclassical model analysis on the supposed lack of intrinsic motivation to work. He also emphasizes the necessity for a strong welfare society that can alleviate the damaging impacts of unemployment (Ibid.). This, again mirrors the opposition against government spending in favor of welfare spending, as described by Kalecki (Kalecki, 1943). The relevant policy of austerity and the assumed dichotomy of state versus market have taken this precedence and created a theoretical framework that expels class conflict, from the discourse. This has resulted in also expelling the worker as the source of value and instead tells us that the economy is made up of individuals of equal opportunity. This is at least what Clara Mattei (2022) believes.

Her work focuses on the relation between economic theory and policymaking and employs an interdisciplinary approach that considers the history of economic thought, economic history, as well as methodology (Mattei, 2022). She says that austerity has informed contemporary policy, specifically unemployment benefits, and industrial policies. Mattei sees a permanent attack on organized labor, cutting union benefits, curtailing the role of the unions, but also, fundamentally securing wage flexibility and wage repression (ibid.). Mattei argues that austerity is successful, because it has a powerful set of theories backing it and that it is in fact, not the product of the neo-liberal era post-1980. Instead, she shows how it finds its origins in 1918. After the First World War, the state had become the main employer, the main producer, and the main regulator of the labour force, and property of the means of production and wage relations, were re-politicized. This was answered by supposedly apolitical theory, which was grounded in the growing marginalist framework, which would later birth neoliberalism. Mussolini used these theoretical concepts as a reason to make strikes illegal and curtail wages, but also indirectly by creating an economic downturn. Slowing down the economy, thereby creating higher unemployment, which weakened the bargaining power of workers (Mattei, 2022).

Another approach not entirely in line with Kalecki’s logic is the one proposed by institutional economics, concerning the role of dominant social groups, which supposes an alliance between employers and employees within a sector against, so-called “outsiders” like the unemployed. This is especially present in the research of Baccaro and Pontusson on the Growth Model Perspective (2016). They describe how European countries in the last decades have seen a recomposition of their aggregate demand, either towards wage-led or profit-led growth models. While the latter is also concerned with the suppression of wages in some sectors, it assigns responsibility to dominant social blocks, consisting of employer- and employee associations within profit-intensive industries, who in turn shape the political discourse in favor of an overall suppression of wages and employment conditions, in the form of labor-market reforms for those areas of the economy, not elementary to the nation's growth (Baccaro & Pontusson, 2016).

For our case, special relevance is a detailed application of these concepts, presented by Paulo Marques (2015). He shows that this segmentation of the labor market in Portugal has not taken place on the lines of sectors, but instead affected demographical groups, and disproportionally negatively the young (Marques, 2015). As this age group usually makes up a large share of workers in the tourism sector, this has possible implications for our analysis.

Interpreting the Case: Bargaining Power in Portuguese Tourism.

As we now know, Kalecki argues that full employment can lead to greater bargaining power for workers and this can lead to increased wages, which can in turn lead to excessive price price-increases for the daily use of things and facilities. Business owners are thus incentivized to counter full employment due to the possible adverse effect on profits. Kalecki (1943) notes that capitalist societies frequently prefer profit and economic development over full employment, which can lead to great levels of joblessness and underemployment. This seems to work well with the theory of growth-models from Baccaro and Pontusson (2016). Overall, the Portuguese government has taken part in endorsing some policies towards full employment by executing strategies such as public works plans, tax credits for industries that employ large workforces, and vocational training programs to maximize the abilities and employability of the labor force (Marques, 2015). However, Kalecki also points out that attaining full employment can be difficult to achieve governmentally, as it may mean reallocating income and influence from the wealthy to the salaried class. Additionally, he writes that full employment may lead to a bigger demand for social amenities, as workforces have added disposable wages to spend on schooling, healthcare, and other government-delivered facilities (Kalecki, 1943). This also seems to be the case in some areas of Portuguese life, as cost of living has risen in the more populated areas (Marque, 2015).

Without a significant percentage of the unemployed population, or – in Karl Marx’s words – without a reserve army of labor, class consciousness grows, and societal relations begin to change as workers gain bargaining power (ibid.; Marx, 1887). Since Portugal already has one of the stronger remaining labor movements, this is especially relevant. Not only does Portugal have two relatively large separate union-confederations, but they also each backed by equally strong leftist political parties (Marques, 2015). Strikes could therefore proliferate as employers would no longer have the option of threatening to fire particularly demanding employees as a disciplinary measure. However, there are situations in which, although there is virtually full employment in a specific sector for an extended period, workers’ bargaining power is kept relatively low. Such seems to be the case in the tourism sector in Portugal. The country has seen a rapid surge in tourism over the last few years, and it consistently contributes around 15% to its Gross Domestic Product (Statista, 2021).

