Archive for the ‘Job Creation’ Category
Talk of economic recovery distracts attention from the fact that this recovery largely remains a jobless one.
The chart below, taken from Catherine Rampell’s New York Times blog, shows the number of months it has taken for the US economy to restore its pre-recession number of nonfarm payroll jobs in our six most recent economic recoveries.
As Rampell explains:
The chart above shows economic job changes in this last recession and recovery compared with other recent ones; the red line represents the current cycle. Since the downturn began in December 2007, the economy has had a net decline of about 1.1 percent in its nonfarm payroll jobs. And that does not account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy there should be more jobs today than there were before the recession.
Current economic dynamics make clear that it is time to stop waiting for market forces to create a jobs recovery. We need a real jobs program, one that will not just generate jobs, but living wage jobs that involve the production of needed goods and services. That, not deficit reduction, is what should be at the top of our political agenda.
As the following chart from the Financial Times shows, public sector gross capital investment–which includes government spending on infrastructure, scientific research, education, and other long-term priorities–is now at its lowest level since 1950 as a percent of GDP.
Perhaps even more worrying, net government investment, which takes depreciation into account, is heading towards zero.
Removing spending on defense from the total leaves an even more depressing picture. The Financial Times evaluated all the major budget proposals currently being considered by Congress, and finds, as illustrated in the next chart, that all of them involve significant reductions in non-defense public investment over the next decade.
Slashing public investment is not the way to a healthy economy.
The current economic recovery officially began June 2009 and is one of the weakest in the post-World War II period by almost every indicator except growth in profits.
One reason it has offered working people so little is the contraction of government spending and employment. This may sound strange given the steady drumbeat of articles and speeches demanding a further retrenchment of government involvement in the economy, but the fact is that this drumbeat is masking the reality of the situation.
The figure below shows the growth in real spending by federal, state and local governments in the years before and after recessions. The black line shows the average change in public spending over the six business cycles between 1948 and 1980. Each blue line shows government spending for a different recent business cycle and the red line does the same for our current cycle. As you can see, this expansionary period stands out for having the slowest growth in public spending. In fact, in contrast to other recovery periods, public spending is actually declining.
According to Josh Bivens:
public spending following the Great Recession is the slowest on record, and as of the second quarter of 2013 stood roughly 15 percent below what it would have been had it simply matched historical averages. . . . if public spending since 2009 had matched typical business cycles, this spending would be roughly $550 billion higher today, and more than 5 million additional people would have jobs (and most of these would be in the private sector).
The basic stagnation in government spending has actually translated into a significant contraction in public employment. The figure below highlights just how serious the trend is by comparing public sector job growth in the current recovery to the three prior recovery periods.
As Josh Bivens and Heidi Shierholz explain:
the public sector has shed 737,000 jobs since June 2009. However, this raw job-loss figure radically understates the drag of public-sector employment relative to how this sector has normally performed during economic recoveries . . . . (P)ublic-sector employment should naturally grow as the overall population grows. Between 1989 and 2007, for example, the ratio of public employment to overall population was remarkably stable at roughly 7.3 public sector workers for each 100 members of the population. Today’s ratio is 6.9, and if it stood at the historic average of 7.3 instead, we would have 1.3 million more public sector jobs today.
In short, the challenge we face is not deciding between alternative ways to further shrink the public sector but rather of designing and building support for well financed public programs to restructure our economy and generate living wage jobs.
The dominant firms in the U.S. and other major capitalist counties are happily making profits. They just aren’t interested in investing them in new plant and equipment. Rather they prefer to use their earnings to acquire other firms, reward their managers and shareholders, or increase their holdings of cash and other financial assets.
The chart below, taken from a Michael Burke blog post in the Irish Left Review, shows trends in both U.S profits (defined by Gross Operating Surplus which is calculated by subtracting the value of intermediate inputs, employee compensation, and taxes on production from earnings) and investment (defined by Gross Fixed Capital Formation).
As you can see the increase in profits (in orange) has swamped the increase in investment (in blue) over the relevant time period; in fact investment in current dollars has actually been falling.
Looking at the ratio between these two variables helps us see even more clearly the growth in firm reluctance to channel profits into investment. The investment ratio (investment/profits) was 62% in 1971, peaked at 69% in 1979, fell to 61% in 2000 and 56% in 2008, and dropped to an even lower 46% in 2012.
According to Burke, “If US firms investment ratio were simply to return to its level of 1979 the nominal increase in investment compared to 2012 levels would be over US$1.5 trillion, approaching 10% of GDP.”
