Financial Crisis Impacts on Progress of Employees - Essay Example

?   Financial crisis impacts on progress of employees Chapter Two: Literature Review Introduction Financial crisis can be traced back from Brettons Woods era in (1945- 1971), the famous gold standard era in 1880-1993, the great depression mystery in 1930 which economist up to today have not arrived at a consensus on the factors that the led to the crisis, Asian financial crisis in the late 1990’s, Mexico financial crisis in the mid 1990’s, and lastly the latest global financial crisis in 2008. The latest financial crisis was the most severe, even though the costs associated with the crisis have not yet be evaluated, led to major changes in the financial landscape. Therefore, there is a need to review the underlying literature developed by various scholars on financial crisis. There have been a lot of studies conducted by various scholars since the great depression in 1930’s up to today. Literature obtained from this series of academic studies conducted by the various scholars is still relevant up to today in offering explanations on how and what were the main contributors of the various crisis. This literature has been relied upon by many academicians as well as policy makers in order to make sure that such events do occur again. Theoretical Literature There are two theories, which seem, to be more developed and various scholars have borrowed much from them. These theories are the Minsky’s crisis theory and Marxist crisis theory. Minsky’s crisis theory is named after the Hyman Minky a renowned economic professor who developed this theory. Hyman initial objective was to elucidate the domestic economy crisis. This has since changed as this theory is adopted by various expert and scholars in delineating global financial crisis. The underlying concept in his theory was the fragility observed in the financial system. He elucidates the behavior of both the financial sector and non-financial sector to engage in liabilities with a high level of risk as businesses enlarge was the major contributor to the crisis. From an international front, he argues that the interdependency of economies fundamentally leads to instability of the global financial system. He attributes the instability experienced in the global financial system to lending activities that lend debt accumulation (Davies 2010). The main theme of theories was the concern expanding economy and the emergence of “a speculative investment bubble”. Hyman argued that as the economy expanded, that is, as the economy experienced tremendous growth, thus resulting to low level of unemployment as the level of investment in the economy increases. Optimism increases and trade between debt and risk changes. As a result of the increases in optimism, there is an increase in the level of asset prices as well as increase, in speculation. The increase in asset prices in return allowed ponzi borrowers to thrive in an economy (Davies 2010). This also leads changes the attitudes that investors have toward risk thus resulting in, changes in liability portfolio. As a result of changes in risk and liability structure, the financial structure becomes fragile thus resulting into a financial crisis (Davies 2010). In doing this Hyman linked, the fragility experienced in a normal economy to the speculative investment bubble which emerges in the financial market. Minky argued that, when the corporate sector and the economy as a whole are experiencing growth, that is when the cash inflows exceeds the amount need to phase off debts there is a tendency to develop speculation (Davies 2010). When the grows up to appoint where the present assets cannot support the economy when borrowers cannot repay their loans since the cash-inflows are not enough to finance consumption and to honor debts, this degenerate into a financial crisis. When this occurs, the lenders adopt stringent credit issuance policy; such that even companies with the capability of obtaining loans are not spared; thus, this leads to the contraction of the economy. The movement of a stable economy into a fragile sate can, therefore, be articulated to development of a speculative investment bubble according the Minky’s theory of financial crisis (Davies 2010). Minsky can be termed as Keynesian economist since he advocated that there is a need for government intervention in order to stabilize the economy. Hyman argued that government needs o establish regulatory authorities that controlled the capital markets so to avoid creation on of complex financial instrument that were so much complex and the financial market was not ready for. In addition, he also postulated the government should be the “last debt resort” that is the government should always be ready and will bail out the private sector when faced with a crisis. He cited two instances in 1907 panic, and the great depression of 1930 where the federal government was not willing to intervene and this lend to very high losses (Buckley 2011). In 1980’s, there were a series of deregulation in the financial market as well as the economy as whole. Minky was opposed to this deregulation, arguing that leaving the market to stabilize alone would only