For a time now my editor Rick Stengel has been asking the question: Why won’t unemployment stay at around 10%. That is to say, even after the economy pulls out of the recession how do we know that unemployment won’t remain where it is today. Perhaps 10% is the new 5%, when it comes to unemployment. We have afterall outsourced many of our manufacturing jobs and some of our service jobs to China, India and elsewhere. So if we make a lot less than we used to and do a lot less than we used to, whose to say that unemployment won’t remain stubbornly high, no matter which way the economy is headed.
My response a year ago or so ago when Stengel started to ask the question was because it can’t. I majored in Economics and know from my classes that the long-run frictionless rate of unemployment in the economy is about 5%. Once the economy got a kick-start, that’s where the jobs numbers would be headed again rather quickly.
Well it turns out, for now, editor knows best. We are probably six months or more into the economic recovery and the rate of unemployment has remained stubbornly high. And now others are starting to ask the same question Stengel was asking a year ago: What stops unemployment from staying higher than we have experienced before? And what happens? Well it ain’t pretty. Here’s why:
You may wonder why I and others are writing about unemployment now. Last month’s jobs report actually showed a drop in the unemployment rate. Wasn’t that good news. Not exactly. In fact, the drop was mostly due to people giving up on looking for work. Worse, the job report showed that the time it is taking for people to find a job continues to go up. Almost half of all out of work Americas have been without a job for 6 months or more.
In an editorial in the WSJ, PIMCO’s Mohamed El-Erian points out some of the problems with persistently high unemployment
First, persistently high unemployment erodes the skills of any labor force, especially when joblessness is a big problem among the young. This reduces future productivity and growth potential.
Second, a high rate of joblessness puts pressure on inadequate social safety nets like the unemployment benefit system. It also exacerbates the strain on government budgets already stretched at both the federal and state levels.
Third, stubbornly high unemployment makes those who are employed more cautious. By spending less, they aggravate the economic slowdown.
And finally, high unemployment has historically induced companies and countries to become more inwardly oriented. Many firms have already moved to a “self-insurance” mode, including holding large cash balances rather than investing in equipment and hiring people.
The first two points are ones I touched earlier in the year in an article about why teen unemployment is a worse economic problem than you think. But the second two problems are ones I haven’t heard before and could very well be contributing to our slow recovery. My only problem with that logic is that wouldn’t that be the case every time. Yet, somehow after every other recession the unemployment rate has dropped. So why is this time different?
Nonetheless, El-Erian really falls flat when he gets into his solutions.
Instead of simply debating the case for further government stimulus, policy makers should also come up with a comprehensive strategy that focuses on improving human capital, particularly through a greater emphasis on education and training; expanding infrastructure and technology investments, in part by creating a more friendly tax system; encouraging a bigger translation of scientific advances into economy-wide productivity gains; and better protecting the most vulnerable segments of society.
I’m not even really sure what that last part means. Job training sounds nice and it probably won’t hurt, but the problem is there are few studies that show job training actually lowers unemployment or raises incomes. Business tax cuts on the other hand to boost growth is a really bad idea. Cutting taxes is exactly how we got into the current budget mess. And driving up our debt further by reducing revenue will only make it more likely that we will have higher interest rates, and slower growth. What’s more, as Felix Salmon correctly points out productivity doesn’t seem to be the answer either. Remember, the fastest way for companies to boost productivity is to fire workers, and make the rest of us do more.
What’s more, productivity improvements don’t necessarily result in higher wages for the less-skilled: they’re just as likely to result in greater returns to capital, as owners extract more profits from the business, or else to result in the jobs going to better-educated workers instead.
So what should we do about lowering long-term unemployment? Salmon runs through a number of other proposals out there in a very good follow-up post called Attacking Unemployment. Andy Grove of Intel fame would like the government to be more protectionist and increase tariffs. And CJR’s Audit blog finds a lot to like in Grove’s argument.
Look, it’s no accident that the era of corporate dominance has coincided with a hollowing out of the American labor force, and free trade is one part of a multifront war on labor that has included a concerted attack on unionization and lax immigration enforcement.
Free trade for the modern “American” multinational is about arbitrage: Environmental arbitrage. Labor arbitrage. Regulatory arbitrage. Tax arbitrage. Hell, press arbitrage. You think Apple and Dell and all those folks would have been able to keep their atrocious working conditions (yes, I’m considering companies responsible for their outsourced labor) as hidden in the U.S. as long as they did with Foxconn in China?
If you follow it to its logical conclusion, the stagnation of American workers’ wages won’t stop until it reaches a sort of equilibrium with those of workers in countries like Indonesia.
Economist Michael Hudson would like to see income taxes drop and property taxes increase. That way people would spend less on housing and consume more, boosting the economy. Of course, weren’t rising housing prices a key driver of consumption in the late 2000s. So I’m not sure Hudson can have it both ways.
Barbara Kiviat took a stab at the question of how to create jobs a few months ago with her cover story and what she found was that it is really hard to do, especially for government:
The cold truth of the matter, though, is that there’s not much Washington can do to gin up permanent jobs on such short notice. The federal government is a key player in engendering job growth in the long term — by establishing smart policy in areas such as trade, education, immigration, health care, energy, infrastructure and taxes — but over the course of months or even a few years, there’s little it can effectively do besides hiring directly or stepping in as a buyer of goods and services.
For me, I like the suggestion of trying to better leverage taxpayer money that David Leonhardt made earlier this week in his regular NYT column. As the energy program showed, making grants to companies to get them to invest seems to work. And we could start a series of public-private investment partnerships with the goal of boosting jobs. Companies get money to research and develop and expand as long as they pledge to keep the jobs that money helps create on American soil for a reasonable amount of time, say a decade. At that point ship them overseas. By that time hopefully, our public-private partnerships will have had time to create other jobs and open up new opportunities.
The problem with this approach is that it is very costly. As we have seen with Cash for Clunkers and the homebuyer tax credit, a lot of money ends up going to people or in this case companies that would have spent money on R&D anyway. And that may be the true bottom line on creating jobs: No matter what you do, it ends up being a very costly proposition.