The same dynamic is observable in the other main capitalist economies:
In 1995 the investment ratio in the Euro Area was 51.7% and by 2008 it was 53.2%. It fell to 47.1% in 2012. In Britain the investment ratio peaked at 76% in 1975 but by 2008 had fallen to 53%. In 2012 it was just 42.9% (OECD data).
So what are firms doing with their money? As Burke explains:
The uninvested portion of firms’ surplus essentially has only two destinations, either as a return to the holders of capital (both bondholders and shareholders), or is hoarded in the form of financial assets. In the case of the US and other leading capitalist economies both phenomena have been observed. The nominal returns to capital have risen (even while the investment ratio has fallen) and financial assets including cash balances have also risen.
So, with firms seeing no privately profitable productive outlet for their funds, despite great societal needs, their owners appear content to reward themselves and sock away the rest in the financial system. In many ways this turns out to be a self-reinforcing dynamic. No wonder things are so bad for so many.
The Federal Reserve Bank has said it will maintain its stimulus policy as long as the economy remains weak. One of its key indicators for the strength of the economy is the unemployment rate.
The unemployment rate has been steadily falling for several years, from 10% in October 2009 to 7.3% in August 2013. However, this decline in the official unemployment rate gives a misleading picture of economic conditions, at least as far as the labor market is concerned.
The reason, as the Economy Policy Institute explains, is because of the large number of “missing workers”. These missing workers are:
potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job. In other words, these are people who would be either working or looking for work if job opportunities were significantly stronger. Because jobless workers are only counted as unemployed if they are actively seeking work, these “missing workers” are not reflected in the unemployment rate.
The chart below shows the Economic Policy Institute estimate for the number of missing workers.
The next chart compares the estimated unemployment rate including missing workers (in orange) with the official unemployment rate (in blue).
As you can see, while the official unemployment rate continues to decline, the corrected unemployment rate remains stuck at a rate above 10%. In other words labor market conditions remain dismal. And here we are only talking about employment. If we consider the quality of the jobs being created, things are even worse.
Profits are definitely up. In fact, as Doug Henwood reports in a post on his Left Business Observer blog, corporations are “flush with cash”:
At last count, U.S. nonfinancial corporations had nearly $16 trillion in financial assets on their balance sheets, almost as much as they have in tangible assets. The gap between internal funds available for investment and actual capital expenditures—what’s called free cash flow—is very wide at around 2% of GDP. That’s down from the high of 3% set a couple of years ago, but sill higher than at any point before 2005.
So, what are corporations doing with all their cash? Well, definitely not investing in new plant or equipment.
Quoting Henwood again:
What matters for the accumulation of real capital is net investment—the gross amount invested every year less the depreciation of the existing capital stock. We’ve just gotten numbers for 2012, and they’re remarkably low. Private sector net nonresidential fixed investment (as a percent of net domestic product, or NDP) fell below 1% in 2009. It’s recovered some, to just over 2% last year, but that’s half the 1950-2000 average, and lower than any year between 1945 and 2009. We won’t have 2013 numbers until August of next year, but it looks like they’ll stay in this depressed neighborhood.
Instead of investing, “corporations are shoveling cash out to their shareholders. Through takeovers, buybacks, and traditional dividends, nonfinancial corporations are transferring an amount equal to 5% of GDP to their shareholders these days—again, down some from recent highs, but very high by historical standards.”
These trends help explain how the top 1% of income earners were able to capture 95% of all the income gains over the period 2009 to 2012. They also help explain why continued stagnation appears the most likely outcome for the years ahead.
The government announced that the unemployment rate fell in August, down to 7.3 percent from 7.4 percent in July. But there is little reason for cheer. As Business Week explained:
The worrisome part is why the rate fell. The size of the workforce declined by about 300,000 and the participation rate fell to 63.2 percent from 63.4 percent—the lowest since August 1978. The participation rate is the number of people either working or actively searching for work as a share of the working-age population. It rose steadily over the years as more women entered the workforce before falling sharply in the 2007-09 recession, and it hasn’t recovered since.
In other words, the unemployment rate continues to fall only because people continue to lose hope of finding a job. The chart below shows the trend in the U.S. labor force participation rate.
The following chart highlights one reason for our dismal employment record. In contrast to previous recoveries, state and local government spending has been slashed, resulting in an ongoing contraction in state and local employment, with negative consequences for private sector employment as well.
And, it is worth emphasizing, this shrinking labor force participation rate, which represents a clear failure on the part of our economic system to create jobs, is taking place during a period of economic expansion. One can only shudder at what lies ahead for working people when this expansion finally ends in a new recession.
