December 6, 2010
Unemployment
Unemployment—Posner
As Becker points out, the real significance of the increase in the unemployment rate from 9.6 percent in October to 9.8 percent in November is not the.2 percent increase, which is within the margin of error, but that it signals the depth of the economic hole that the country has fallen into. It is now three years since the depression—and it is a depression, not a "recession" or even a "Great Recession"—those are euphemisms—began, and it did not end last summer when GDP stopped falling (by that measure, the Great Depression ended in 1933). The proper comparison is between actual GDP and the GDP trend line (3 percent a year)—until actual GDP rejoins the trend line, the economy is in depression. Real (inflation-adjusted) GDP is roughly the same today that it was three years ago; it "should" be 9 percent higher—which would make GDP almost $1.5 trillion greater today than it is. The economy cannot rejoin the trend line with unemployment as high as it is.
A rise in the unemployment rate can actually be a recovery signal. The reason is that the rate is based on a definition of the unemployed that excludes people who have not been looking for work in the previous four weeks. As an economy recovers and demand for labor grows, people who had been discouraged from looking for a job because demand was so weak begin looking—and until they find a job, they are counted as unemployed. But that is a case in which both employment and unemployment are rising, while the increase in the November unemployment rate reflected, rather, weakening demand for labor, though probably that is a random event rather than the beginning of a trend.
Besides the 15 million unemployed, another 2.5 million Americans would like to work but have not searched for work in the last four weeks and a further 9 million are involuntarily working only part time. Many full-time workers have taken steep pay cuts, though the costs of goods and services have not fallen. (True, average hourly earnings have not declined, but often the pay cuts take the form of furloughing workers or cutting shifts, so that the worker is working fewer hours per week and therefore taking home less pay. The worker may or may not be able to find a part-time job to fill the gap.) The total number of employed persons in the United States is only 140 million; when you subtract from that number the workers who are involuntarily working part time and the (unknown) number of workers worried about losing their jobs or experiencing hardship because their wages have been cut, and then adds the unemployed and the discouraged workers, it is apparent that the employment picture is very dire.
The fall in income and rise in anxiety that mark (and mar) the current labor situation cause a reduction in consumption and hence in production, and so reduce the incentive of both consumers and businesses to borrow, and of banks to lend (they fear high default rates—and their balance sheets are probably weaker than they appear to be). Anxiety increases not only the savings rate, but also hoarding—banks and other businesses accumulate cash, and individuals invest their savings in low-risk forms that do not fuel business investment (an example is a federally insured savings account, with the bank investing its deposits in Treasury securities). With money circulating slowly and inflation as a result negligible, long-term fixed-interest-rate debtors, such as mortgagors, obtain no relief from their debt burdens. The huge state and local debt, together with the enormous federal debt, have created economic uncertainty compounded by what appears to be political paralysis in dealing with public debt, and by the hard-to-predict impact of the health reform law and other Administration initiatives on business. Together these factors may be creating a high-unemployment, low-growth equilibrium that could persist indefinitely.
What is to be done, if anything? The ideal solution—which is unattainable—would be to combine a short-term stimulus with long-term fiscal and regulatory reform aimed at reducing governmental deficits and increasing economic growth. With interest rates very low and much savings in inert forms (such as the $1 trillion in excess reserves held by the banks), there is an argument for the government's borrowing those savings and putting them to work on projects that would require labor, and thus reduce unemployment. But not only is a further stimulus politically impossible (in part because of the poor design, execution, and explanation of the large stimulus program enacted in February 2009); it would take too long to put into effect to avoid a risk of its crowding out private investment when the private economy begins to grow more rapidly.
The Sluggish US Employment Picture
The Sluggish US Employment Picture-Becker
Employment in the United States fell by a lot during the Great Recession from December 2007 to June 2009. The unemployment rate grew correspondingly from a low of 4.4% in May 2007 to a peak of 10.2% in 2009, and the underemployed grew even faster. That was bad enough, but the growth in employment and decline in unemployment since the trough of the recession has been quite slow. Forecasters got a shock on Friday with the release of preliminary data that indicated the unemployment rate rose a little from 9.6% to 9.8% in November rather than remaining stable or even falling a little. Although data for one month alone do not mean much because of large measurement errors, the average growth in employment over the past three months has been slow, and the unemployment rate has hardly budged. Even more disturbing is that the fraction of the unemployed who have been out of work for longer than six months has remained at a very high level of a little over 40%, up from the much lower level of about 15% prior to the recession.
