David Gordon: It's a pleasure for me to be here. I mostly work on the United States, though I also do some comparative work among the advanced countries. I shall say from the beginning that I know essentially nothing about the economies from which I gather most of you come, so I will not dare to say anything about what would be appropriate economic policies in your respective situations. I do want to try in general to sketch an argument which it would appear to me is often missing from discussion of economic policy in Central and eastern Europe and the former Soviet Union. Most American economists, to my knowledge, who have gone to your countries, to Russia, have strongly urged the advisability, the preferability, of essentially a free-market, laissez faire economy. As I'm sure you've heard some people say, such an economy doesn't exist in the western world, and it's interesting that American economists and English economists and other western economists have argued so strongly for a pure free-market economy when there are so few examples of such a completely unregulated market economy in the countries from which they're originating. Because I don't know your economies, I can't make arguments about what would make sense for your economies, so what I thought I would do is give an example of a critical area of the economy in the advanced countries. I'll start with some problems which exist in the United States, and then try to present the structure of an argument for the importance of government regulation of firms and the labor market in affecting issues like wage growth and productivity growth. In general, the scope of my argument will be that among western advanced countries, the United States is much less regulated, much more of a laissez-faire economy than most European economies and Japan, and we suffer for that. We are much worse off as a result of that lack of regulation. Now, I don't know what your expectations are, but to many people in Europe, the US economy is regarded as a model, and so to the extent that any of you may think that the US economy represents the kind of model that ought to be emulated, I want to challenge that very strongly, at least in the area that I will be talking about.

I will talk for about forty minutes or so, because I'm not going to be talking about all of economic policy, I just want to focus on one case, and if there are other issues of economic policy that you also want to talk about, then of course I would like to leave room for that as well. Also because I may use some terms that may not be familiar to you, if you have relatively little background in issues of economics and economic policy, please feel free to interrupt me if you need clarification of some terms or some points I'm making, but otherwise we'll try to save the rest of the session for discussion, okay?

I want to talk about how firms produce their labor relations and their labor markets. And I want to focus that discussion on a single critical index of economic performance for national economies. And that index is productivity growth. Labor productivity, as I think you know, means the amount of output that can be produced per hour of workers' labor hired by a firm. When we speak about labor productivity for a national economy, of course, then we're speaking on average of how much output per hour can be generated in various economies. Now, it's very hard to measure labor productivity, there are lots of difficult issues of measurement, and it's very difficult, therefore, to compare levels of labor productivity across the advanced countries. It's not so difficult to measure the critical index that most people rely on for assessing the viability of economies in the area of labor markets and production, and that's the rate of growth of productivity. If you have the level of output per hour, and then you look at how that changes from year to year, you get a measure of how much more productive an economy is becoming over time. And the reason that I choose this example is that it is absolutely essential for a country's economic future that it aspire to a relatively rapid rate of productivity growth, for all kinds of reasons. If productivity growth is relatively more rapid, it creates more room for relatively more rapid wage growth. Wage growth is essential for people's standards of living. If productivity growth is very slow, and wage growth is very rapid, then that immediately puts a squeeze on firms, it puts a squeeze on firms' profits, it puts a squeeze on countries' competitiveness, and that can't be sustained for very long.

Secondly, we don't always have to take the benefits of rapid productivity growth in the form of rapid wages. We could also, depending on the situation, choose to take advantage of rapid productivity growth by working less, by enjoying more leisure time. Productivity growth creates the possibility of keeping standards of living more or less constant and reducing the amount of time you need to work in order to produce that output, to enjoy more leisure. IN the advanced countries, in the years after World WarII, the amount of hours that people worked per year declined very rapidly, and people enjoyed that, it meant that people had more time for leisure.

Third, if productivity growth increases rapidly enough, it makes people in the future more productive. It creates space for more investment, it means that over time, if you sustain these rapid rates of growth of productivity over a long period, that future generations will be able to enjoy either a higher standard of living than we have been enjoying, or more leisure time, or some combination of both.

Finally, if you're concerned about competitiveness, which is certainly a concern that many of your economies have been facing and will be facing, that the United States economy is facing, how competitive an economy is in the global economy, productivity is absolutely central. Where you have flexible exchange rates--that is, where people are free to buy and sell a country's currency at whatever rate the market will bear--one of the key relationships that affects a country's competitiveness over time will be what's called unit labor costs. Unit labor costs are the costs of producing a unit of output. And they're basically equal to the relationship between wages and productivity. If productivity stays flat, and wages go up, then unit labor costs go up, and compared to other countries, an individual economy may become less productive. Or, if wages stay relatively flat and productivity growth goes up, unit labor costs will go down and a country may become relatively more competitive, and expand its exports, reduce its imports, enjoy a more favorable balance of payments, etc. An example of how important productivity growth may be to a country's competitiveness involves the United States. As I think you probably know, since the early 1970's the United States economy has become less competitive in global markets than it used to be. And much of that loss of competitiveness had not been with low-wage economies in the developing world, it's been with advanced economies such as Japan and Germany. Now at first blush, some people are surprised by that, when they look at the data for the United States, because our wage growth in the United States has been the slowest of any of the advanced countries over that whole period. And if it were only wages that determine competitiveness, which is the way some people sometimes talk about it, then we ought to have been doing very very well indeed, but we haven't been. And the reason has been that our productivity growth has been the slowest among all the advanced countries, so slow relative to that and other countries that we've lost a competitive share of international markets.

So productivity growth is absolutely central. What influences differences in productivity growth across countries? The United States, since the early 1970's, consistently has suffered from essentially the slowest rates of growth of productivity of any of the largest of the advanced countries. Now why would that be? What I want to argue is that one of the most important reasons, not the only reason but one of the most important reasons, is that compared to almost all of the other advanced economies, as many people use these phrases in this discussion, the United States travels the low road in organizing production. Firms try to increase their profits by driving down labor costs, by making quick and dirty use of their workers, not by rewarding workers with wage growth, by rewarding workers with training, by rewarding workers with job security, but tossing workers out the window like pieces of used tissue. By contrast, many other countries travel what is called in this discussion the high road. They reward workers with more rapid wage growth, they provide workers with much more substantial job security--employment security: not just the particular job you're working in, but the possibility of having a job. They provide workers with much more training and the opportunity for improving their skills on the job, and they provide workers with much more of a voice in the firm on how production will be organized, on what kinds of investment decisions will be made, and so on and so forth.