As the Wall Street Journal reports:
Four years into the economic recovery, U.S. workers’ pay still isn’t even keeping up with inflation. The average hourly pay for a nongovernment, non-supervisory worker, adjusted for price increases, declined to $8.77 last month from $8.85 at the end of the recession in June 2009, Labor Department data show.
In other words, as the chart below illustrates, the great majority of workers are experiencing real wage declines over this expansion.
Growth also remains sluggish, increasing “at a seasonally adjusted annual pace of less than 2% for three straight quarters—below the prerecession average of 3.5%.” But by intensifying the pace of work and reducing the pay of their employees, corporations have been able to boost their profits despite the slow growth.
The following chart from an Economic Policy Institute study shows the continuing and growing disconnect between productivity and private sector worker compensation (which includes wages and benefits) using two different measures of compensation.
As the Economic Policy Institute study explains, “there has been no sustained growth in average compensation since 2004. The stagnation began even earlier, in 2003, when considering wages alone. Since 2003, wages as measured by both the ECI and the ECEC (not shown) have not grown at all—a lost decade for wages.”
The point then is that we need a real jobs program, one that is designed to create new meaningful jobs and boost the well-being of those employed. Government efforts to sustain the existing expansion have certainly been responsive to corporate interests. It should now be obvious that such efforts offer workers very little.
The United Nations Conference on Trade and Development (UNCTAD) recently examined the causes of rising inequality in developing and developed countries. In what follows I discuss its analysis of the developed country experience, particularly the United States.
As its 2012 Trade and Development Report (TDR) notes, economists are well aware that the post-1980 growth in inequality has been accompanied by accelerating technological change and globalization. Studies in the 1990s attempted to determine whether technological change or globalization best explained the rising inequality over the 1980s and early 1990s. The eventual consensus was that the primary cause was skill-biased technological change. In other words, as production became more complex, businesses needed workers with ever greater skill levels and were willing to pay a premium to attract them. This boosted income inequality and the only reasonable response was greater skill acquisition by lower paid workers.
Drawing on more recent work, the TDR argues that this consensus needs to be reconsidered. It finds that the post-1995 inequality explosion is best explained by globalization, or more specifically transnational corporate globalization strategies.
According to the TDR (page 83):
The new aspect of income inequality in developed countries – also termed “polarization” – concerns employment in addition to wages. The trade-inequality debate in the early 1990s focused on the divergence between the wages of high-skilled and low-skilled workers. However, the more recent period has been characterized by a very different pattern of labor demand that benefits those in both the highest-skill and the lowest- skill occupations, but not workers in moderately skilled occupations (i.e. those involved in routine operations). The moderately skilled workers have been experiencing a decline in wages and employment relative to other workers.
To highlight polarization trends, the TDR first “decomposes wage developments of earners between the 90th (top) and the 10th (bottom) percentiles” which “allows a comparison of the ratio of wages at the 90th percentile with that of the 50th percentile (the 90–50 ratio)” as well as a comparison of “the ratio of wages at the 50th percentile with that of the 10th percentile (the 50–10 ratio).”
The chart below shows that in the United States the 90-50 ratio has steadily grown, reflecting increased earnings for those at the top relative to those in the middle of the income distribution. However, beginning in the 1980s, the 50-10 ratio largely stopped growing. In other words it is the hollowing out of the income distribution that underpins current inequality trends. And, according to UNCTAD, this hollowing out is largely due to the destruction of middle income jobs.
As the next chart shows, this polarization of employment has taken place in almost every developed capitalist country, which helps to explain the almost universal growth in income inequality in the developed capitalist world.
UNCTAD argues that this development is primarily the result of the growth in transnational corporate controlled cross-border production networks. Competition between leading transnational corporations drove them to find new ways to lower costs. Their preferred strategy has been to divide their production processes into discrete segments and then locate as many segments as possible in different low-wage countries. They control their respective networks through direct ownership of the relevant foreign affiliates or increasingly through their control over the relevant technologies and/or distribution channels.
These networks have helped leading transnational corporations increase their profits. Their operation has also transformed developed country economies, reducing mid-level jobs and earnings as well as increasing dependence on imported parts and components as well as final goods and services.
The growth in production networks has boosted the share of developing countries in world exports from 25% in the 1970s and 1980s to 40% in 2010. China, of course, is the leading production platform for most transnational corporations. One way to highlight the growth in global production and its consequences for the U.S. economy is to chart the growth in merchandise imports from low-wage economies, which are defined as those countries with a per capita income less than 5% of that of the United States before 2007. “The resulting group of 82 developing and transition economies includes many small economies but also some of the large economies in Asia, especially China, as well as countries such as India, Indonesia, and the Philippines.”
