The Faces of UnemploymentPosted: July 7, 2010
Our economy is no longer producing jobs at a level that can sustain what we’ve considered a ‘normal’ rate of unemployment of around 5%. Our leaders seem incapable of understanding the dynamics of job creation and think that subsidizing businesses and lowering taxes any way they can on any form of business is going to create the trickle down effect. This was a disproved hypothesis decades ago. They mistake monopoly creation for being pro-free market. This has created some very persistent long term unemployment. It will also create a bigger federal deficit because these folks may not return to the job market and peak wages. This means lower tax revenues in the future. Some may also opt for social security at 62 putting them on the expense side of the deficit quicker than previous generations.
There is increasing attention in the press to the faces of unemployment and two such profiles are out there today. The WSJ journal looks at the face of 50 somethings who have been unemployed or underemployed for nearly two years now. These folks are usually at the peak of the income earning years but instead have been dumped out to pasture unceremoniously early with no real safety nets. They are years away from being eligible for the retirement benefits and medicare their elder boomer brothers and sisters can collect. The 50-something generation–well educated and trained–is now the lost wages generation.
Extending unemployment benefits isn’t free, of course, and has the potential to keep unemployed workers out of jobs for longer. But it could also be preventing a “lost generation,” economists say. That generation is the crop of 50-somethings who might have worked for another decade. Their outlook isn’t bright.
Once older workers are laid off they take the longest to find new jobs. For workers 65 and up, it takes a median of 45.1 weeks to find a new gig. For those 55 to 64, 38.7 weeks. It takes a slightly shorter 30.4 weeks for those who are 45 to 54-years old.
Unemployment checks have the added benefit of helping these people feel like they’re still a part of the labor force. When the checks run out, and with few glimmers of hope in their job searches, they’re more likely to drop out of the labor force and turn to a program like disability.
And unlike a relatively short-term fling with jobless benefits, their attachment to disability is more likely to be permanent.
Facing equally dismal job prospects are the so-called Millennials. These are twenty-somethings that cannot find jobs that meet their credentials. The NYT profiled this group of jobless that can’t even get their feet on the bottom rung of corporate ladders these days. A more detailed look at the future prospects of this generation shows that they may not be better off than their grandparents or parents. EVER. This is from Catherine Rampell; also of the NYT.
There are a few forces behind these trends. One is that generally speaking, it’s harder to make it in today’s job market than it was a few decades ago if you don’t have at least a high school degree, since the expectations for what educational credentials workers should possess have risen. This is in part because the economy is less dependent on lower-skilled, manual-labor-intensive industries like manufacturing, and more reliant on industries that require formally credentialed education and training, like health care. Thus, in general, the earnings potential for the most educated has risen, and that for the least educated has fallen.
Only one word describes the American labor market outcome of the last decade – abysmal. Not only is job growth well below trend, but the quality of jobs is in question. The jobs deficit is even more striking considering the supposed gains in productivity over the past 15 years. Job growth should not stagnate. Resources – including labor – released via higher productivity are supposed to be channeled into expanding sectors. Moreover, productivity growth is supposed to yield improved economic outcomes via higher real wages. Yet as spencer famously shows, labor’s share of output has been steadily decreasing since the early 1980s. This downward trend was interrupted by gains evident during the tech bubble of the mid-1990s. Apparently, only during that brief, shining moment of generational technological change did the productivity story work as we believe it should, at least since the early 1980’s.
The other relevant site is Yves at Naked Capitalism who discusses a piece by Andy Grove–the former CEO of Intel– at Bloomberg. There’s a follow up link and discussion piece of that article by Rajiv Sethi. Sethi is another economist who blogs. There are quite a few of us out there these days, I guess because we’re all just panicked about what’s been going on the last 10 years and discussing it in a research article with other economists does not get anything real done in the way of public policy. Yves is definitely a modern day Cassandra with well rounded academic credentials as well as practitioner’s viewpoint to all things financial and economic. If any one deserves to be syndicated, it’s Yves. Every one is discussing the impact of all those old manufacturing jobs that have now gone elsewhere and left those folks without high school diplomas with no future. There’s really nothing out there comparable to what used to be good union jobs and blue collar jobs. Sethi, a microeconomist and Grove, an entrepreneur in an industry that thrives on innovation effectively argue that this loss of manufacturing industry will eventually impact our ability to innovate which is really been the prime driver of the U.S. economy since its inception as a mishmash of colonies.
The Grove article is amazing and the discussion of it by the three economists and their readers is fascinating. It’s going to take some time to wallow through it all, but I highly recommend it. Grove believes that the myth of America to continually birth start ups is just that; a myth. It’s a myth birthed by and of course, followed like a religion (an equally implausible myth) by pro-Business politicians. I’m going to use the generic nomer ‘politicians now’, because it’s obviously it’s just not a Republican mental defect any more.
Here’s Groves hypothesis and it’s an earth-shattering and hopefully myth-shattering one. I have no idea why we tell ourselves these stories and believe in them to the point of blinding ourselves to reality and hope. But, there it is. The Groves article is a response to an article by Thomas Friedman. You can read that too if you’re into the new Horatio Alger story of the Reagan fairy tales.
The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.
Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.
The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.
Scaling used to work well in Silicon Valley. Entrepreneurs came up with an invention. Investors gave them money to build their business. If the founders and their investors were lucky, the company grew and had an initial public offering, which brought in money that financed further growth.
Sethi, a practicing microeconomist, takes it back to a need for change in incentives; one of the major points in the Grove article. It’s also something I discussed in my last economics thread, Simple Truths. Sethi doesn’t want to embrace protectionist policy–nor does Yves– but he and Grove and Yves and then back to Thoma say that we need our policy makers to change the incentives. I agree with these greater minds.
Grove recognizes, of course, that companies will not unilaterally change course unless they face a different set of incentives, and that this will require a vigorous industrial policy:
The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars — fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability — and stability — we may have taken for granted… Unemployment is corrosive. If what I’m suggesting sounds protectionist, so be it… If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.
Update (7/4). In an email (posted with permission) Yves adds:
On the one hand, you are right, any move towards protectionism (or even permitted-within-WTO pushback against mercantilist trade partners) could very quickly get ugly. But the flip side is I wonder if we have a level of global integration that is inherently unstable (both for Rodrik trilemma reasons, international economic integration with insufficient government oversight creates political problems, plus the Reinhart/Rogoff finding that high levels of international capital flows are associated with financial crises). If so, we may have a short run (messiness of reconfiguration) v. long term (costs of really big financial crises) tradeoff.
So why do we give businesses incredible subsidies for doing these activities? Yes, it helps them. But, it does not help the U.S. economy or the American worker or for that matter, the American Taxpayer. Why not give businesses some subsidies if they keep the jobs here and some taxes if they take the jobs elsewhere? This is basically an industrial policy. It’s not a trade policy so it’s not a cry to revive something like Smoot Hawley. No sane economist would suggest setting off a trade war. However, changing the incentives to businesses that bail out on the US to achieve higher profits is something that people with policy responsibility need to take examine. At the very least, we need to stop giving them Federal business. After all, we should be pro-economic growth and development which has no bias towards any particular economic agent. It’s time to quit looking at everything that’s ‘pro-business’ as being good for the U.S. Economy because it is not. That includes putting the criminals in charge of crime scenes something that the Obama administration seems to specialize in.