The U.S. unemployment rate has fallen from 9% to about 8% in the last year, to the delight of everyone from job seekers to the Obama re-election team. But traditional economic theory tells us that shouldn’t have happened unless the economy was growing by double its current 2.5% rate.
That’s the fascinating paradox presented in a research note I got yesterday from JP Morgan Chase economist Michael Feroli. So, the question is this: If old-school theory, and in particular Okun’s Law (I won’t bore you with the details, go to Wikipedia if you’re interested) tells us that we need 4% or 5% growth to lower unemployment right now, why is job growth more robust than it should be?
The reasons matter, because far from being cause for good cheer, they point to a disturbing new trend in the labor markets – the worker as commodity. Let me explain. In the old days (meaning before globalization really took off the in 1980s), employment and productivity (which is a large part of overall economic growth) used to rise hand in hand. There would be a pick up in hiring, and that would boost productivity, and growth (along with asset prices) would rise.
Somewhere on the road to globalization and technology-related job destruction, that link was broken. Feroli puts the marker down in 1984. But the bottom line is that the rise of temporary employment, the decline of unionization, and the rise of the internet made labor less of a fixed cost and stable part of the economic formula, and more of a variable factor – easy for companies to add and dispose of at will. “It’s the worker as commodity,” says Feroli, and what it means is that while employment may rise faster than economic growth dictates (as it’s doing now, in part because flattened wages have made American labor more globally competitive), it can also go the other way. Productivity and profits can rise, and unemployment can stay flat.
All this speaks to what I believe is one of the most important economic trends of our day – the disconnection of the fortunes of companies, and overall economic growth within particular countries, from labor itself. Companies, or even entire countries, can grow fast, while the majority of workers still loose out. It’s a profound shift – one that presents some unbelievably complicated issues for policy makers who need to make sure the majority of the voting population gets a slice of the pie. And even as unemployment is falling in the U.S. right now, the reversal of Okun’s Law means that trend line could change – and fast.
For more on why, check out the Time cover article on the economic recovery that I wrote with my colleague Bill Saporito, available this Friday on newsstands.