Rebalancing comes to the employment market

Unemployed people queue at a Jobcentre Plus at Gateshead, England (Photo: AP)

The headlines on the latest unemployment statistics from the ONS are grim. Unemployment has reached 8.1 per cent – it's highest value since 1996. In terms of numbers (as opposed to percentages), it's at its highest level since 1994. The last times unemployment exceeded 8.0 per cent on the way up were in the first quarter of 1991 and the final quarter of 1980 – not auspicious precedents.

Below the raw headlines, something rather interesting is happening – something predicted by a number of economists for some time. Despite the recession being the worst since the 1920s, unemployment has not so far even reached the heights of the 1990s. The 2008/9 recession was deeper than that of 1979-81. If the same peak unemployment rate had been reached as at that time (11.9 per cent), the number of people unemployed would have been 3.8 million. Many economists – including yours truly – suggested that figures as high as 3.5 million were likely. By unemployment has so far not exceeded 2.6 million.

One factor here – perhaps the most important, really – is that unemployment is what economists call a "lagging indicator". In other words, unemployment reaches its peak after recessions have ended (it lags behind). For example, in the 1980s the recession ended in early 1982, but unemployment continued to rise until 1984. Perhaps the main rises in unemployment are yet to come?

Another factor was a suite of responses by the labour market to the recession. In the 1980s the rise in unemployment was intimately connected with huge rises in wages in 1980 (rising 22.6 per cent in the year to October 1980, at a time when inflation was 15.4 per cent and falling), as workers tried to keep up with rapidly rising inflation and didn't believe the government when it said inflation would come down. When inflation did in fact fall (going down below 4 per cent by early 1983), workers were stranded on uncompetitive salaries and less productive workers being fired was, in fact, a sine qua non for growth to recover.

By contrast, during the current recession workers have accepted a combination of salary freezes or even cuts, non-payment of bonuses, loss of overtime, and part-time working. Hours worked by full-time workers fell significantly during the recession – from 37.3 hours per week on average in 2007 and early 2008 (a figure that had been pretty stable since 2002) to just 36.5 hours by mid-2009 (the lowest figure since comparable records began). Whilst the number of full-time workers fell by 990,000 from early 2008 to early 2010, the number of part-time workers actually rose, by around 570,000.

Such strategies helped firms continue without firing workers for a time, but if there is a further down-leg in the recession, such arrangements are unlikely to be sustainable. Alternatively, if the economy begins to recover more solidly, workers are unlikely to be content to continue to have their real salaries eroded by inflation, to miss out on opportunities for over-time or bonuses, or to have full-time work. A likely sine qua non of recovery is that firms fire their less productive part-time workers and instead allow their full-time workers to earn more.

The latest data suggest that this might indeed have started to happen. For whilst the total number of people in employment has fallen nearly 180,000 over the past quarter, that is entirely accounted for by a 180,000 fall in the number of part-time workers. Over the past year, the number in full-time employment has actually risen, by around 120,000, but there has been a 170,000 drop in part-time employment. Average hours worked are back to 37.0 per week.

This factor is probably also reflected in recent trends in salaries, which have started to pick up again in recent months, now rising at around 2.8 per cent per year, versus just 0.5 per cent in mid-2009.

The last thing to point out, for now, is that although fiscal consolidations have often been associated with faster growth, even in the short-term, they are almost invariably associated with rising unemployment – e.g. see here. I am a strong supporter of the Coalition's fiscal consolidation programme, but I always found the government's claim that unemployment would be likely to fall during it to be greatly at variance with theory and evidence.

Either way – further down-leg or recovery phase - unemployment is likely to rise further from here.

GM pulls advertisement that offended cyclists

General Motors Co. is killing an advertisement aimed at college students after receiving complaints that it makes fun of people who use bicycles for transportation.

That ad has a headline stating, “reality sucks” and depicts a nerdy looking guy wearing a helmet and riding a bicycle being passed by a cute young woman in the passenger seat of a car. It then goes on to say, “Stop pedaling … start driving” and provides information about discount pricing for GM products such as the new 2012 Chevrolet Sonic subcompact sedan and the giant GMC Sierra 1500 truck.

The ad ran in a variety of college newspapers and was turned into a poster that was displayed campuses, according to the automaker.

The advertisement was widely panned on a variety of cycling blogs and in complaints to the company.

“The content of the ad was developed with college students and was meant to be a bit cheeky and humorous and not meant to offend anybody,” said Tom Henderson, a GM spokesman.