Some of the comparisons I will mention will be not only for the United States as against other advanced countries, but for groups of advanced countries that most people agree feature these two different kinds of approaches to managing production. I'll call them the conflictual economies, or the low road economies, and by contrast the cooperative economies, or the high road economies. And some of the comparisons I will make will be between groups of advanced economies organized under those two headings, and just so we can keep track of what those groups are, let me put those basic groups on the board.

This does not take all of the advanced economies and put them in these two groups, because some economies, such as France and Italy and Denmark have kind of mixtures of these two systems. But most of the literature would seem to agree that the United States is the prime example of the low road or conflictual approach. The United Kingdom is another one, and Canada to some degree is the third, among the relatively larger advanced economies. And over here, although there are lots of differences among these economies, most would agree that in some senses or another Japan, Germany, Sweden, now we get to some smaller economies, Norway, and the Netherlands share these characteristics that I mentioned of relatively more cooperative, high road approaches to organizing production.

Some examples of the differences across those economies: if you look at the nearly 20-year period between the early 1970s and the early 1990s or the end of the 1980s, the rates of productivity growth in the cooperative economies, these five, were almost twice as rapid as in the conflictual models. The rates of wage growth in the cooperative economies were much more than twice as rapid as in the conflictual economies. Measures of investment performance, how much of an economy's resources an economy was devoting to building up for the future, suggest that the cooperative economies were devoting roughly fifty percent more of their resources to investing for the future than the conflictual economies. Some indexes that people tend to look at more frequently, not necessarily the most important, are inflation and unemployment. Inflation rates in the cooperative economies were nearly half inflation rates in the conflictual economies over this same period. Unemployment rates in the cooperative economies were about 60% unemployment rates in the conflictual economies.

Many people have said that this situation is changing. A common perception is that that's an old story, I've just told you an old story, and that recently the United States is doing great, it's robust, it's alive, it's coming alive, and that many of these European economies, perhaps even Japan, have been suffering from inflexibility, from much too rigid ways of organizing their economies. And the common measure that's used to highlight this more recent comparison involves unemployment. It's frequently said that the European economies may have done much better than the US in the 60s and 70s, but since the mid 1980s and into the 1990s, unemployment rates have soared in Europe and have stayed relatively low in the United States. but that's wrong. And it's wrong because it treats Europe as a whole, and doesn't recognize distinctions among kinds of economies. In this listing, the UK is just as much a member of Europe as is Germany and Sweden. And mixing them together may be useful for certain purposes, for example the European community has to keep track of how all of them are doing, but for the purposes of comparing kinds of economies it doesn't make sense. And in the 1990s, if you look at unemployment rates, the unemployment rates in the cooperative economies remain about sixty percent of the unemployment rates in the conflictual economies. Even in spite of very high unemployment rates in other European economies. In 1991, the OECD, the Organization for Economic Cooperation and Development, which provides a very useful function of analyzing and providing data on the advanced economies, provided a comparison of unemployment rates across its member countries that tried to control for different ways of measuring unemployment in different countries, so that it gave kind of comparable or standardized unemployment rates, and it provided those data for 20 countries. These five on the right hand side, from lowest to highest, ranked first, second, third, fifth and seventh lowest in unemployment rates among all of the OECD countries. It was the other countries that had high unemployment rates, but not these.

So, what I first suggested was that there are different approaches to organizing and managing production that influence among other things productivity growth, and if we compare different models, let's say conflictual and cooperative models, I've only sketched very barely the differences, we in the United States appear to pay a very substantial price for the kind of approach to managing labor relations which is characteristic of the United States. And in particular, working people in the United States pay an extraordinarily high price, because it is working people in the United States, let's say the bottom 80% of the income distribution, who have suffered a 10% decline in real hourly wages over the last twenty years, that have experienced contraction or erosion of their benefits such as health insurance, are more likely now than twenty years ago not to have health insurance, that are more likely to have lost any provisions of job security that they used to have. It hasn't been fun to be one of the bottom 80% or so of working people and their households in the United States over the past twenty years. It's not been fun at all.

Okay, this is a first introduction. Now the question is, for our purposes here, what is the role of public policy in influencing these differences? What is the role of public policy in constructing an environment such that we may find that across the advanced countries we see some of these characteristic kinds of differences. Now I suspect that you know the basic, if you know this expression in English, the basic punch line, the final line of the story. And that is that public policy in the United States and in the United Kingdom, not so much in Canada, features much less regulation of how firms organize production and much less regulation of labor markets. And the concluding, substantial argument that I want to make is that it is that difference, it is the relatively low degree of government regulation of production and labor markets in countries like the United States, that account for a lot of our disadvantages, and a lot of the price that working people in the United States pay for those disadvantages.

Let me start with a very simple example--the minimum wage. I assume you all know what the idea of a minimum wage is. If you had a completely unregulated labor market, standard economic theory would tell us that the wage that would be earned by various workers in various segments of that labor market would be determined by the balance between supply and demand in the labor market. If lots and lots of workers came from Mexico into the United States, and thus increased the supply of workers in the United States, if nothing else changed than wages would presumably drop in the United States. That's the idea of an unregulated labor market determining wages. Now all of the advanced countries feature minimum wage legislation. somewhere in our histories, we acquired this strange idea that the government ought to insure that people would never be paid wages which were ridiculously low, which in one sense or another were way too low for people to be able to support themselves at a very modest standard of living. Mostly, minimum wage laws date from the second half of the nineteenth century, though in some countries like the United States they really come much later than that.

Now, the minimum wage constitutes a direct government intervention in the operations of the labor market. It says, I don't care what the balance of supply and demand is; you, a firm, may not pay a wage lower than, in the United States now it's $4 and 25 cents an hour, you may not pay a wage lower than that to all of the workers who are covered by this legislation. And I don't care whether there are lots of workers out there who might be willing, because of their circumstances, to offer their services for less than $4.25 per hour. We're not going to let you do that.

