Too soon for US to celebrate rise in jobs
The sharpest drop in unemployment in more than a quarter of a century obscures a simple fact: the jobs market still isn’t working for many Americans.
About 6.3 million people have been out of work for more than six months. The ratio of employment to population is lower than it was when the recession ended as companies have been slow to add to payrolls. And big sources of hiring in the past – the government, health care and retailing – may not be able to reprise that role in the future as legislators limit outlays and consumers curb spending.
“The trends are… scary,” says Nobel laureate Michael Spence. “There’s been a break in (a key) part of the social contract” for many Americans who find they can’t get ahead.
Mixed messages from the jobs numbers make decisions more difficult for Federal Reserve chairman Ben Bernanke and his central bank colleagues as they wrestle over monetary policy.
Rising prices and falling unemployment – the jobless rate dropped to 8.8 percent in March from 9.8 percent in November, the biggest four-month decline since 1983 – suggest that the Fed should raise rates from near zero later this year to keep inflation in check, according to economist Joseph LaVorgna of Deutsche Bank in New York.
He sees yields on treasury securities rising, with the two-year note hitting 1.25 percent to 1.5 percent and the 10-year- note climbing to 4 percent by the end of the year.
Alan Krueger, a former treasury official, argues that policymakers shouldn’t be tightening monetary policy in the face of low employment and elevated long-term joblessness.
“I would like to see quantitative easing 2.5,” with the Fed completing its second round of quantitative easing (QE) in June and then buying more treasury securities thereafter.
That is not likely to happen, says Roberto Perli, a former Fed official in Washington. The threshold for additional purchases beyond the $600 billion (R4 trillion ) in QE2 was “very high at this point”. The debate at the Fed instead focuses on how fast to remove the record stimulus the central bank has pumped into the economy.
Fed policymakers agreed at their last meeting that “gains in employment seemed to be on a gradually rising trajectory”, though there was still substantial slack in the labour market, according to the minutes of their March 15 gathering.
For Dan LaRue, a former marketing specialist at JPMorgan Chase, there is scant sign that the jobs market is getting better. “The reality of what I’m seeing… doesn’t jibe” with reports of an improving labour market, says LaRue, who has been without a full-time job for two years. “It’s ugly out there.”
The New York resident is borrowing money from his 81-year-old mother to make ends meet. “I hate it, but thank God she’s there. I’m willing to take a pay cut, but I don’t think I’m even being considered.”
The ratio of people employed to the population stood at 58.5 percent in March, down 0.8 percentage points from July 2009 when the recovery began and up just 0.3 points from a 27-year low of 58.2 percent in November 2010, according to data from the Labor Department.
The ratio is a better measure of the job market because, unlike the unemployment rate, it is not affected by changes in the size of the labour force, says Edward Leamer, a professor at the University of California at Los Angeles.
About half of the fall in the jobless rate during the last four months was caused by Americans who gave up looking for work and left the labour force – a development that he says is unwelcome. “It’s people getting so discouraged that they’re dropping out,” says Leamer.
That number may grow later this year as extended government unemployment benefits run out, Krueger adds. To collect those benefits, the jobless must show they are searching for work, and the longer people are without a job, the less time they spend looking, according to a study of 6 025 unemployed people that Krueger conducted.
About 45.5 percent of those classified as jobless in March had been without work for more than six months, just off the record high of 45.6 percent set in May last year.
The waning intensity of their searches suggests that they may not be putting as much downward pressure on wages – and inflation – as some macroeconomic models assume, says James Stock, a professor at Harvard University.
That does not mean the Fed should start worrying about accelerating prices, Stock says. “We still have a very weak economy. Disinflation strikes me as a much greater risk than inflation at the moment.”
Gwen Robbins, a 61-year-old resident of Georgia, is a self-styled 99er, so called because her 99 weeks of employment benefits ran out in January. Robbins, an office manager until December 2008, says she has “applied for probably close to 400 jobs” since then.
“I’m giving up on the private sector,” says Robbins, when asked if she will continue her search. Many firms seem more interested in younger applicants, she says, adding that she is now seeking public sector work with the city.
The flaws in the labour market were aggravated by the recent recession but didn’t start there, according to Krueger. The employment to population ratio in the last expansion, which began in 2002, never reached the 64.7 percent peak it attained in 2000 during the previous upturn.
Rising income inequality and sluggish wage growth during the past expansion also suggest that the labour market’s troubles are ingrained, Spence says. Average hourly earnings showed little growth from 2002 to 2007 when adjusted for inflation.
Economists posit a variety of reasons for the dysfunction.
Spence attributes it partly to globalisation, as China and other emerging markets take work Americans once did. Leamer points to technology, with machines replacing people in the production process. For Krueger, some of the fault lies with the US education system and training programmes for not providing employees with the skills they need.
The challenges facing the US involve both the quality and quantity of jobs created, Spence says. A study he did with New York University researcher Sandile Hlatshwayo showed that virtually all of the growth in employment between 1980 and 2008 was in the non-tradable sector, which was not subject to international competition. Government and health care together accounted for 40 percent of the jobs added.
Employment growth in that sector is likely to slow as government spending is restrained, the authors argue in a paper for the Council on Foreign Relations in New York. Value added per person grew 0.7 percent a year in the period studied, which explains why wage gains for these types of jobs were limited, they say.
Value added in the tradable arena, which includes manufacturing and financial services, grew by an average 2.3 percent a year, allowing these employees to enjoy bigger compensation increases. The sector as a whole added few net jobs, though, as manufacturers in particular moved production overseas, Spence and Hlatshwayo wrote.
The result, according to the paper: growing income inequality as many of the jobs the US created were low-paying ones that added limited value.
“The American dream is being seriously tested right now,” Leamer says. “It’s an emergency for the middle class.” – Bloomberg