lead to a situation of market failure. This was based on research Hayman conducted on the mid 70’s crisis. He argues that, had it not been for government intervention where invoked aggressive fiscal policy, the recession would have had far must severity than the ones experienced (Buckley 2011). In addition, he points out that, since the current financial market main objectives is to make a profit and also open to inventions such as techniques, financial product and strategies all aimed at making profits (Buckley 2011). Therefore, any flourishing financial activity will be certainly imitated in the market without consideration of the complexity and the risk associated with the financial inventions. This implies that, there is a need to regulate the financial sector and avoid the market from collapsing. In order to offer a better understanding of his theory, he argued that debt accumulation was the key contributor to the crisis (Toporowski 2005). Minky argued that, as fragility of the financial system increased as the debts increased, in particular level of short term debts increase thus making the liquidity of the parties concerned to decline significantly. In this scenario, the interest charged on short term debts is fund was lower than the one charged on the long-term. With lower interest rates in the short –term firms reacted by taking the advantage, thus taking short-term loans resulting in a decline, in the liquidity of the firm. In this case, he delineated debt accumulation by identifying there types of borrowers from the private sector who constituted a large proportion in debt accumulation. The three types of borrowers included ponzi borrower, speculative borrower, and hedge borrower (Toporowski 2005). A ponzi borrower is a party who borrows fund hoping that the appreciation in the prices of asset experienced when the economy is expanding will generate cash flows that will be enough to repay the debt. If the price assets begin to fall, then ponzi borrower will not be able to repay either the principal amount or the interest that the principal amount has earned (Buckley 2011). The other type of borrower that Hyman identified was the hedge borrower; a hedge borrower is a party who utilizes cash flow from a current investment to repay both the principal amount and the interest (Buckley 2011). Speculative borrowers are parties who will utilize the cash flow earned from an investment to service the debt, that is, they use the cash flows from investment to pay the interest due, and re-borrow an amount equal to the principal so as to repay the principal amount. The act of re-borrowing in order to repay the outstanding debt only decreases the liquidity of the firm, thus resulting to crisis (Buckley 2011). In reference to Minsky’s theory, financial crisis result to disinclination to fund investments. A decline in the investment spending leads to declined profits, this only worsens the situations as the party concerned will not be in a position to meet debt obligations. An increase in the level of defaults of debts results in a decrease, in the aggregate demand, thus causing the prices to decline. This implies a loss to the borrower, since the real worth of the outstanding debt increases. Minsky's has received a lot of popularity and publicity in the recent global financial crisis. With many scholars adopting this theory in a bid of explaining the events that the world experience in the 2008 global financial crisis, where the subprime mortgage bubble busted thus leading the whole world into a crisis face several limitations. The theory was not developed in the global context, but Hyman in developing Minky’s theory his point reference was a domestic economy. In addition to this, although this theory is one the most developed theory in explaining the financial crisis Hyman an outstanding economist whose contribution in the field of economic cannot be refuted, he failed to build an economic model to strengthen his theory, nevertheless this theory clearly elucidate the main contributors of a crisis. The second most advanced theory is the Marxist crisis theory; it was postulated by the great German philosopher Karl Marx. Karl Marx was a propagator of communism with strong believes that the society can only achieve development if it discarded the capitalist way of life. Marx believed that capitalism only subdivided the society into the owners of factors of production and the laborers and also that capitalism brings with itself the tools of self destruction In developing the crisis theory Marx argued that, as competition increases, there is a tendency that capitalist market will collapse, thus enterprises experience a boom cycle which would eventually bust to result into a financial crisis. In order to develop the Marx crisis theory, Marx developed some axioms which included the labor exploitation concept, and falling profits which degenerates into a crisis (Kates 2010). Even, though, some scholars are of the opinion that Marx never postulated a theory of crisis, but only issued commentaries about the economic crisis. Marx was of the opinion that crisis emerged due practice of capitalism. Marxist scholars argued that, adoption of capitalist policies