Now, the pure kind of Adam Smith, Milton Friedman, dare I say Jeffrey Sachs view of laissez faire, unregulated, market capitalism would argue that that kind of government intervention is a bad idea, that you ought to let the market do what the market does. But in fact, to put the argument somewhat simply, not only does the minimum wage provide some protection for working people, it also tends, if you continue to increase the minimum wage over time with respect to the movement of prices or with respect to the movement of the average wage, it also tends to push firms to make more effective use of their labor resources. To speak in fairly blunt terms, if I'm an entrepreneur, and there are lots of workers available outside my factory gates, and I can pay them whatever I want, it's very tempting to pay them as little as I possibly can. And if there's still workers available at that very low wage, then I'll make use of those low-wage workers. And I won't economize on them, I won't teach them skills, I won't invest in machines and equipment to make them more productive, not because I'm a bad person but because there's no economic incentive for me to do so. If the minimum wage continues to rise along with the growth of the economy, it says to firms, make good use of your workers, make them more productive; pay for the higher minimum wage that we're forcing you to pay by investing in machines and equipment, investing in training the workers, so that they will become more productive and they will earn the higher wage your earning. In the United States, beginning in about 1980 but essentially with the much greater control over economic policy which right-wing political forces gained in the United States, not just with the arrival of Ronald Reagan in the White House in 1981, somewhat before that, let's say since the early 1980's, that idea of using the minimum wage as something that would continually increase over time in real terms was thrown out the window, just thrown out the window, abandoned; so between 1980 and 1989, the minimum wage stayed flat in nominal, legislated terms, but its real value, controlling for the rate of inflation, declined by 25% in the United States between 1980 and 1989. Which meant that more and more firms were given the temptation to do whatever they wanted with these low-wage workers, relatively inexpensive workers, that they could hire. And it meant that they had less incentive to invest, less incentive to try to improve the productivity of their workers, and that contributed both to declining wages of US workers, and to the continuing stagnation of productivity growth in the United States. So that's an example. The minimum wage now in the United States--it's hard to compare across countries, cause there's different scope of coverage from one country to the next--but probably it's fair to say that if you compare the minimum wage in the United States with the minimum wage in the European countries on that list, it's only something like 60% as high in the United States as in those other European economies; and they're doing much better. Now, if Adam Smith, Milton Friedman and Jeffrey Sachs were right, at least in this one respect, the United States ought to be doing better, not worse. But the converse is true, the opposite is true.

One of the reasons in the United States that there has been so much opposition to continuing to increase the minimum wage, the main reason there's been so much opposition, is that businesspeople in the United States enjoy traveling the low road and prefer to pay their workers as little as possible. But one other reason for the erosion of the real value of the minimum wage in the United States has been that people are afraid that if you increase the minimum wage, some workers will be thrown out of work. This is the common response of the Milton Friedmans and the Jeffrey Sachs, the free-market view. If the wage goes up, it should be, according to textbook free market economics, that labor demand will go down. Now, there's been some new and very provocative work by some of the best labor economists in the United States, for example a guy named David Card at Princeton University in New Jersey, nearby, which has provided very striking evidence, both in the United States and some other countries, that there are not these employment displacing effects when the minimum wage goes up. We increased the minimum wage in the United States a bit between (EM: can you say for the record what's the minimum wage now? DG: the minimum wage now, again, is 4 dollars and 25 cents an hour). That happened in the period between 1989 and 1991; it had been 3 dollars and 35 cents an hour for this whole period in the 1980s. Between 1989 and 1991, it increased in two phases, from 3.35 an hour to 4.25 an hour. Now the textbooks would have led us to expect that, everything else held constant, there should have been a substantial increase in unemployment, especially among lower-skilled workers that would be in those ranges that would be affected by the minimum wage. There wasn't, as far as we can tell. And Card and some of his colleagues have published a book, I guess it came out early this year or maybe late last year, that presents very striking evidence that there aren't these effects. Now, why aren't there those effects when the textbooks tell us there should be? One reason is that firms have always exercised some discretion over the wage that they pay their workers. It's very uncommon that firms will let the wage be set in the market out there, and then they'll pay whatever the going wage is in the market. They'll often pay a wage higher than what is the going wage in the market, in order to provide encouragement to their workers to stay on the job longer, to learn some skills, and so on and so forth. So in that sense, the textbook models are wrong. And the second reason that we think probably there aren't these employment displacing effects is that firms that face an increase in the minimum wage probably try to make better use of their workers and probably don't find much increase in their labor costs, and therefore they don't need to increase their price and therefore they don't necessarily need to suffer a decrease in labor demand. Now, they're complicated issues, and there's lots of argument going on right now; this new book by Card and his colleague has been very controversial, and you could bring in a number of other economists to talk to you about that issue, and they would get pretty heated in discussing some of the issues. But the burden of proof has shifted; the burden of proof now suggests that you would have to provide strong new evidence that there would be these employment displacing effects, not as it used to be that you'd have to prove that there wouldn't be those effects. So I wanted to be sure to mention that final set of considerations about the minimum wage.

What other kinds of regulations of production and the labor market may help explain some of the clear differences between conflictual and cooperative economies? Well, one thing, and something that would certainly be of relevance, I assume, to many of your economies, is that government regulations make it much harder for workers in the United States to form labor unions than in most of the other advanced countries. In many advanced countries, if a majority of workers sign a Card expressing their interest in or desire to be represented by a labor union, a labor union is formed, or there is an election within two weeks. In the United States, when a majority of workers sign a card indicating their preference or desire to form a labor union, that begins a tortuous, long process of conflict between the firm and those workers and the union which is trying to organize them over who will be represented, where the election will take place, whether the union can have access to workers with providing information for them on the job, and on and on and on. And elections are sometimes not held until a year and a half or so after this initial indication of workers' preference to form a union. And firms have a considerable advantage over unions, because they have unregulated access to workers during working time and can feed them whatever information they want about unions, whereas the unions can only speak to workers outside of the working time, outside of the factory or the office. And then even if the election is held, and the workers win the election, the company can simply stall and refuse to bargain in good faith, and roughly a third of workers who win elections never get a union contract; the companies just stall. And regulation by the federal government, which should supervise those situations, is so weak that those workers just twist in the wind and never end up satisfying their wishes to be represented by unions and to get a contract.