A total of 24.3 million passengers have been welcomed at Portugal’s airports in the first half of this year, marking a 344% increase compared to the figures for the same period last year (Schengen Visa, 2022). Naturally, this has contributed to significant changes in the Portuguese economy, such as increasing pressure on the housing market and demand for labor. Political discourse regarding both the effects and the needs of this specific sector has been immensely varied, with comments by party representatives and other political actors calling for a wide variety of governmental action. One claim that has become increasingly common in the media, especially when it is put out by tourism employers' associations, is that there is a worrying shortage of workers in the sector. Just in October this year the AHETA, a hotel owners’ association in Algarve estimated the Portuguese labor market to be around 8-000 workers short in the sector. Earlier this year, the Secretary of State for Tourism, Commerce and Services, Rita Marques, put that number in around 50 thousand (AHETA; 2021; SSTCSP, 2021). The Portuguese economy is not in a situation of full employment, with an unemployment rate reaching around 6%. However, on a sectorial level and for the purposes of analyzing the applicability of Kalecki’s claims, one may consider tourism to be in such a situation. In fact, not only is virtually everyone in this sector currently employed, both the government and business associations are saying they are many thousands of workers short of an ideal situation. And indeed, much has been done recently to address this problem. In November this year, the government implemented its plan to create a special kind of visa that allows its carrier to enter the country to search for a job for up to six months, whereas before migrants could only legally work in the country by entering already with a work contract (ThePortugalNews, 2022). A type of policy aims directly at motivating foreigners to come to search for work in Portugal, effectively heeding the pleas of the hotel owners, and perhaps preventing them from having to increase wages. If the employers are successful in their lobby, in the not-too-distant future there will be a lot more foreigners in search of work in the country, which will help keep wages low. However, the situation should, according to Kalecki’s considerations, already result in a surge of bargaining power for workers and employers losing leverage. A study of the sector conducted this year by the temporary work agency Eurofirms revealed that 61% of tourism workers have fixed-term contracts and that 54% earn less than 800€ per month (HRPortugal, 2022). These conditions are not only well below average in the European Union, but they are also significantly more precarious than the national average. According to the study, due to difficulty in finding good jobs, most of the workers in the sector wish to move to other sectors (ibid.).

Add this to the fact that tourism is particularly monopolized, with 1% of the companies controlling 64% of the market and 32% of jobs. It seems impossible for workers’ leverage in wage negotiations to be impacted negatively any further. Their threatening to quit and starting to work for competing companies is impossible. The second factor has to do with unionization. For various reasons, immigrant workers tend to be less organized or not at all, which influences the potential for bargaining. This is only extrapolated through the demographic make-up of the workers in the sector. These are predominantly female and under 30, like in most temporary employment everywhere (Randstat, 2021). This presents a problem if we consider that the young have been the losers in an ongoing struggle for labor-market segmentation in Portugal, which stems from other, well-unionized industries trying to keep their labor costs from rising. As both the tourism-sector, as well as young women represent areas with the lowest union-representation in the country, their fate seems sealed twofold (Marques, 2015). The last and perhaps most interesting of these factors is related to immigration law. The vast majority of the people who enter Portugal with the intention to work, seek to acquire a residence permit through Article 88 (Lei n. º 23/2007), which allows one to apply for regularization provided the applicant has a valid work contract.

This process provides a doorway for people to get the papers they need to see their rights fulfilled. However, the possibility to have a work contract without citizenship for extended periods of time gives rise to dire situations in which immigrants are desperate for a work contract and will accept virtually any conditions from their employers only for the chance of having the right papers to apply for Article 88. In fact, in recent years we have witnessed various cases of migrants working across the country in inhumane conditions, and often for no money at all. As mentioned above, the tourism sector is one that is particularly dependent upon immigrant workers. So, even though there is sectorial full employment, bargaining power is obliterated by restrictive immigration laws that make workers desperate to keep their jobs to have any hope of regularization. By allowing people to work without citizenship rights, the Portuguese State removes what Kalecki predicted to be some of the capitalists’ objections to full employment.

Overall, the chosen case presents some interesting applications for Kalecki’s theory but also shows that there is a myriad of other factors that play into the political aspects of full employment apart from the one he describes (Kalecki, 1943). Not only can we show how business-owners are lobbying hard in order to keep bargaining power, low, but it seems also evident how the workers within the sector are additionally constrained for socioeconomic, sectoral as well as demographic reasons.