has led to sporadic business cycles. They stated that, when the business is characterized by a boom that is when there is a lot of competition among the players in the market the capitalist market is headed to a collapse (Toporowski 2005). As stated above the Marxist crisis theory mainly relied on two axioms in elucidating crisis, one of the axioms was the under-consumption theory. The Marxist under-consumption theory stated that, crisis arose where the aggregate demand in an economy could not match the quantity supplied in the market by the firms (Toporowski 2005). The inadequate demand made the market fails to clear thus destabilizing the economy into a crisis. Marx was of the opinion that the value of the product should be equal to the cost of production and in this case the labor cost (wages paid to the workers in a production plant) (Toporowski 2005). Marxist argued that assuming an economy is composed of the capitalist (parties owning the factors of production) and consumers who are workers extending they labor services to the capitalist. When laborers are, paid an amount less than the value of what they produce then the workers will not have the capability of purchasing the product that they produced. These results to under-consumption, where the entire products produce are not demand, and this would in-turn results into a crisis due to overproduction ( Kates 2010).Extending this theory a step further, under-consumption inhibits establishment of investment, thus leading to high level of unemployment, since capitalist only care about making profits The concept of under-consumption which as we have observed from the above delineation, results from labor exploitation practices. Labor exploitation practices since, workers are underpaid so that the capitalist can fulfill their selfish gains. In reference, to this Marxist conclude that crisis emerged from adoption of the capitalism policies and was against such policies arguing that if states wanted to avoid crisis which were so costly then communism was the best option as illustrated in the communist manifesto which he personally wrote(Allen & Gale 2007). The second, axiom is falling rates of profit. Under capitalism, the main aim of production is to make profits, therefore, capitalist will only engages in production if the venture is profitable. Marx argued that, when capitalist engage in completion there is a tendency of profits to fall According to Marx the fall in profits originated from practices that were exploitative in nature that are aimed at increasing profits. In this case, the fall in profit should be reimbursed by the use of surplus accumulated in earlier years, and if this does not happen then this will result into panic among the capitalist and eventually a crisis (Allen & Gale 2007). Marxist crisis theory is an outstanding theory with many economists borrowing heavily from this theory in an attempt to elucidate the recent global financial crisis. I find this theory as the most underdeveloped theory of financial crisis due to the following reasons. First, Karl Marx never developed any crisis theory but only issued a commentary on the main reasons why crisis occurs. The famous Marx crisis theory is only a shallow developed theory composed of the commentaries which Marx successor put together as the Marxist crisis theory. Secondly, Marx never used any economic model in explaining the concept of crisis as he had just shifted from philosophy to start writing in the field of economics. Lastly, Marx suggestion that the capitalist states should abolish capitalism to join communism is not only unrealistic but also impossible in the twenty first century. Empirical Literature A number of studies have been conducted on impacts of financial crisis on employees, in this section we will discuss a number of the studies conducted recently. One such studies, is a report by Bispinck, Dribbusch and ?Z on impacts of economic crisis on employees contained in a WSI report of March 2010. In this report, the trio carried out a study on the impact of economic crisis on employees on three sectors employees; metal working, financial services, chemicals, commerce and hotels and catering. The trio conducted an online survey on www.lohnspiegel.de, from the month of August to December in the year 2009 (Bispinck et al 2010). As outlined in the report, the employees were supposed respond several issues that included; the economic situation of the organization they were currently engaged in, changes in employment, whether their organization was involved in staff reduction measures, and about changes in the incomes of employment. The employees were supposed respond how they would rate each of the circumstances named above which were associated with the crisis. Where the ratings ranged from worsened no change, or improvement (Bispinck et al 2010). On the first query, where the employee from the five branches were supposed to respond on the economic situation of organization in overall the employees surveyed, 38% were of the opinion that the economic situation has worsened, 44% were of the opinion that there was no change, while 18% were of the opinion that the economic situation had improved (Bispinck et al 