So many of us in this country who favor both more substantial and different kinds of government regulation of production and labor markets argue strongly for what we call labor law reform, that would dramatically reduce the obstacles that workers face in forming unions. Roughly one third of workers in the United States who are not now members of unions say that they would like to belong to unions. And this is in a climate which is very hostile to unions, and still a third say this. That amounts to close to 40 million workers in the United States, 35 million workers, who are not now members of unions who say they would like . . .how come they don't get to satisfy . . . This is a democratic country, right? It's supposedly one of our great strengths. But workers don't get to satisfy their basic desire to belong to a union. Many of us urge some very simple changes in labor law which would help satisfy democratically those desires of workers. For example, something called automatic certification which does exist in some European countries and some provinces in Canada. When 55 percent of workers in a given plant or office sign cards indicating that they want to be members of unions, they form a union; forget about the election part, because all that does is drag it out, at least historically that's been the casein the United States. Now, why do I care so much about unions? Why does this figure in this discussion? There is a lot of evidence for the advanced countries that, holding everything else constant, which is sometimes hard to do, unions contribute not just to higher wages for workers, but also to higher workers productivity. Why? Well, one of the main reasons is that they contribute to more cooperative workplaces in which workers feel they have a stake; they feel that what happens in the workplace really matters to them. The analytic language that's often used to underscore that effect is that, in places where workers are members of unions, they have a voice. In economics and political science there is often this contrast between the exit option and the voice option. In institutions, people have often two options; either if you don't like it, you scram, you exit, you leave the institution, or you voice your discontent and try to change things within the institution. In the United States, mostly workers just have the exit option, they don't have much of a voice option. In these cooperative economies, workers have a substantial voice option. With a voice option, it appears to be the case that workers can improve productivity in the plant. Workers are the ones who know best how to make things, how to organize production, how to remedy flaws in quality of goods produced--give them a voice; and it makes a difference.

Last example of policies which regulate production in the labor market in a way which we think would be advantageous. Providing workers with more employment security by making it harder for firms simply to dismiss a worker, to fire a worker. In the United States there are virtually no public laws which in any way impede a firm's freedom to dismiss a worker when the firm wants to. There are no provisions, whereas in most other advanced economies, and certainly in most of these cooperative economies, there are. In the other economies, there are usually provisions for advanced notification if a firm intends to close down a plant. You know, that you have to notify workers up to six months in advance, so that workers can make provisions, begin to look for other work. That's usually coupled with some kind of severance pay--severance pay means pay that you give a worker if you're going to dismiss them. It creates a disincentive for firms to fire their workers, and obviously also it provides some cushion for workers if they're going to be laid off to give them some time to look for another job. Now one of the sharpest contrasts, as I've said, between the United States and these other cooperative economies is that in the United States there are no such provisions. Why does this matter so much?

Again, it has to do with voice. If I'm a worker in a plant, and I know that I have a substantial amount of employment security--I don't need to know that I'm guaranteed this particular job, in fact that's not a very good way to go about it--but as long as I know that I'm guaranteed some kind of job in this enterprise, and if I also know that my wages may go up over time as long as productivity goes up over time, then I care a lot about trying to contribute to rising productivity over time. But, if I'm a worker who no matter how hard I work could be thrown out the factory gate tomorrow? What incentive is there?

[cut off by tape] . . . There is severance, there are limits on what kinds of workers you can dismiss in what kinds of situations. Adam Smith, Milton Friedman and I suppose Jeffrey Sachs probably wouldn't favor those regulations, but they seem to make a big difference. And we in the United States suffer from the lack of such regulations. Obviously workers suffer, and the main argument that I'm trying to suggest to you is that all of us in the United States suffer from the lack of those kinds of regulations because our economy performs less well than it could if we had some of those kinds of regulations.

So I'll stop there. I stress again that this is one example of the potential effectiveness of regulation of the economy. I'm not saying that any kind of regulation is equally good. Obviously there are differences. And I'm not saying that we in the United States should have the state run everything. But I am saying there are approaches to regulation which have been followed in a variety of advanced economies that seem to have significant appeal. And I'd be delighted to talk either about the area that I've concentrated on, or to the extent that I can, about other areas as well.

Elzbieta Matynia: Thank you very much. I think what we will do is, we will have a time for questions now, and at some point I thought we will use the opportunity that we have Jerzy here to tell us about where the new economies fit in, and how do the things David discussed, how do governments are dealing with those regulations, how are they addressing the needs vis a vis regulations. But I thought that before we will ask him to do so, and I didn't even ask him officially prior, but I thought it would be a good idea because he does know things beyond Poland, he traveled to the Czech Republic, to Hungary, to Ukraine, he knows better than most of us here the general picture in the region. But before that we will leave a space to ask some follow-up questions.

Sylvia Mihalikova, Bratislava: What do you see as a positive example from US to follow in East-Central Europe or in other countries which is positive, because you spoke only of negative?

DG: Well, it may take me a long time to think . . . Again, I'm speaking in the context of comparisons across the advanced countries, and limiting myself to the economy. I think there are some wonderful things about the United States, but very few of them have to do with the way we organize our economy compared to other advanced countries. I can't give you any examples in the area of health care and health insurance; I think the United States has a tragic and pathetically wasteful and unsympathetic system of health insurance and health coverage in the United States. Now of course some people can gain access to excellent health care in the United States. But you would have to argue that you need our kind of system of absence of health insurance for a third of the population in order for there to be access to the kind of advanced health care that we have, and I don't believe that argument. So I can't give you any examples there.

I can't give you any examples in the area of fiscal and monetary management of the economy. One of the classic examples of economic management, economic regulation of the economy is for the government to try to regulate the business cycle--if there's too much inflation, to increase the interest rate or to reduce the fiscal deficit. In many advanced economies, the central bank is much less independent of the rest of the government than it is in the United States. Our federal reserve board in the United States is very independent of the rest of the government. And one thing that results is it reduces our flexibility, because it means that we can't look for the best combination of fiscal policy, that is policy involving net government spending, and monetary policy, involving interest rates and the money supply. The federal reserve board is in such an independent and powerful position in the United States that it can trump, it can counter, it can dominate anything that the rest of the government does. I think there are other reasons why the central bank should be less independent in the United States, but for leading mainstream economists like James Tobin, one of the people in the United States who's won the Nobel Prize, this simple argument is very important; it reduces our ability to find the best kind of coordination of monetary and fiscal policy.

