Why Is Job Growth Tepid?—Posner

The unemployment rate has been 8.2 percent for three months now, creating concern that we are in a high-unemployment equilibrium. The unemployment rate is not a very good measure of the employment situation, because it excludes discouraged workers—persons who are not looking for a job. The number of discouraged workers actually dropped slightly in June. On the other hand, the number of underemployed workers rose slightly, causing the total of un- and underemployed to rise from 14.8 to 14.9 percent. Yet there has been a net increase, though a small one, in the number of new hires and in average wages. The safest observation is that no significant trend is visible in the data for the past quarter. 

In another six weeks it will be four years since the financial crash that set off the steep economic downturn in which the nation and the world still find themselves. The downturn stopped years ago but the economy has stalled. Apart from the high unemployment rate, it is noteworthy that personal consumption expenditures per capita, corrected for inflation, are exactly where they were in 2007, before the crash, even though the savings rate, which soared in the immediate aftermath of the financial collapse, has receded to the low pre-collapse level, in part because of very low interest rates, which make saving money unattractive. It is noteworthy as well that inflation expectations are very low, implying that demand for products and services is not expected to increase significantly; an alternative possibility, however, is that producers have excess capacity because current demand is weak, in which event, given the current unemployment, producers may be able to hire workers to meet a surge in demand without incurring higher unit costs of production and therefore without raising prices. 

Consumption drives the U.S. economy. If consumption is stagnant, there is no incentive to expand production. In the wake of the financial collapse of September 2008, companies slashed their work forces—and when personal consumption expenditures returned to their pre-crash level discovered that they could satisfy consumption demand with a smaller workforce, and still can, and if they do not anticipate higher consumption in the near term they have no incentive to expand their workforces. This seems to me the most economical (in the Occam’s Razor sense) explanation for the current high unemployment rate. 

One can imagine an increase in consumer demand abroad stimulating export production and therefore employment in export industries, but foreign consumer demand is on the whole stagnant also, and our export producers face fierce competition from countries that are trying to increase their own exports. And U.S. federal and state government spending, while it plays an important role in maintaining private incomes and thus personal consumption expenditures, is not doing much more for the economy; government purchases of goods and services are down, and government at all levels is laying off workers and thus contributing to unemployment. 

I am intrigued by the possibility that the economy actually stopped growing in about 2000 as a result of foreign competition, increased automation (which perturbed labor markets), decline in quality of education, economic mismanagement by federal, state, and local government (irresponsible spending and fraudulent accounting seem endemic characteristics of our state and local governments), inattention to serious economic problems such as our very badly designed tax code, and misallocation of resources, with excessive resources going into housing construction. An appearance of growing prosperity was maintained by public and private borrowing at very favorable rates made possible by the mercantilist policies of foreign countries like China, Japan, and Germany. House prices soared because housing is the product preeminently bought with debt, and the savings rate plummeted because home equity value was rising, while consumption soared as people took out second mortgages or home equity loans on their appreciating homes and spent the proceeds on personal consumption. 

Still, the economy has righted itself to the extent that it is no smaller than it was before the crash; the contrast in this regard between 1929-1933 and 2008-2012 is reassuring. But how is it then that less labor is being employed? One possibility is that the shock of the crash accelerated a trend toward more efficient use of labor, as a result of greater automation (with low interest rates reducing the relative cost of capital expenditures and thus encouraging the substitution of capital for labor) and improved techniques of selecting and supervising employees. In the long run, more efficient production through more efficient utilization of labor should, by reducing costs and therefore prices, stimulate demand and therefore supply. But three months is not the long run; and thus far a rapid growth in productivity is not visible in the statistics. 

The unusually uncertain political environment may be retarding employment. The reason is not that this is a presidential election year, but that the two political parties seem so far apart regarding policy. The Republicans in Congress will for understandable political reasons do everything they can to prevent the economy from improving before, and possibly after, the election, because they are committed to the position that Obama is responsible for the high unemployment rate. Romney may of course win, and no one knows what policies he would follow as president and with what effect and whether the Democrats would adopt the same obstructionist, scorched-earth policy as the Republicans have (probably they would). Nor is it clear, or even likely, that either party has a politically feasible program or prospect of meaningful economic reform. The impact of the Affordable Care Act that the Supreme Court has now upheld is highly uncertain. Political uncertainty is a retardant to economic recovery, but I would be inclined to place greater emphasis on weakness in demand in consequence of the sharp drop, triggered by the financial crash of September 2008, in household wealth and employment prospects.

Comments

[NEH]

Terry, Glad too see a positive take on the problem. As for the views of WWII vets, most of these guys are either dead or in the process of dying and are confronted with more pressing problems than unemployment issues. You're correct in identifying that "Necessity is the Mother of Invention", the crux of the problem is that large numbers of the unemployed can't wait a few years for the employment situation to improve and turn around. They need employment now! As people I know are want to say, "All I need is a full time paying job with Benefits and all my problems would go away". And how many Nationwide are currently in this boat?

affl, As for "Liberty", perhaps you need to take a lesson from American History. Specifically, the Whiskey Rebellion and other incidents. Where farmers and corn distillers in Western Pa. refused to pay a "TAX" on whiskey production and attacked and kidnapped Federal Officials trying to enforce the Law and collect the tax. Then Washington and his Admin., called out the Militia, marched into Pa., broke up the Rebellion, arrested some 20 Rebels, tried them for treason, paroled some and convicted two for treason. Washington later paroled these two as well. So much for "Liberty" on the Western Frontier in the U.S..

Perhaps, todays "Tea Party" ought to take a lesson from this...

[Judge Posner What About Demographics?]

