Jobs and Job Creation

Please do not get excited over this morning’s report of a 40,000 drop in new claims for unemployment assistance. It is largely fiction. The weekly total was 404,000, which is much better than where we were a few months ago, but is nowhere near where it needs to be for us to argue strong job growth is underway.

Why fiction?

For the same reason that I cautioned you last week to ignore the apparent spike upwards in the first couple of weeks this month. Bureaucracies are slow to gather data at this time of year. Holidays and inclement weather mean that local offices tend to have backlogs of applications to process. When they do, the numbers appear to jump up. When the backlog is worked off the numbers appear to drop quickly. The real trend is, as it often seems to be, somewhere in the middle.

So this morning’s apparently good report is simply a reflection of the ending of this regular seasonal quirk.

What is going on out there in the job market?

Not a whole lot.

In fact, as you may all now be aware, the inability of the US to generate jobs is fast becoming a fixation in the economics fraternity with everyone offering up a reason.

Earlier this week Andrew Leonard at Salon neatly summed the problem up: the US is rotten at job creation right now because it has weak unions, a weak safety net for workers, weak education and re-education programs, ridiculous income inequality, and a policy making elite that is intensely focused on the upper echelons of society rather than the lower echelons.

Oddly, when we read this list, it appears to be a litany of policy prescriptions right out of an orthodox economics textbook. In this view:

• Income inequality is of no concern. It is a consequence of the hurly burly of the free market. That incomes so concentrated drain the economy of aggregate demand and thence job creation does not register in this view simply because aggregate demand is not something to study. The total income is the economy is not altered, so why does its distribution matter?
• Weak unions are a jolly good thing. Unions, after all, introduce all sorts of evils, chiefly the stickiness of wages. Stickiness, you must understand, is very bad. If workers would be willing to work for ever lower wages there would always be lost of jobs.
• Weak safety nets. Ditto. Safety nets are just intrusions in the magical world of the free market. If a worker thinks there is a net to catch them they might not be so eager to take that pay cut. Hence safety nets contribute to stickiness. That’s bad.
• Weak education. I will resist my desire to make aside comment about education in economics. But. America has systematically underfunded education and job training. We have left it increasingly to the private sector. In turn, the private sector has trimmed training and education as being … you guessed it, a cost. As we know costs need to be cut they get in the way of profits. As a result we have left workers in need of training, especially younger ones in need of experience as well, to fend for themselves. This is the free market at work. Good.
• A self-regarding policy elite. That’s a good thing. It means that our well educated and highly thought of leaders are working tirelessly in the interests of system stability. And keeping the systems intact is crucial to the economy’s wellbeing. Stability means we will not be subject to nasty shocks that might destabilize things and cause a build up of toxic assets, lost profits, uncertain business outlooks, lower returns of equity, and diminished portfolio values all of which are life threatening to the system. It is a good thing that our leaders are learned enough to understand how important it is to keep the system afloat. After all: a rising tide lifts all boats. No matter that some boats are larger than others.

As you can tell I am not so convinced about this.

That America sucks at job creation is a fairly new phenomenon. I have spoken about the last decade here before. The entire 2000 through 2010 decade has been a “lost decade” for a vast majority of Americans. That a few did extremely well is equally certain. But job creation fell off the policy radar somewhere along the way. About the same time we became obsessed with deregulation and relentless pro-business legislation.

One summary of all this is that the orthodox economics underlying the mess is constructed to hold true in a hermetically sealed system. But our economy is more open. Our businesses compete, hire, and fire, globally. Getting rid of an American worker is fine, in the business elite’s mind, if they are hiring someone in India [say]. The world’s workforce is the same. And if the American worker cost so much more then it is entirely rational to make the “adjustment”. Profits stay high, shareholders are happy, Wall Street applauds, and the system works well.

Another view is that all these unemployed workers are simply dross being squeezed from the system. They didn’t add any value. So getting rid of them is a good thing. How do we know that added no value? Profits are healthier without them than before. Corporate cash flow is great thank you, even after all the “outplacement” costs. Dross doesn’t get hired back too easily, so we should expect a long term unemployment cycle.

And so it goes.

Ultimately all the orthodox arguments for America’s unusually high unemployment rate flop in the face of history. It used to be that the US was regarded as something of a job creating machine. It was the envy of the world. American economists lectured the world about the vaunted labor market flexibility here. All you had to do was look at the job cycles of the postwar recessions. They were remarkable: short sharp bursts of unemployment, followed by equally short sharp recoveries, followed, in turn, by prolonged and steady increases in work opportunities.

This went belly up in the infamous stagflation of the late 1970’s after which we introduced all sorts of orthodox policy prescriptions. Far from fixing things these seem to have made things worse. Our labor market has lost its flexibility, wages are stuck, and workers here are exposed to downside risks far more than their peers elsewhere.

In retrospect the union infested, hyper wage-sticky, and worker friendly years of the 1950’s and 1960’s look very good by comparison.

Apparently we are to believe that somewhere in the early 1980’s, and ever since then, our workers became really dumb, lazy, and incompetent. They became a cost to be controlled, rather than an asset to be managed. Worse: they all flocked into construction because that’s the last frontier for these all-brawn, no-brain folks. And after the bubble they have nowhere to go.

Well, I think Leonard is correct. Pretty everything we did along the way during that past three decades has led to this mess. It was deliberately created. Our policy makers designed it thus.

So there should be no surprise or shock.

It’s the government’s fault. It has to be. Orthodox theory tells us that it cannot be the magical market.

Meanwhile I repeat a pet peeve of mine: I find it faintly unethical for tenured professors of economics to preach/teach/advocate flexible labor markets. Frankly it sticks in my craw. If it’s OK for professors of economics to have job security, why not for the average Joe/Jane? And before you all lambast me: I know that tenure is under threat. For that, blame the economics department.

So, ultimately, I don’t think our workers suddenly became dumb, lazy, or incompetent.

Our policy makers did. That’s why America has a job creation problem.

That and lack of aggregate demand. But I’ve said that before.

Addendum:

David Ruccio has, as ever, lots of neat charts plotting the crisis and its aftermath. And he was the one who pointed me to the Leonard article that I had previously missed. So: thanks David!