I don't think we have any advantages in the area of regulation of the conditions affecting business. It's often thought that US firms are in a position to be much more flexible and much more innovative than in other economies. But often, as is the case particularly in Japan, what is necessary for firms to be able to be innovative is to be able to be sure of the prospects for investment support over a long enough period so they can take the risks of developing new products or major innovations. And it's very hard for firms in the United States to take those risks. Now there is the key example in the United States of the computer software industry, which would appear to run counter to that, and I can't give you a good argument for why that's done so well in the United States in the face of these disadvantages.

EM: But David, if this is so, one can argue, and remember we have people here from those countries who especially at the turn of the century produced a large group of immigrants to America, and people from these countries are still coming here. Isn't it something about American economy that makes them feel that they can make it on an individual basis? And I'm asking about the small businesses; you were talking about the large scale economy, but this is the country, and there's of course the division on the border between what's the general, sociopolitical opportunities here, the general freedom which is kind of extended on the realm of the economy, that it's very closely connected with the chance that people can have here to put themselves on the map, so to speak, to make it, to be a one-person business, and then two people business, family business; if we look at Koreans, how good they are doing in this country, if we look at different ethnic groups even in New York who put themselves on the map of different kinds of small businesses, whatever is needed, as awful as the removal of asbestos, in which Poles are very famous; that was the need of the city, and they had expertise in it. Can you comment on this? If this is so--emigration is also for economic reasons, and this is a country which absorbed that kind of immigrants too, not just political.

DG: For the purposes of our discussion, it's probably useful to distinguish between conditions in the US economy in the period between let's say 1890 and World WarII, on the one hand, and World WarII and after on the other. It's perfectly obvious that in the former period, the United States was a wonderful rich opening for many immigrants from first Southern Europe and then Eastern Europe, or Southern and Eastern Europe almost simultaneously, to come, prosper; workers did well, and those who started business did well. But this was a period in which the United States was growing rapidly, in part because it was still expanding as a very large economy with a very large domestic market, and other economies had not developed some of the distinctive style that they've since developed. So that period is probably less relevant to our discussion than the more recent period. For the more recent period, yes, of course, some people who come to the United States do well. Some people who are IN the United States do very well too. If our social welfare function, if what we care about, is to create an opportunity for a few people to do very, very very well, than the United States is great. Chief executive officers in the United States are paid twice as much as chief executive officers--these are the head honchos in large corporations--are paid twice as much as people who run corporations in Japan and Germany. They love the United States, the United States functions very well for them. There are roughly 12% of people in the United States who are active in the labor market, who are self-employed as opposed to being wage and salary employees.

EM: Twelve percent only?

DG: Yes. What's striking about that is that since the late 1970s it's increased for the first time in 200 years. From the early 1800s to the late 1970s the share of people who were self-employed continually decreased, especially because people moved out of agriculture.

Question: How do you define self-employed?

DG: Just working for yourself instead of earning a wage or a salary from someone else who pays you that salary.

Question [Bert]: It seems to me, following on what Elzbieta said, you're overlooking a large part of our economy, because there are many people who are not by your definition self-employed, but are by no means employed in major industry where you're talking about the chief executives of major corporations.

DG: Whom do you have in mind?

?: Small businesses. I ran a business at one time that employed 40 people. I was the chief executive officer. I would by no means put myself in the class of the CEO of General Motors, but technically I wasn't self-employed, I worked for a salary. It seems to me that one of the strengths of the US economy is this very low threshold of entry into business. People set themselves up in business willy-nilly, there are virtually no regulations prohibiting someone from putting up a sign and saying I'm a business. Some people do extraordinarily well, some only make a living, but they make a living on their own without somebody telling them what to do . . .

DG: Look, I'll state my position as precisely as I can. In the United States, for the last 25 years, if you were in the top 10% of the wealth and income distribution, whatever the nature of your economic situation--head of a small business, self-employed, head of a large corporation, a professor, a doctor, a judge--if you were in the top 10% you did very well. If you were in the next 10%, you did so-so. If you were in the bottom 80% you suffered. And we can decide and debate among ourselves whether that's the set of priorities that we want embodied in an economy and the way we organize an economy. There's no question. But that kind of uneven development is relatively more likely to occur in a relatively less regulated economy, again depending on the nature and objectives of the regulation. And one of the obstacles to changing the policy in the United States that I as a political activist as well as an economist face all the time, is that there is this, I don't know if you know this phrase, there is this Horatio Alger myth in the United States which comes from a set of novels that come from, what, the early 20th century, end of the 19th century, about someone who came from a very poor situation and did very very well.

Interjection: Bill Gates.

DG: Well, Bill Gates did not come from a poor family to begin with. That may be a difference. He went to a very exclusive private school in Seattle called the Lakeside School, he and his friend Paul Allen, so they did not come out of the ghetto.

Many people in the United States believe that story. And it may be that the average person, the representative voter--this is a very profound issue of values, and norms, and how you want to structure a democracy--it may be that the average person would prefer the kind of economy in which there was a very small chance of he or she making it very big, to an economy in which there was a rather substantial chance that his or her standard of living would increase gradually over a long period of time. It would appear that the strength of the so-called Horatio Alger myth in the United States is strong enough that many people would prefer the former to the latter. On balance I don't think that that comes to anywhere near a majority of the US population. But yes, these questions are very important, because they help make clear that there is a choice between these models, such that some people--I think roughly 10% of the population--can do much better in that model than in that model. And if that is one's preference, then that would be the direction in which one would potentially move.

I did want to add one other thing about immigration. Partly because of the hold of this myth in the United States, we tend to hear more about the immigrant who make it than the ones who don't. Go to Chinatown and try to gain access to the sweatshops in Chinatown that are some of the most venal, inhospitable, tragic organizations of work that we've witnessed in the United States in the twentieth century, and it's now the end of the 20th century. The conditions are really very close to servitude, if not even slavery. This is in the United States, in the year 1995. Those immigrants are not making it. They are bound to conditions which are very very demeaning, inhospitable, and difficult to survive. So there are the two sides of the coin.

[bert?] I agree with most of your criticisms of the US economy, and I guess you have to start someplace with regulation, but it seems to me there are very fundamental issues of attitudes that underlie this, and I don't know that regulation is necessarily going to address it. I mean there's the story, you know, these are all anecdotal, but that 90% of the people in the United States consider themselves middle class, no one considers themselves in the working class. The history of unions has been checkered at best in the United States, there's some fear of unions just not being quite as hygienic . . .

