Question

1. Various governments have recently been considering putting limitations on top corporate executive pay and/or taxing corporate executive bonuses very highly (for example, at a 70 percent tax rate)What are the implications of this on the market for top executive talent?

2. The United States is virtually the only country that permits employment - at -will. This means that other countries employees may terminate for cause only. What kind of implications might this have on companies operating in the United States and abroad?

3. President Barack Obama recently issued an executive order granting nearly five million undocumented immigrants work authorizations. What effects do you think this will have on the workplace in the United States? What global effects might this have?

4. The recent global economic downturn has caused many companies to cut back r consider cutting back their training and development budgets. What might the implications of such actions be, both in the short term and the long term?

Answer 1

The recent global economic downturn has caused many companies to cut back r consider cutting back their training and development budgets. What might the implications of such actions be, both in the short term and the long term?

Economic recessions are often portrayed as short-term events. However, as a substantial body of economic literature shows, the consequences of high unemployment, falling incomes, and reduced economic activity can have lasting consequences.

Findings include:

• Educational achievement: Unemployment and income losses can reduce educational achievement by threatening early childhood nutrition; reducing families’ abilities to provide a supportive learning environment (including adequate health care, summer activities, and stable housing); and by forcing a delay or abandonment of college plans.
• Opportunity: Recession-induced job and income losses can have lasting consequences on individuals and families. The increase in poverty that will occur as a result of the recession, for example, will have lasting consequences for kids, and will impose long-lasting costs on the economy.
• Private investment: Total non-residential investment is down by 20% from peak levels through the second quarter of 2009. The reduction in investment will lead to reduced production capacity for years to come. Furthermore, since technology is often embedded in new capital equipment, the investment slowdown can also be expected to reduce the adoption of new innovations.
• Entrepreneurial activity and business formation: New and small businesses are often at the forefront of technological advancement. With the credit crunch and the reduction in consumer demand, small businesses are seeing a double squeeze. For example, in 2008, 43,500 businesses filed for bankruptcy, up from 28,300 businesses in 2007 and more than double the 19,700 filings in 2006. Only 21 active firms had an initial public offering in 2008, down from an average of 163 in the four years prior.

Long-run impacts:
The traditional analysis of fiscal stimulus typically looks at the short-run impact of fiscal policy on GDP and job creation in the near term. However, economists have long recognized that short-run economic conditions can have lasting impacts. For example, job loss and falling incomes can force families to delay or forgo a college education for their children. Frozen credit markets and depressed consumer spending can stop the creation of otherwise vibrant small businesses. Larger companies may delay or reduce spending on R&D.

In each of these cases, an economic recession can lead to “scarring”—that is, long-lasting damage to individuals’ economic situations and the economy more broadly. The following sections detail some of what is known about how recessions can lead to long-term damage.