By way of Conclusion

Do Kalecki’s theories apply to what is happening in the tourism sector in Portugal? How would he expect employers to act when faced with full employment in their sector? If tourism has what he refers to as full employment, why are conditions so precarious? Firstly, and most importantly the obvious and successful intention of employers to pressure the government on facilitating the entry of more immigrants thereby increasing the labor supply, could be interpreted as corroborating Kalecki’s prediction. However, the scope of this essay does not allow for conclusive research and provide definitive answers to these questions. That would require significant quantitative studies to assert the relative influence of each factor. Another possible direction for future research could consist of both a closer qualitative analysis of the socio-political intricacies within the sector, as well as a larger scale look at the influence of neoliberal doctrine on Portuguese politics. We are nevertheless able to point out several factors that, although not individually decisive, exert a significant influence over the bargaining power of workers in this sector. These are the industries' efforts to get more workers and expand the pool of possible employees, the level of monopolization, the low levels of organized labor, and the demographic makeup, which is adversely affected by segmentation. This case illustrates how capitalist ethics and the doctrine of 'sound finance’ can be used to serve the interests of business leaders and oppose government intervention, even when it would be in the best interests of workers and the broader economy to increase employment and raise wages. Both Kalecki and Mattei argue that these concepts, which are often presented as fundamental ethical principles, serve the purpose of business leaders opposing government intervention. The underlying motivation behind this opposition is the desire to maintain a certain level of unemployment to suppress wages and labor costs. Rather than addressing the problem by raising wages, business owners in the tourism sector have instead lobbied for new legislation that would allow them to recruit cheap labor from outside the EU and maintain unemployment levels.

In this essay, we have explored the implications of Kalecki's theory on the political aspects of full employment, using the case of the Portuguese tourism sector. While the real solution to the labor shortages in this sector would be to raise wages, business owners' preference unsurprisingly tips the scale against the favor of workers. Following Kalecki, we would like to see full employment increase wages over time, but at this moment, there seems to be little hope for such developments. As it turns out the political aspects of full employment, while very insightful, are more multifaceted than one might expect at first glance. It is harder to see a way for workers to gain leverage than it is to suppress them.

Bibliography

AHETA-Associação de Hotéis e Empreendimentos Turísticos do Algarve. (2022).

Baccaro, L., & Pontusson, J. (2016). Rethinking comparative political economy: the growth model perspective. Politics & Society, 44(2), 175-207.

Blanchard, O., & Fischer, S. (1989). Lectures on macroeconomics. MIT Press.

Evans, P., & Sewell, W. H. (2013). The neoliberal era: Ideology, policy, and social effects. Social resilience in the neoliberal era, 35-68.

Ferreira, M. (2019). Portugal's Tourism Industry Struggles to Find Workers. The New York Times. Forder, J. (2014). Macroeconomics and the Phillips curve myth. OUP Oxford.

Henley, A. (1988). Political aspects of full employment: A reassessment of kalecki. The Political Quarterly, 59(4), 437-450.

HRPortugal (2022). Less jobs and more qualifications. Study brings impacts of technology in the tourism sector. Tanja Reis. 2.1. 2022

Kalecki, M. (1943). Political Aspects of Full Employment. Political Quarterly, 14(4). 322-331.

Kalecki, M. (1971). Selected Essays on the Dynamics of the Capitalist Economy 1933-1970. Cam bridge University Press.

Lei n.º 23/2007. Article 88.

Mattei, C. E. (2022). The capital order: How economists invented austerity and paved the way to fascism. University of Chicago Press.

SSTCSP (2022). Marques, R. Secretary of State for Tourism, Commerce and Services.

Marques, P. (2015). Young people and labor market segmentation in Europe: an institutionalist perspective.

Marx, K. (1887). Capital: a Criticism on Political Economy. Today: monthly magazine of scientific socialism, (45), 57-61.

SchengenVisa. (2022). Airports in Portugal Have Welcomed Over 24.5 Million Passengers in the First Half of 2022. August 17, 2022.

Statista (2021). Total contribution of travel and tourism to the gross domestic product in Portugal from 2019 to 2021(in billion U.S. dollars). Travel, Tourism & Hospitality.

Randstat, (2021). temporary work in Portugal has an increase of 45%. 21.9.2021. ThePortugalNews, (2022). Portugal creates new work visa for foreigners. 15.6.2022.