DG: I said it mattered a whole lot what kinds of regulations you pursue, and the examples I was giving you don't impose anything on anybody. Yes, a minimum wage says to firms, you can't pay below a minimum wage and that should increase. But why would attitudes impede the positive prospects of increasing, stand in the way of realizing the gains that one could expect form increasing the minimum wage. But more to the point, because you raised the example in the case of unions, I'm not saying that everyone in the United States has to be a member of a union; I'm saying that there are 35-40 million workers, in a very hostile climate, who now say they would like to be members of unions, and are not. Let's address that issue. And then let's see what happens. Maybe if those 35-40 million join unions, and that invigorated the union movement, then some of the other people would begin to think that being a member of a union is a better deal than they now think it is.

I agree with you that attitudes are very important, but we have so far to travel in moving from the low road to the high road that there's lots of room for changes in policy that would not impose on people who would prefer not to be subject to those policies, that in my judgment would do lots of good.

Jerzy Thieme: I never specialized in labor economics, and it's difficult for me even to ask relevant questions, but I guess that one thing that could be observed in this country for the last 20 years or even more is restructuring of the economy and that the services play more and more of a role in this country. Your analysis about wages and productivity, as far as I understood, please correct me if I'm wrong, applied to the industrial production sector. It's difficult to apply this kind of analysis of productivity to the service sector, no?

DG: No, I disagree. We suffer our disadvantages most acutely in the services sector in the Unites States. Productivity growth in manufacturing has revived some in the United States, but it's productivity growth in the service sector, broadly speaking, which accounts for 70% of employment, in which we suffer the most severe disadvantages. And there's nothing about the arguments I made that would limit them just to goods producing sectors or to manufacturing. the question of wage incentives, the question of employment security, the issue of providing workers a voice.

EM: But how to measure the productivity, isn't it more difficult?

DG: It's more difficult, but there have been pretty careful efforts to try to control for those problems and standardize for those problems, and the comparisons hold up. You just have to allow for a wider range for error in examining service sector productivity, but there seems to be no doubt in anybody's mind that the most severe disadvantages that the US faces compared to many other advanced countries is in productivity growth in the service sector.

EM: Can you give an example of that? I mean, which areas of the economy would one have in mind in talking about the service sector?

DG: Let's say, take retail trade. Wages are among the lowest in the retail trade sector in the United States, and that means that firms have very little incentive to make more productive use of their labor.

EM: This is like people selling in stores, like salespeople? Okay.

DG: It is much more common, as I understand it, in Europe, for there to be automated checkout systems with credit card options for payment, yes that's changing in the United States. It is much more common for customers to be asked to bag their own groceries in a grocery store in Europe than in the United States. And you may say that's a disadvantage, an imposition on the customer, but my experience in Europe is that people don't mind it. I bagged my groceries in the United States. That means that productivity is higher and less workers are used, in large part because those workers earn more.

Jerzy Thieme: Second question is, you know, many people use the term Eurosclerosis. This is usually supported by some statistics, and those statistics are I guess not contradictory to the statistics you presented. I don't know anything about the numbers, but the argument usually is, that Europe for the last 20, 15 years or so created much less new jobs than the United States, and that the United States, due to the relatively low regulation level, is able to create new jobs at a scale that is radically faster and higher than Europe.

DG: Well, I tried to confront that at the beginning of my presentation. The problem with that argument about Europe is it lumps very different kinds of economies in Europe all under the same heading. If you look at the economies in Europe that best illustrate the kinds of features--and again, we're talking about principles of economic policy and principles of economic regulation--if you look at the economies that best illustrate some of those principles, in my judgment, they do not by the usual indicators used suffer form Eurosclerosis. Their unemployment rates have been lower than in the United States, whether you measure it from 1980 to 1994, from 1989 to 1994, it doesn't matter which dates you use, those five countries have average unemployment rates 60% below those three countries, and four of the five have average unemployment rates lower than the US unemployment rate during those periods. So the Eurosclerosis argument, in my judgment, has been too crudely applied. And then, of course, there's another issue, I mean, suppose it were even true, there's another question about the tradeoff between a somewhat higher percentage of people having a job at a very low wage, and a slightly lower percentage of people having a job at a substantially higher wage. And I think in terms of aggregate economic welfare, it's possible to argue that even if the Eurosclerosis argument were true, which I'm arguing is not exactly the case, it would be possible to argue that people in Europe on average were much better off still, even if there was this tradeoff on the margin. Unless you could show that the greater inflexibility, as it's called, in European economies, had other side effects like much lower productivity growth rates, and you can't show that. So I think the argument is substantially misplaced. We talked earlier about my providing some reading materials. Much of what I've talked about is based on a book I've just finished that's coming out in the spring, and I will make one chapter of that available, and in that chapter I try to confront precisely this argument because I do think it's been misapplied.

Jerzy Thieme: But one thing is the level of unemployment, which could for example the low unemployment could mean that there is overemployment and that the companies needs restructuring. And a different thing is the rate of creation of new jobs. It's not exactly the same thing, the level and the dynamics.

DG: No, I understand that. But the main thing that would make those two things different, if they were different, would be what happens with labor supply. Let's take the European case: if not so many jobs are being created, and unemployment rates don't go up so much, as is the case here, one reason for that may be that families are working fewer hours. Which has been the case in for example Germany. And one of the reasons historically why families have tended to work fewer hours is that their wages have gone up, so that they've felt they could afford not to work as much as before. The labor supply in the United States has increased very dramatically since the mid-1960s, and one of the main reasons, we think, is that wages have been declining. I don't like to focus on simple facts too much, because there are always different interpretations of those, but I'll give you an example of some very striking facts. On the top graph, real hourly take-home pay, average production non-supervisory workers hourly wages, controlling for inflation, controlling for taxes. And this is from 1948 to 1994. And pardon my graph, but it looks something like that. All of this is for the US. 1972-1979, continual decline. Total hours worked per capita in the United States, which is a measure of how much we are working to support people who need to be supported. Looks like that.

EM: This is where the Koreans working at night in the Korean vegetable stores are.

