Monday, August 22, 2011

Understanding Unemployment in the US

Here is a bit from an interesting article by Robert J. Gordon in the economics journal Vox:
The US is missing millions of jobs. This column argues that the total is 10.4 million. It claims that 3 million of these can be traced to the weakened bargaining position of labour and the growing assertiveness of management in slashing costs to maintain share prices. Moreover, this employment gap is not shrinking because of the ‘double hangover’ effect—an excess housing supply and besieged consumers unwilling to spend.

High and persistent unemployment in the US has emerged as one of the most important macroeconomic legacies of the 2007–09 world economic crisis. While the decline of business activity in the US was no larger than in Europe, the US is an outlier in its outsized response of the unemployment rate to its decline in output (IMF 2011).

Here we quantify the shortfall of US employment—some 10.4 million missing jobs—and ask: Why did the number of jobs decline so much and why has it recovered so little? Two sets of causes stand out.

First, there has been a changing balance of economic power in the US between management and labour in the past two decades that has led to more aggressive firing of workers when business profits head south.
Second, the large negative output gap (actual real GDP below trend or potential) is not shrinking, due to the “double hangover” persisting in the aftermath of the housing bubble.

By explaining why the recovery of aggregate demand has been so weak, we provide an understanding of the refusal of the large negative output gap to shrink—a refusal shared by its twin, the employment gap.
Go read the whole article to get all the details.

The message Gordon has for US workers is pretty gloomy:
When the economy begins to sink—like the Titanic after the iceberg struck—firms begin to cut costs any way they can; tossing employees overboard is the most direct way. For every worker tossed overboard in a sinking economy prior to 1986, about 1.5 are now tossed overboard. Why are firms so much more aggressive in cutting employment costs? My “disposable worker hypothesis” (Gordon 2010) attributes this shift of behaviour to a complementary set of factors that amounts to “workers are weak and management is strong.” The weakened bargaining position of workers is explained by the same set of four factors that underlie higher inequality among the bottom 90% of the American income distribution since the 1970s—weaker unions, a lower real minimum wage, competition from imports, and competition from low-skilled immigrants.
Here is his accounting for the loss of 11.88 million jobs:
  • The shortfall of consumer-services spending is the largest subcomponent; it translates into 3.59 million missing jobs.

  • Next come the 2.17 million lost jobs in residential construction (on top of those lost between 2006:Q1 and 2007:Q4),

  • The 1.76 million in nonresidential structures,

  • 1.65 million in consumer durables,

  • 1.47 million in state and local government, and

  • 1.38 million in equipment and software.
What continues to astound me is the absolute ignorance inside the Obama administration about the economic situation. I can understand the abysmal ignorance of the Republicans. They are anti-science religious fanatics who think God created the universe -- all 92 billion light years in diameter -- in just a few days. It makes sense that they are complete ignoramuses about economics.

The American people deserve better leadership. It is as if the US decided to field an Olympic basketball team and selected players among a boys high school baseball team and chose an art teacher to be "the coach". Mr. Obama -- call me pretty, call me divine, call me artful -- just doesn't have what it takes to deal with the real world problem of getting the US back to economic health.

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