Demographics play a critical role here. U.S. growth from 1983 to 2000 coincided with baby boomers ranging from age 19 to 37, with a median of 28 (in 1983) up to age 36 to 54, with a median of 45 (in 2000). Now the baby boomers age range is from 48 to 66, with a median of 57. The amount that a person contributes to the economy increases rapidly on average, both in terms of production and consumption by individuals and their families, from age 28 to 45. That amount starts to level off and perhaps even decreases from 45 to 57, again considering production and consumption by individuals and their families. This trend does not bode well for the next 10 years.

Judge Posner and Becker your thoughts on this?

[desarrollo de aplicaciones web]

Interesting post. Thanks for the info. I'll keep coming

[Agua Alcalina]

Thanks for Posting Mr. Posner. Very usefull

[Anne Roberts]

The employment rate is in a steady downward spiral the past few years. We all know this, despite the fact that we refuse to believe it is happening.

[pan]

I commend to you the book "Race Against the Machine," which makes a very plausible argument that decreasing employment is due to technology advancing over the past three decades at an exponential rate. This is completely unprecedented and we have not yet come to terms with it.www.diesel-generatorset.com

[coast clothing]

I show heart very thank the authors share, thank he has a heart of devotion, thank he can have such attainments of heart wrote so good article. I will continue to focus on the author's other works.

[michael kors outlet]

Good article! It was very good, select material is very close to the life, the life around, launched a very fine narrative. Topics also very clear, very friendly, can let the reader with the attitude of the care to read such a good article.

[black]

Jade: ( also known as Jade Jadeite, nephrite ). Jadeite is a kind of sodium and aluminium silicate, molecular formula: NaAl ( SiO3)2. Nephrite is a hydrated calcium magnesium silicate, molecular formula: CaMg5( OH )2( Si4O11)2.
Quartz: quartz is an it colored gemstones, pure quartz is colorless and transparent. The molecular formula SiO2. http://www.wholesalechinasite.com/Quartz include crystal, iridescence or red color quartz, rutile rutile quartz, Amethyst spots or network, Citrine, smoky quartz or smoky quartz, quartz, stone, blue line Ishi Shiyoung, milky quartz, blue quartz or sapphire quartz, tiger eye, eagle or falcon eye, quartz cat, with star or stars quartz.

[chinasite]

Real Sports Jerseys provides all the officially licensed sports apparel you would ever require. They Specialise in replica and authentic NBA jerseys, MLB uniforms, NHL jerseys, NFL uniforms, NCAA jerseys and throwback jerseys. In case you are having trouble finding your favourite sports player's jersey and you Wholesale from China have looked all over the place, look no further. They have all of your favourite teams and players. They can also personalize sports Sports Jerseys uniforms for your own personal needs. They are your cease Bags shop for all sport jerseys and apparel.NFL training camps are a few weeks away so get your Men Shoes 2012 Sideline gear now and get ahead of the Back to School shopping curve with a great new backpack, lunch box or t-shirt..

[mont blanc pens sale]

Mont Blanc Pens For Sale. To buy discount Mont Blanc Pens online. Offers Montblanc Boheme,Etoile,Greta Garbo,Ingrid Bergman,Starwalker Writing Instruments.

[Michael Kors]

Thanks for sharing! The fashion Michael Kors UK has constantly been evolving making many brand Michael Kors HandBags more challenging to maintain up with all of the newest Discount Michael Kors styles. As we all know, well-known brand are always popular around the world. And owning a luxury Michael Kors Hamilton seems to be a dream for all the women.
When it comes to 2012 new style Longchamp Bags, somebody would choose get online and find out some latest Longchamp Le Pliage Handbags. There are undoubtedly one of Hollywood’s most favoured Discount Longchamp designers. The unique design Longchamp Hobo Bags attacted numerous of girls.
http://www.michaelkorssaleuk.com/
http://www.longchampsalestore.com/

[David Peterson]

Part of the reason why unemployment remains high is that the Obama Administration is not simply trying to boost aggregate demand, but is actually trying to alter the composition of aggregate demand. For example, there have been significant cut backs at NASA and in defense procurement, and more are planned. In addition, he's made a decision that certain segments, such as alternative energy, construction of infrastructure, etc., should be boosted, while others should be cut. In short, his plan is not just a "growth" strategy, but is also a "change" strategy.

But anytime there is a shift in demand or production, that necessitates a corresponding shift in labor resources from one industrym that is cut to another which is stimulated. And the way that happens is that workers in one industry are laid off, and must seek work elsewhere. Ultimately, they may find work in those industries which have been stimulated, or in industries where openings are available because workers have quit and moved to the stimulated industry. But it takes time, and in the meanwhile, those workers will be unemployed.

So it is not just the LEVEL of aggregate demand which is important, but also the composition. If the government has embarked on a policy designed to alter the composition of aggregate demand, that will inherently cause a higher level of unemployment as workers move into those industries which have been stimulated, and out of those which have not.

[John Laing]

The law of diminishing returns may well apply to stimulus, to all "pump priming."

Everybody thinks low rates are a good thing - wrong.

The Fed is holding rates down, artificially; that's great for the Treasury which has to service all that federal debt but it's bad for market lenders if the interest rate is less than the risk premium.

Lenders can't lend if the risk exceeds the rate.

As rent control is bad for the supply of apartments, so too rate control is bad for the supply of loans, business expansion and jobs.

What's good for the Treasury is lousy for the economy.

[Farnendus Farnendus]

I would simply say to you all “awesome information”
http://mypaydayloan-quick.info/

[Farnendus Farnendus]

I would simply say to you all “awesome information”.
http://mypaydayloan-quick.info/???????????