DG: No, it doesn't include the self-employed.

EM: I was trying to say that those little businesses you were talking about, the reason they were actually maintaining themselves is they were putting in longer hours.

DG: One thing that's striking about this is that one of the main things that has happened with labor supply in the United States, as has been true in lots of other countries, has been that the labor force participation rate of married women has increased very dramatically. That has been true for both these periods. So labor hours per capita declined during this period, despite the fact that more and more married women were joining the labor force from 48-66, and then those hours have been increasing since then, one reason has been that married women have been . . . So you put these things together, and they are very strongly suggestive of the idea that unemployment rates can go up, in part, because of increasing labor supply, because of declining wages. So we have to keep that connection in mind as well.

Dionyz Hochel, Bratislava: How can you interrupt the number of Mexican workers who are travelling to the US? One of the reasons why the number of these workers are increasing is the fact that they are attractive in such jobs that are not attractive to US workers.

DG: Should we reduce the number of Mexicans coming to this country? Your question presumes that we should. I don't necessarily--it's a very controversial issue in the United States. But I don't agree with the premise that we should reduce immigration of Mexicans. One reason you might think that we should, and I take it this may be what you have in mind from you question, is that the growing supply of low-wage immigrants, especially let's say Mexicans, into the United Sates is driving down wages for other. . . .The evidence suggests this is not the case. There is remarkably little evidence in serious economic studies to suggest that the increasing supply of low skilled immigrant workers in the United States since the early 1980s, say, has had any effect on average wage levels or low wage levels in the United States.

I mean, what I would do about low wage immigration to the United States is try to reverse the directions of economic policy governing Mexico, not to try to close the borders into the United States. A lot of the reason for the increasing immigration into the United States has had to do with deterioration of people's conditions in Mexico, particularly since 1983, with the collapse of the peso; and that has a lot to do with the kind of economic policies that have been imposed on Mexico by the World Bank and the International Monetary Fund. This gets us into a whole other area, and if you wanted to pursue that area, my colleague Lance Taylor is much better equipped to discuss these issues than I am. But I think those policies have been a disaster for Mexico. And if I wanted to reduce the flow of immigrants from Mexico into the United States, which I'm not sure that I want to do. I mean would we have wanted to reduce all those flows that we were talking about . . .

EM: You are talking about different kind of policy which is actually right now being decided in Washington, the southern border is going to be dramatically sealed. That's a kind of mechanical way of cutting the flow. It's going to be very very difficult very soon to come to this country. Airports are going to be much more carefully . . .

DG: Yeah, but I'm not persuaded there's much you can do about it, in the same way that I'm not sure there's much you can do to reduce the supply of drugs into this country. But in any case, the two main points are: I'm not sure we want to or need to reduce the supply; immigration on balance in the history of the United States has been a very positive force. Secondly, if I wanted to do something about it, I would try to change the kinds of economic policies that have made people's circumstances much more severe in Mexico than they were in the past.

Heshan: When you talk about a conflictual versus a cooperative model of economic organization, I get the sense that you are talking about manufacturing industries and service industries to a certain extent. But I see, and it's just a point of clarification, you talk about the next 10 percent, not the top 10 percent, not the bottom 80, but the next 10 percent, I wonder exactly where they fit in the economy. I'm thinking about white collar workers and the vast armies that have grown since the 1930s in office jobs, where for example, if you work for large corporations there is a certain degree of cooperative incentive provided to those workers through health insurance, through various other types of benefits, through guaranteed increased in salaries over the years, and lots and lots and lots of perks, and where there's a certain mentality of a caring business, you see this in Saturn, the Saturn auto manufacturing plant. My girlfriend, for example, works for Disney and gets an enormous amount of . . . DG: At what level? Heshan: Very low, she's an associate subrights manager.

DG: That's at a low level of managerial employment, not at a low level of white collar employment. The vast majority of my bottom 80% are actually white-collar workers, since such a small percentage of total employment is in manufacturing. I'm not talking, in no way, I suppose I should have clarified this from the beginning; in no way, when I was talking about labor relations in the United States or the conflictual model was I in any sense limiting it just to manufacturing, although I should know better, because often that's what people think of when they hear unions and stuff like that. No, in fact the story is much more dramatic and much more historic outside manufacturing than inside manufacturing. The vast majority of my bottom 80% are white collar workers. They're not managers; they're secretaries and typists and programmers and a vast range of occupations. If you want to limit yourself to just managers, which is a big category, something like 18% of employment in the United States in the non-farm private sector is in managerial and supervisory occupations. Now, part of what makes us very striking is that that percentage is probably about 3 times higher than Germany or Japan. We have very top-heavy corporations, this is another part of the argument in the book; you need top-heavy corporations to manage workers if you're not providing them incentives to manage themselves. So there are a lot of people in the managerial category. Yes, a very large percentage of them are in the top 20%, let's say. Some of them haven't been doing that well. Some of them have been losing job security, have been discovering that whatever job security they thought they had wasn't so secure. The recent polls have suggested that job satisfaction rates in lower and to some degree middle level management have declined sharply in the last 15 years. So some of those people, who were definitely in the top 20%, haven't been so happy. But the most important response is that we should be careful to distinguish between the much much larger white-collar category, and the small, but in the United States still very large category of managers and supervisors. Some of them have done very well, some not so well.

[andina?} there's an argument in our country that we need now possibilities to accumulate capital. That means a low level of state interference, and to strengthen private responsibility, the morality of private responsibility. So perhaps we are in a different situation than the US now, closer to the situation of the earlier USA, 19th century.

DG: Of course you're in a different situation, but the issue that I'm posing for you is whether there is anything about the US model that would provide better opportunities for private capital accumulation than the cooperative model. One of the things, for example, well, a comparison that I gave you right at the very beginning is that the rates of private capital accumulation in the cooperative countries are 50% higher than in the conflictual economies. One of the reasons for that, if you have a private sector; obviously, a central issue you face is how to make the transition from a state-dominated to private, and I can't comment on that. I have my views, I hope that you all will have a chance to read a book by a present and former colleague, Lance Taylor and Alice ? book, "The Market Meets its Match," because they make these kinds of arguments for your economies and they're in a much better position to make those. But for example, if I'm a private entrepreneur, one of the things that will give me a positive incentive and possibility for accumulating capital, investing, over the medium term is if the rate of productivity growth is fairly steady and it's above the rate of wage growth. That was true for the cooperative economies, it was not true for the conflictual economies. In the period between 1973 and 1989 for which I did most of these comparisons, in the three conflictual economies on average the rate of wage growth was slightly higher than the rate of productivity growth, even though the rate of wage growth was very low. And that's because there are no mechanisms in which the workers can participate to help regulate that difference. And so from the point of view of the private sector, if one of your principle objectives is to promote capital accumulation which I think it should be in the United States; we have too low a rate of private capital accumulation in the United States, and therefore our productivity growth rate suffers--you want a system that can help internally regulate in the private sector, without the government having to step in all the time, the relationship between productivity growth and wage growth.