1. Economic damage
   • Recessions result in higher unemployment, lower wages and incomes, and lost opportunities more generally. Education, private capital investments, and economic opportunity are all likely to suffer in the current downturn, and the effects will be long-lived. While economies often see rapid growth during recovery periods (as unused capacity is returned to work), the drag due to the long-term damage will still prevent the recovery from reaching its full potential.
2. Education
   • As noted by many researchers, education—or “human capital”—plays a critical role in driving economic growth. As such, factors that lead to fewer years of educational attainment for the nation’s youth will have substantial consequences for years to come.
   • Recessions can impact educational achievement in a number of ways. First, a substantial body of literature addresses the importance of early childhood education. Because education at this level (either pre-k or even earlier) is primarily driven by parental options and funding, factors that reduce families’ resources will impact the level and quality of education available to their children.
3. Opportunity
   • There can be no doubt that recessions and high levels of unemployment lead to reduced economic opportunity for individuals and families. Job loss, reductions in incomes, and increases in poverty all result in losses to individuals and the broader economy.
   • To take just one example of lost opportunity, recent research has found that college graduates entering into the workforce during a recession will earn less than those entering in non-recessionary environments. Surprisingly, the findings also suggest that the income loss is not temporary: lifetime earnings and occupational paths are affected as well. According to Kahn (2009) “taken as a whole, the results suggest that the labor market consequences of graduating from college in a bad economy are large, negative, and persistent.” She finds an initial wage loss of 6% to 7% for each 1 percentage-point increase in the unemployment rate, and even after 15 years, the wage loss is still 2.5%.
   • Non-college graduates are likely to fare worse. While unemployment in the most recent recession has increased for all groups, those with less education and those with lower incomes face much higher rates than others.
4. Job loss
   • In the current recession, the unemployment rate has increased from 4.9% in December 2007 to 9.7% in August this year. There are currently about 15 million people who are unemployed—twice the number as at the start of the recession—with roughly 1 in 6 workers un- or underemployed. About 5 million workers have been unemployed for more than six months, and these long-term unemployed are the highest percentage of the total since 1948.
   • Loosing one’s job obviously creates problems for most individuals and families. The income loss can persist for years, even after a new job is taken (often at a lower salary).
   • Although the literature on the impact of job loss is too extensive to detail here, it is worth noting the evidence presented by Farber (2005). Using results from the Displaced Workers Survey through 2003, Farber finds that a job separation is costly: “In the most recent period (2001-03), about 35% of job losers are not employed at the subsequent survey date; about 13% re-employed full-time job losers are holding part-time jobs; full-time job losers who find new full-time jobs earn about 13% less on average on their new jobs than on the lost job…”
   • The impact of job loss goes well beyond income and earnings, and can impact one’s mental health (see Murphy and Athanasou (1999) for a review of 16 prior studies). It is also important to note that how one fares in a recession depends on a variety of factors. For example, older workers tend to be over-represented among the long-term unemployed when compared with other age groups.
5. Poverty and wealth
   • Simply put, poverty is not good for the economy. When children grow up in poverty, they are more likely, later in life, to have low earnings, commit crimes, and have poor health. Holtzer et al. (2007) estimate the cumulative costs to the economy of childhood poverty to be about $500 billion per year, or about 4% of GDP. There is significant evidence that poverty has lasting consequences for kids, including educational achievement, cognitive development, and emotional and behavioral outcomes. As noted above, family income can be expected to impact educational attainment in various ways, but falling incomes and higher poverty levels also impact adults’ opportunities as well.
   • Wealth also shapes economic opportunities, providing a lifeline when times are tough (such as a recession) and can finance additional education, retraining, or the startup costs of a new business. Unfortunately, a large share of the country has little in the way of wealth: in 2004 approximately 30% of households had a net worth of less than $12,000 (Mishel et al. 2009). This problem is even more severe for certain populations: the median financial wealth for blacks—which includes liquid and semi-liquid assets such as mutual funds, trusts, and bank account holdings—was just $300 in 2004.
6. Economic mobility
   • As noted above, inter-generational mobility—or the lack thereof—can lead to persistent impacts of recessions.
   • Poorer families can lead to less opportunity and worse economic outcomes for their children through a variety of mechanisms—be it through nutrition, educational attainment, or access to wealth. A recession, therefore, should not be thought as a one-time event that stresses individuals and families for a couple of years. Rather, economic downturns will impact the future prospects of all family members, including children, and will have consequences for years to come.
   • A range of findings suggest that economic outcomes— especially one’s position in the income and wealth distribution—are often carried over from one to the next (Solon 1992; Hertz 2006). More directly related to job loss, Oreopoulos et al. (2005) looks at labor market earnings of children whose fathers experienced a job loss. Not only did the job loss lead to a persistent loss in family income, but the next generation also had earnings 9% lower than similar children whose father did not experience unemployment.
7. Private investment
   • Perhaps the most obvious areas in which recessions can slow economic growth is in those of investments and R&D. Economists have long recognized the central role of investment and technology as key contributors to economic growth.
   • Recessions can and do lead to decreases in investment spending and the adoption of new technologies. This is a result of at least four factors. First, an economic downturn will lead to a drop in demand for firms’ products as customers’ incomes decline, thus lowering the return to investments. Second, limited access to credit will limit firms’ ability to invest. Third, recessions are periods of increased uncertainty that may lead firms to retrench toward “core” products and production techniques, and therefore they may be less likely to experiment with new products and techniques. Finally, we must also consider the interaction between human and physical capital. Technology is often embedded in new physical equipment: as production and employment is reduced, there is less purchasing of newer equipment. As a result, workers are less able to utilize their skills, and there is less need to “up-skill” current employees or hire additional employees with new skills.