As the above chart shows, most of the world has been affected by this development, although the rise in U.S. imports from low-wage countries, primarily from China, stands out. Having said that, it is worth emphasizing that most U.S. imports from China are produced by foreign owned firms operating in China–often under the direction of U.S. transnational corporations–not Chinese companies; Apple products are a good example.
This development means that the polarization in U.S. income and employment is now structurally rooted in the operation of the U.S. economy. As the TDR points out (page 91):
Sector-specific evidence for the United States for the period 1990–2000 indicates that all of the four sectors with the largest growth in productivity (computers and electronic products, wholesale trade, retail trade and manufacturing, excluding computers and electronic products) experienced positive average employment growth, adding a total of nearly 2 million new jobs. By contrast, the sectors with the largest productivity gains during the 2000s experienced a substantial decline in employment. Computers and electronic products, information, and manufacturing (excluding computers and electronic products), accounted for a sizeable share of overall productivity growth, but employment fell, with a loss of more than 6.6 million jobs, about 60 per cent of which occurred before the onset of the Great Recession of 2008.
In other words, strengthening the corporate bottom line will do little to reverse income and employment polarization. As the TDR explains (page 80):
The evidence presented in the chapter indicates that, in developed countries, the effect of the forces of globalization on income inequality since the early 2000s is also largely due to behavioral changes in the corporate sector in response to greater international competition. Companies have given less attention to upgrading production technology and the product composition of output through productivity enhancing investment with a long-term perspective; instead, they have increasingly relied on offshoring production activities to low-wage locations, and on seeking to reduce domestic unit labor costs by wage compression. This trend has been associated with a polarization of incomes in developed countries. For the United States, evidence suggests that a new mode of corporate governance aimed at the maximization of shareholder value is pushing corporations to maintain external competitiveness through wage repression and offshoring, and to increase profits through, often speculative, financial investments, rather than by boosting productive capacity.
Any improvement in living and working conditions in the United States is going to require far more than tinkering at the margins. The fact is that U.S. economic dynamics have undergone a major transformation.
As Figure 1, taken from a Dollars and Sense article by Gerald Friedman, shows, profits and investment are no longer positively related. Since the early 2000s, profits have soared as a percent of GDP and net private investment has plummeted. Even during the 1990s, when high-technology was celebrated as the engine of never-ending growth, net investment as a share of GDP remained below 1970s and 1980s highs.
Our leading companies, the ones that shape government policy, are now able to make healthy profits without spending on plant and equipment much beyond replacement. Their profits are now largely secured by globalizing manufacturing production, financialization, intensification of work, wage suppression, and government tax-breaks and subsidies. Of course, that means that their quest for profits will continue to lead to policies likely to undermine progress in reversing negative trends in majority living and working conditions.
A case in point is their aggressive push, supported by the Obama administration, for new free trade agreements—the Trans-Pacific Partnership Free Trade Agreement and the Trans-Atlantic Free Trade Agreement. President Obama took the lead in securing passage of the Korea-U.S. Free Trade Agreement, arguing that it would improve our trade balance with Korea and by extension U.S. jobs. Well, the returns are in, and in line with the record of past agreements, the outcome is the exact opposite.
The Eyes on Trade blog offers the following summary:
April  was another record-breaking month for U.S. trade with Korea under the U.S.-Korea Free Trade Agreement (FTA). The monthly U.S. trade deficit with Korea soared to its highest point in history, topping $2.5 billion for the month of April alone.
According to a ratio used by the Obama administration, the unprecedented deficit surge implies 13,500 U.S. jobs lost to trade with Korea in just thirty days. April’s trade deficit with Korea was 30% higher than in April 2012 — the first full month of FTA implementation — and 90% higher than in April 2011, before the FTA took effect.
The deficit increase owes largely to a dramatic drop in U.S. exports to Korea since enactment of the FTA. U.S. exports to Korea in April once again fell below the levels seen in any given month in the year before the FTA took effect. The sorry track record defies the promise (FTA = more exports) that the Obama administration used to pass the FTA. Undeterred by the facts, today the administration is using the same worn-out promise to sell the Trans-Pacific Partnership.
Unwilling to pursue policies that directly threaten corporate interests, the Obama administration has relied on monetary policy, or more specifically lower interest rates, to boost investment and employment. As Figure 2 from the Dollars and Sense article makes clear, while lower rates generally boost investment, data points for 2009, 2010, and 2011 strongly suggest that monetary policy has lost its effectiveness.
President Obama can talk all he wants about the need for more investment and better jobs, but unless he is pushed to pursue dramatically different policies, it is hard to see any real gains for working people over the next decades.