2010).. The results were also replicated on the query about development of employees where, 41% were of the opinion that employment had significantly declined at their work place. Around 39% were of the opinion that there was no change in employment development, and 20% responded that there was an increase in employment (Bispinck et al 2010). In overall according to survey, the most hit of the five branches was the metalworking industry where around 73% of the employee who participated organizations used short time working in order to cut down on the cost of production. It was also found that from the metalworking industry that around 71% of the respondent stated that agencies had terminated their employees, while about 63% of fixed-term contract were allowed to expire with no revitalization (Bispinck et al 2010). Although the report does not issue a clear conclusion on whether financial crisis impacted negative on employee, it is evident that no matter the sector which the participants were engaged in. The impacts of the financial crisis we sever according to the responses from the respondents. This was based on the revelation that, instance where workers rights were violated increased significant and instance of employee increased significantly. This survey is a major milestone in the study of impacts of financial crisis on employees, the conclusion of the study was well drawn from the findings of the study, but this study lacked a control measure of ensuring that the participants to the survey were only employees. Therefore, the findings obtained from this might not viable since there is uncertainty that, the entire respondent who gave the responses were employees. Secondly we are going to review an issue paper prepared by the international labor office to be presented in a global discussion forum on “impact of the financial crisis on finance sector workers” in Geneva (2009). The issue paper gives a delineation of the economic situation before the financial year where 2006 act as the reference year or rather the base year. The issue paper, points out that in 2006 United States made that, by 2016, the financial sector would employ around 9.57 million workers, approximately 14.4% over the number workers employed in 2006. The financial sector had employed at a total of around 8.306 million workers; that is the banking sector 1.825 million workers, approximately 2.3 million in the insurance sector and roughly 0.816 million in commodities and securities, while around 3.422 million workers in the real-estate business. These projections never lived to become a reality due the global financial crisis (International labour office, 2009). According to the report in order reduce costs operation financial institution resulted on lying off workers, for example, the America express reduce its work force by 10 % that is 7000 employees. This was replicated in countries like United Kingdom where the financial sector lost around 194,000 jobs in October 2008in London alone (International labour office, 2009). In addition to the popular layoffs, another negative impact was an increase in redundant cost, failure of the organization to fill up vacant position and de-motivating factors were highlighted in the report to be on a rising trend (International labour office, 2009). In conclusion, the international labor issue paper proposed some policy responses that should be adopted, in an effort to reverse the trend that was experienced in the financial sector. Among the policy, responses proposed in the issues paper were the provision of unemployment benefits and establishment of job search program aimed at mitigating losses incurred by employees (International labour office, 2009). I find the issue paper very resourceful with very brilliant recommendation aimed at mitigating losses that were incurred by the employees. However, the paper failed to consider other sectors of the economy. Therefore, it is insufficient to elucidating the phenomenon of financial crisis influences to employees. In addition, to consideration of the financial sector only, its recommendations might not be applicable (beneficial) to employees in other sectors. Overview of the Literature The literature on the relationship between financial crisis and progress of employees has been hampered by lack of clear theoretical frameworks by which financial crisis influences progress of employee, and this could pin down the literature specifications on financial crisis- progress of employee relationship. Hypothesis This study aims at establishing how financial crisis impacts on the progress of employees. In this section, we shall give an outline of the null and alternative hypothesis that will be used. The null hypothesis will be stated as follows; H0: financial crisis has an impact on the progress of employees. While the alternative hypothesis in this case will be; H1; financial impact does not have any impact on the progress of employees. CHAPTER THREE: RESEARCH METHODOLOGY Introduction Research methodology or design simply refers to an outline on how the study was conducted. This will elucidate the procedures that the study will adopt. For this section, it is necessary for the research to have