“We have gotten feedback and we are listening and there are changes underway.  They will be taking the bicycle ad out of the rotation…. We respect bikers and many of us here are cyclists,” he said.

This follows a higher-profile reversal made last month concerning GM’s OnStar vehicle communication service.

In that case, GM reversed course and said it will change how it will handle former OnStar customers once they opt out of the service.

The automaker said it will change its proposed “Terms and Conditions” policy and will not –- as it had intended -- keep a data connection to customers’ vehicles after the OnStar service is canceled.

U.S. Sen. Charles Schumer (D-N.Y.) said OnStar's policy represented an invasion of privacy and he threatened a federal investigation.

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-- Jerry Hirsch
Twitter.com/LATimesJerry

Photo: General Motors advertisement. Credit: General Motors Co.

Wall Street: Stocks and gold up again

Gold: Trading now at $1,681 an ounce, up 1.2% from Tuesday. Dow Jones industrial average: Trading now at 11,522.26, up 0.9% from Tuesday.

Another up day. Stocks opened higher yet again as fear about the European financial crisis ebbs.

Fighting Volcker. Banks had been lobbying regulators hard before the release of a draft of the Volcker rule -- one of the most important pieces of the financial reform legislation -- and now that the draft is out, they will continue their lobbying effort.

Psychic help. As bankers try to figure out how to deal with tough economic conditions, at least some of them are turning to psychics for guidance. 

-- Nathaniel Popper in New York
Twitter.com/nathanielpopper

Photo credit: Stan Honda / Getty Images

Climate change could shrink chocolate production: report

Scientists say climate change will eventually claim many victims -– including, according to a new report, chocolate.

As temperatures increase and weather trends change, the main growing regions for cocoa could shrink drastically, according to new research from the International Center for Tropical Agriculture.

Ghana and the Ivory Coast –- which produce more than half of the global cocoa supply –- could take a major hit by 2050.

Currently, the optimal locations to grow the crop are about 330 feet to 820 feet above sea level, with temperatures of about 72 degrees Fahrenheit to 77 degrees. That range will soar to 1,500 feet to 1,640 feet in four decades to compensate for hotter weather.

Cocoa production, which reached about $9 billion from 2008 to 2009 and accounts for 7.5% of the Ivory Coast’s gross domestic product and 3.4% of Ghana’s, could be in for a heavy slide.

Peter Gleick, a MacArthur fellow and chief executive of the Pacific Institute, bemoaned the potential decline of the sweet treat last week in an open letter to climate change skeptics in Forbes.

Many farmers will need to find alternative crops such as cashews and cotton. But researchers pointed out that as temperatures phase out some fields, others could become prime growing spots.

“Climate change brings not only bad news but also a lot of potential opportunities,” according to the report. “The winners will be those who are prepared for change and know how to adapt.”

Fluctuating weather in the United States alone has already wreaked havoc with harvests for peanuts, wine grapes, pumpkins and coffee beans.

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-- Tiffany Hsu

Photo credit: Ricardo DeAratanha / Los Angeles Times

Whose Jobs Are at Risk in Free Trade

With Congress expected on Wednesday to take up trade agreements with South Korea, Colombia and Panama as well as a benefits package for workers who lose their jobs to foreign competition, the Joint Economic Committee of Congress has released a report showing that the workers most likely to be hurt by free trade are the same groups that will have the most difficult time getting new jobs.

According to the report, “Nowhere to Go: Geographic and Occupational Immobility and Free Trade,” the workers most likely to lose their jobs as a result of increased trade are older workers and those without a college education. The most obviously affected industry has traditionally been manufacturing, where workers tend not to have college degrees and an increasing number are 45 or older.

Particularly in this dismal economy, finding new jobs is a challenge for these workers. According to Labor Department data, the unemployment rate among those with just high school diplomas is 9.7 percent, more than double the rate among those with a bachelor’s degree or higher.

And while the unemployment rate among those 45 to 54 years old is actually lower than the rate for 25- to 34-year-olds, once they are unemployed, older workers tend to spend much longer searching for work.

The Joint Economic Committee report reviews data showing that the occupations that are expected to grow the most in the future are also those with a high share of workers who hold bachelor’s degrees. According to Labor Department data cited in the report, about a quarter of the job growth between 2008 and 2018 will come in professional occupations, where about 65 percent of current workers hold a four-year degree.

At the same time, the five slowest growing occupations, including production, maintenance and repair and farming, fishing and forestry, are those that do not tend to require college degrees.