The slow recovery is disturbing because speedy recoveries typically follow severe recessions. For example, the sharp contraction of the American economy between 1981-'82 produced an unemployment rate of 10.8% in December of '82, but that was followed by a steady fall in unemployment to a rate of only 7.4 in November 1984. It has been one and one half years since the NBER determined that the Great Recession had ended, but unemployment has only fallen by about ½ of a percentage point, and the growth in employment has been well below the cumulative declines in employment during the recession.
Nor is the comparison between this recovery in employment and that of past recoveries the only cause for concern since some European countries have done much better. The Great Recession hit Great Britain hard since its banks were also in deep trouble, and Britain's economy is in many ways similar to that of the US. Yet while Britain experienced larger declines in GDP during this recession than the United States did, its unemployment rate did not rise nearly as much, and is now under 8%, much below the American rate. Germany's labor market is organized differently than the British labor market, its banks were in less trouble than were the Anglo-Saxon banks, and it subsidized employment during the recession. Nevertheless, it is noteworthy that while German exports, second largest in the world, had to sharply contract during the Great Recession, its unemployment rate is around 7%, and has fallen rather rapidly during the recovery.
One mechanical way to discuss what is happening to unemployment is to look at the growth in output, productivity, and capital. Given the growth in say GDP, the growth in employment and capital arithmetically must be smaller, the greater the improvement in productivity. American GDP has been growing at the unimpressive annual rate during the past two quarters of about 2%, while productivity has been improving at a quite good rate- it increased by 2.3% in the 3rd quarter of 2010. This leaves only limited, if any, room for growth in employment.
Some analysts have seized on this purely arithmetical relation between output, inputs, and productivity to argue that the continuing improvements in productivity explains why employment has been increasing so slowly since the end of the Great Recession. However, the attempt to impute causation from productivity growth is a mistake since employment can grow rapidly even when productivity is growing rapidly if the growth in output is sufficiently rapid. The history of the United States and all other countries that experienced good to rapid economic growth since the end of World War II is one of quite rapid growth in both productivity and in employment.
If an economy had a fixed number of jobs, then advances in productivity might well eliminate some jobs-the way computers eliminated many clerical jobs- and fewer jobs would remain. Advances in particular technologies have sometimes eliminated certain jobs, but they have often created an even larger number of new jobs, the way many jobs now depend on the computer and Internet.
The main reason why employment has been growing slowly in the United States is not the advance in productivity, but rather it is that many companies do not want to add many employees because they feel very uncertain about what will happen to demand, profits, and costs during the next year or two. Although banks are flush with over a trillion dollars of excess reserves, they have been reluctant to lend to new and other small firms that want to borrow, or to consumers, because banks are uncertain about whether they will be paid back on time by the borrowers.
Some uncertainty by borrowers and lenders is inevitable coming out of a severe recession. However, that normal uncertainty has been magnified by fears about the government sector. Many businesses have been afraid that the new healthcare law will raise their employment costs, that taxes and regulations on business, high incomes, and investments will go up, that the financial reform act will excessively increase the costs of banking and of other business activities, that the growth in government and the large deficits of the past several years will force increases in future taxes, a smaller private sector, and a less efficient economy.
I have been arguing on this blog and elsewhere that the best approach now is for Congress and the president to concentrate on increasing long-term economic growth (see my post on 11/07 for an agenda for growth). This would require low taxes on investments, encouragement to basic R&D, and sharp reductions in expected government spending, especially on social security retirement income and Medicare and Medicaid. Tax revenue would also have to increase, and this could be accomplished through widening the tax base, such as by eliminating the tax exemption on mortgages, by flattening out income tax rates, and perhaps also by adding a value added tax.
Many in China and elsewhere believe the US economy is too sick to be cured. I do not agree, but recovery would require some unpalatable medicine with regard to spending and taxes, somewhat along the suggested by the recent majority-backed Report of the National Commission on Fiscal Responsibility and Reform. Unless the US takes serious actions to promote its long-term growth, the next decade may be a very difficult one.