in-depth knowledge on the various methods and research techniques that can be used in conducting research. In this section, we will discuss the research philosophy; the techniques of research used in the study, as well as discuss the justification for adopting the techniques used and rejecting of other alternative research techniques available. In addition, the source and the method used in the data collection process, also under this section, we will consider the procedure used while conducting the study and analyzing of the information collected. Research Philosophy There are various philosophies that can be used in a research study, for example, realism, interpretive, rationalism, positivism and subjectivism. Realism philosophy argues that the concept of science exposes the realities of a community in a way that is not clear. Interpretive philosophy, on the other hand, encompasses a different approach where human experiences and beliefs are taken into consideration (Kothari 2008). Rationalism philosophy considers reality as factual and universal. Subjective philosophy believes that reality is only building in as societal context. Lastly, positivism philosophy requires an in depth understanding of all facts through the use of scientific methods, with an intention of creating a theoretical unbiased study assisted by the hypothesis of the study. In order to achieve the objective of the study, the study made use of both interpretive and positivism philosophy will be the most applicable (Kothari 2008). Research Approach and Techniques This research is mainly based on primary data where both manager and employees were interviewed; therefore, it involves both quantitative and qualitative research. The interviews were conducted through the use questionnaires, where the respondents were supposed issue response on various factors that affect the progress of employees. Such factors included; they view on the state of working conditions, changes in income, redundancy situation at their work place, employment development, personnel reduction measures, and career development opportunity. The respondent who participated in the study were drawn mainly from the following sectors, financial sector, construction and metalworking industry, Tourism, hotel and catering industry chemical industry and the commerce sector. Sources of Data and Data Collection This being a study based on the primary data which requires the research to obtain first hand information from the field it was necessary to conduct interviews and issue questionnaires. In order to collect the necessary data that was used in this study surveys were conducted, that is, questionnaires and interviews to both managers and employees were conducted. A number of 100 managers and employees drawn from the five sectors of the economy were interviewed. The respondents were issued with the questions where the questions of interest were closed-ended. The method used in selecting the participants was a random so as to minimize biases in the study. Sampling This study, adapted non probability sampling where, purposive sampling was used. Purposive sampling was used in order to ensure that the population used in the survey, was a population that would assist the study in obtaining its objectives. In addition, stratified sampling was used in helping to isolate employee into different clusters according to the five general categories which the study considered. Ethical Consideration Ethical factors were duly considered in conducting the research, where confidentiality, objectivity, professional behavior, professional competence, integrity and due care were all upheld in throughout the research period. The code of ethics highlighted above was adapted as follows; the data collection process and analysis was handled with due care so as to ensure that professionalism was maintained. In addition, care was observed in disclosure of facts. In regard to transparency, all sources of data used have been disclosed under the references. The data collected from the surveys conducted was also treated with confidentiality. In overall professional behavior was exercised through the process of conducting the study. Data Presentation, Analysis and Timeline for the Activity After data collection exercise discussed earlier in this chapter, the data collected from the surveys was presented in-form of tables, graphs and charts and later analyzed in a manner which met the objective of the study. In order to outline timeline of various activities conducted during the study, a Gantt chart is provided under the Appendix. Task Id Task Name Week 10 Wk 11 Wk 12 Wk 13 Wk 14 Wk 15 Wk 16 Wk 17 Wk 18 Wk 19 Wk 20 Wk 21 Wk 22 Wk 23 Wk 24 I Research Planning II Library Research III Planning for primary research IV Gathering of primary data V Analyses of primary data VI Draft copy of research project VII Final Project submission Appendix 1: The Gantt Chart References Allen, F., & Gale, D. (2007). Understanding financial crises. Oxford: Oxford University Press. Arunachalam, P. (2011). Impact of global financial crisis on Indian Economy. New Delhi: Global Research Publications. Bruce, A. (2003). 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