Because trade can displace entire industries in a specific region, it helps if a displaced worker can move. But the report shows that older people are much less likely to move than younger workers, making it harder for older laid-off workers to find new jobs.

China calls on U.S. to oppose currency legislation

China warned the U.S. against trade protectionism hours after the Senate passed a proposed bill that would slap tariffs on Chinese goods over its perceived under-valued currency.

In a written statement posted on its website, China's Foreign Ministry urged Washington to oppose the bill.

“This proposed bill in the name of so-called ‘exchange rate misalignment’ is protectionism and a serious violation of World Trade Organization rules,” Ma Zhaoxu, a foreign ministry spokesperson, said in the statement. “This won’t solve America’s own economic and employment problems.”

China's central bank also issued a statement Wednesday defending the value of the country's currency, known as the yuan or renmenbi.

“The American Senate has repeatedly ignored the facts, has constantly pestered [China] on the renminbi exchange issue in order to find an external excuse for its own malaise,” the statement said.

The legislation, which could penalize any country found to be holding the value of its currency down to create an unfair trade advantage, is largely targeted at China, which is believed to under-value its yuan by upwards of 25%.

The bill would still need to pass the House where it faces stiff opposition from Republican leaders wary of a trade war and harm to U.S. business interests in China. The Obama administration has not demonstrated support of the legislation either.

The American Chamber of Commerce in China also urged lawmakers to oppose the legislation, saying the U.S. would benefit more by pressuring Beijing to open its domestic market to American firms.

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--Benjamin Haas

Photo: China's currency controls have been blamed for an unexpectedly large global trade surplus. Credit: How Hwee Young / EPA

Growing Businesses Cut Payrolls, Too

Casey B. Mulligan is an economics professor at the University of Chicago.

In many industries, sharp employment cuts during the recession cannot be attributed to a lack of demand.

Today’s Economist

Perspectives from expert contributors.

The standard narrative of the 2008-9 recession and lack of recovery has been that the financial crisis, housing crash, excessive debt and other factors caused consumers to spend less, and businesses to invest less. With the private sector spending less, employers had a hard time selling their products, so they had to lay workers off, cut back on new hiring, or both.

Perspectives from expert contributors.

As Paul Krugman put it, “Businesses aren’t hiring because of poor sales, period, end of story.”

Yes, consumer spending dropped sharply, as did business investment, in 2008 and 2009. But that observation does not tell us whether low employment is a result of low spending or if the reverse is true.

I agree that a few important industries, including manufacturing, home construction and much of the retail sector, did, and still do, suffer from significantly low demand. Those industries vividly illustrate the demand narrative — but they are only a minority of the overall private sector.

The lack-of-demand hypothesis is incorrect for a large fraction of the economy. The chart below illustrates output, revenue and employment from the United States wireless telecommunications industry (that is, cellphones). This industry has clearly not been suffering from a drop in customer demand.

Since 2007, the number of mobile connections has increased almost 20 percent, to 303 million from 255 million. The Bureau of Economic Analysis estimates that consumer spending on mobile communications increased 15 percent (not inflation adjusted) over that time frame.

Despite continued demand growth, employers in the wireless telecommunications industry sharply cut employment, at an even greater rate than employers in other industries. After growing 6 percent from 2005 to 2007, the industry’s employment had fallen 14 percent by 2010.

There is no way to blame that sharp employment drop on “poor sales.”

This pattern is not limited to the cellphone industry. Other industries sharply cut back their employment even while their revenues were falling little, if at all; the employment loss from such industries numbers in the millions.

To examine this issue more systematically, I used the industry economic accounts published by the Bureau of Economic Analysis. Industries can be examined at varying levels of detail: I divided the private sector into 21 industries and classified them according to the percentage change in their revenue between 2007 and 2009. The table below shows the results.

In two of the industries, education and health care, revenues grew more than 2 percent (in fact, their increase was about 10 percent), and their employment increased, as is shown in the table’s top row. Five other industries summarized in the next row had a revenue increase but still sharply cut their employment. Four others had minor revenue declines and cut their hiring sharply, too.

The number of full-time equivalent employees declined 2.2 million in those nine industries combined, even though it seems that those industries had enough sales to maintain their employment. Something else motivated them to cut employment and motivated them to forgo an opportunity to hire some of the many workers laid off by declining industries.

As I wrote before much of the employment decline happened, I think “some employees face financial incentives that encourage them not to work, and some employers face financial incentives not to create jobs.”

That’s why even growing business are now getting by with substantially fewer employees.