Joblessness Threatens Economic Recovery Around the Globe

December 22, 2009

A “jobless recovery,” which means that job growth rate is much below economic growth rate, or “jobloss recovery,” which describes an expanding economy that is losing employment, is not uncommon for the United States. The economic recoveries after the 1990-91 and 2001 recessions were accompanied by sluggish employment recoveries. Following the end of the previous recession in November 2001, it took as long as four years for non-farm payrolls to return to their pre-recession March 2001 levels. It means that the recovery period for lost employment was five times longer than the recession period itself, which was only eight months. Before that, the recovery period after the 1990-1991 recession was three years. Employment is usually a lagging indicator for the overall economy, but a three– or four–year recovery seems too long to simply be called “lagging.”

In both cases, the slow re-hiring of workers reflected moderate economic growth. In the last two recovery phases, growth rates were much more moderate than in earlier recoveries. Following both recessions, the growth rates in the years after the economy reached its cyclical bottoms were 1.9 percent and 2.6 percent respectively. But previously in the postwar period, growth rates following recessions’ low points had averaged more than 7 percent.

The current U.S. economy might be following this “jobless” or “jobloss” trend. Almost all forecasts indicate that the U.S. unemployment rate is expected to hover at the current high level for a while, remaining above 9 percent even through 2011. The current recession began with an unemployment rate of 4.9 percent in December 2007. However, the latest number for November 2009 was 10.0 percent, an increase of more than 100 percent over two years. This should be a good case comparison with the last recession phase: unemployment rose from 4.3 percent in March 2001 to 5.5 percent in November 2001, and again it took as long as four years to get back to the pre-recession level. We can expect that the coming recovery for employment will be much more severe and it will take much longer to recover the pre-recession level.

This argument stems from the fact that upcoming economic growth will be as moderate as the growth after the last two recessions; the recovery pattern is expected to be L-shaped or W-shaped, not V-shaped. The economy is close to bottoming out, yet is still hampered by three constraints: (1) deflationary pressure on asset prices, (2) an ongoing struggle in households to balance household budgets, and (3) fragility in the financial system.

Besides, businesses seem increasingly reluctant to hire workers back in the current economy. Statistics about average weeks of unemployment, released by the Department of Labor, illustrate the serious problems in the current labor market. The unemployed period has lengthened since the 1980s, but the latest figure for last November in 2009 reached its highest level with 28.5 weeks, meaning it takes newly unemployed workers more than half a year to find a new job. The increase of prolonged unemployment indicates that job creation will be slow in the coming recovery.

Furthermore, reliance on just-in-time employment practices like part-time jobs instead of full-time, permanent jobs has also increased. As a result, the percentage of part-time workers compared to all employment rose to its highest level, 20 percent, in November 2009. In the recovery from the last recession, this figure averaged about 15 percent. Additionally, more and more businesses see the benefits of outsourcing production to cheaper labor forces overseas rather than investing in the domestic labor market.

There is little doubt that businesses are lacking the energy for new recruitment in the current moderate economic recovery.

Such companies’ conservative approach to new hiring has been consistent with the general reluctance for new investment. In the United States, more and more companies have invested only within their own cash flow. During the last period of economic expansion, the saving-to-investment balance of the corporate sector ran a surplus, although it was normal for investments to be made in response to expanding demand by enthusiastically raising funds.

Now, uneasy about cash flows and outcries from vigilant shareholders, and facing cut-throat price competition under globalization, companies are abating excessive assets and cutting back on nonessential investments. This trend is both an effect and a cause of today’s moderate economic growth and economic uncertainty and will become more and more common. This kind of survival strategy might look attractive to corporations, but it gives rise to a “fallacy of composition” in which improvement in one area is conflated with improvement in the whole economy, thus undermining the world and local economies.

To add to the difficulty, jobless or jobloss economies can be seen across the globe, not only in the United States. Japan experienced sluggish employment recovery in the 1990s and is predicted to do so again in coming years. After the Japanese bubble burst in the 1990s, there were two business recoveries: October 1993 through May 1997 and January 1999 through November 2000. However, the unemployment rate did not stop rising until 2002. And now, in October 2009 the unemployment rate has gone up again, reaching as high as 5.1 percent.

For European countries, job creation has been an oft-heard mantra over the last couple decades as they suffer downward rigidity in the labor market, such as inflated wages and overly generous unemployment benefits. Such harsh structural issues continue to prevent new recruitment in Europe. 

China also faces a jobless recovery even as it enjoys high economic growth. In China, production has become more capital-intensive rather than labor-intensive; output growth does not generate enough employment to absorb the expanding pool of underemployed workers from rural areas. The official unemployment rate in urban areas is expected to remain as low as about 4 percent, yet in the early 2009 the Chinese Academy of Social Sciences, one of most distinguished think tanks in China, released a report claiming that actual unemployment reached 9.4 percent. Whichever is correct, the Chinese government has made dealing with employment a high priority in order to deter social unrest.

Nevertheless, two plausible factors seem to drive China toward a capital-intensive economy. First, the cost of capital has been held down by the virtual lack of dividend payments and very low or negative interest rates in real terms set by the government. Chinese business sectors can collect funds at low rates for building their plants or machines as substitute for workforces, the costs for which are relatively high when they need to expand their business activities. Second, Chinese core industry has been shifting from labor-intensive industries like textiles toward capital-intensive areas such as steel or automobiles. As a result, since 1990 the number of China’s employed workers has increased by about only 1 percent per year while the real GDP growth rate has averaged 10 percent. The increasing number of Chinese job seekers can’t be absorbed, even with the high economic growth.

Economies appear ready to bottom out in many counties, but it is too early to let our guard down. As seen above, many economies are staging recoveries by using less labor. This might not be so much a cyclical problem of the business sector as a structural or an irreversible problem in many economies. The employment problem will become larger, and more fiscal actions might be needed to boost job creation in the near future. Ad-hoc steps for job creation won’t be sufficient to solve a structural problem; governments should foster dynamism in the economy by incentivizing promising industries like environmental industries in which many jobs are expected to be created and to build employability skills for the unemployed. Short-term stimulus packages must be combined with long-term growth and job-creation strategies. Without progress in fixing the jobless and jobloss problems, world economies might suffer moderate economic recoveries or sink into a double-dip recession.