Question: As in Japan?

DG: As in Japan and as in Germany and as in Sweden. I call it usually when I talk about this, a positive productivity growth dividend--enough left over from productivity growth, after you've given workers their incentives, so that there's some left for investment. And the facts tell us, on average in those countries you don't get it. So it's difficult to accumulate capital.

EM: I'd like to ask Jurek now to share both his observations about what actually is going on in those economies which you come from, but also what are your views on what's going on there, since we are presenting views here!

JT: Since I only have a few minutes, I thought about some example which could show how different are the approaches in the countries. I don't have an organized thing, but maybe I will share with you one observation. About 6 months ago I was in Uzbekistan, in Tashkent, and also the Czech minister of privatization Mr. Roman Ceska was invited. And we were asked by the Ministry of Privatization, or the state agency for national property, which is kind of the ministry for privatization, to share experience with them, with the government official, about privatization, about economic reforms, with staff of the agency. And first there was a conference, we had some presentations, there were many people from the region, from the world bank experts, Unida experts and so on. At the very end of the conference two of us were invited to see at a private meeting the minister of privatization and his deputies--Mr. Roman Ceska and myself. And what was interesting--the minister asked me first, from this conference I learned that, or maybe he started this way: we were never interested in the Polish experience because you had this shock therapy applied by Jeffrey Sachs. And then he said, but we learned from this conference that your privatization is very slow, and we want to learn from your experience. The first time we are interested in the Polish experience because it is so slow, so well-regulated. Then of course you know I met with Mr. Klaus, Mr. Ceska, Mr. Ciska, my Czech counterparts and we had always quarrels, what is the best way to do privatization, and they always made jokes, Poland is so slow, it never privatizes, and so on. But this Uzbek interest in slow privatization shows that there are three models in the region: first I would say, if it is a model, or maybe approach, is the Uzbek approach--do not touch microeconomics, don't touch macroeconomics, do nothing, do not reform, find ways to delay, to slow down. And of course the reasons are, there are many reasons, but they say that they don't want to follow the Russian experience because it was chaos, they don't want to follow the Czech experience in privatization because it was too fast and unregulated, so perhaps the Polish experience.

The Czech experience, I had many discussions with top Czech officials, we met frequently all over the region. The Czechs are very proud of their approach to privatization, and they are trying to sell their model all over the region. But they never said much about macroeconomic reforms. Microeconomic reforms were very fast and unregulated; the government philosophy was, the less regulation the better, the faster the better. There will always be time to write regulations when you need them. It doesn't make sense to write regulations, because you can't predict what will happen.

It is much less was know that on the macro level, until the middle of this year, a lot of the regulation was on a macro scale. There was no convertability of currency, and quite substantial wage regulations.

EM: Meaning a minimum wage?

JT: I don't know technically. On the one hand, they privatized the economy and didn't observe too much restrictions, layoffs, bankruptcies. If you look at the Czech economy from a bird'seye view, there is not much change on a macro level since privatization. Most managers, according to the statistics, are in the same positions as they were. What I know is from my Czech colleagues.

There is one thing which is liberal rhetoric, and one real life approach. Rhetoric is very strong. Minister Ceska was asked at one conference, what is the outcome of privatization of economy? the answer is quite logical from a liberal view: "We don't know what's going on on the level of companies. It's not the role of government to gather information on companies. We won't use taxpayers money because the information could be used to manipulate. It's for private research groups to collect information. We're not interested in funds in private hands."

In Poland, for example, there are many parties--Poland is a political mosaic. Another anecdote: I discussed with someone in parliament who's extremely laissez-faire. I was asked to lobby him on a bill I introduced. I said something like, but listen, in America" and he said "don't give me the example of this communist country." One the one hand, there's is this extreme right; on the other hand, people who blocked privatization for a long time.

In Poland in 1989-90, there were Sachs, Balcerowicz, IMF, and slow privatization until recently. I am quite familiar with one field that is usually regulated--capital markets. Here in Poland it seems to me, I believe, that Poland followed the example of the US and practically all the rules of procedure and the structures of the SEC [Securities and Exchange Commission] were implemented in Poland, resulting in tough regulation of Polish securities markets. I believe Polish capital markets are overregulated for the stage of development they're in. New Deal regulations applied to an economy, a sector of the economy that was very well developed compared with the situation in Poland. The development of capital markets in the US 60 years ago is not comparable to Poland now. Thus overregulation, I believe it's overregulation, the reason given is that the SEC is to protect small investors. But protect at the cost of making it difficult for companies to raise capital. So companies don't want to go public. There are 60 companies with disclosure, with disclosure requires a prospectus, the same level of sophistication as the US, but these are 60 out of three to five hundred (the rest shouldn't exist). Only 60 exist in this very well-regulated market. The argument against overregulation is that this country is not yet at a stage of early accumulation of capital. Too much regulation would slow down development rather than help it. The example of regulation of capital markets may not be very typical, but it's an example of where too much regulation harms rather than helps.

Another thing, where philosophy, compare the Czech and Polish philosophies. For various historical and traditional reasons, it's impossible to do anything in Poland without regulation; everything goes through the parliament. In the Czech Republic, there is a philosophically different approach. They implement, and then think about regulation. They do, then regulate.

Another country with a history and tradition is Russia, where everything is done by decree. This makes it easy and fast, but it's far from a democratic way of legislating.

EM: We've arrived at the end of our meeting. I'm sorry we can't see how the things David talked about--minimum wage, labor unions--how they're being treated in our countries. But we will send the transcript to the countries, and maybe bring back that information. Thank you very much!