Brookings: Topics - Unemployment

Confronting Suburban Poverty in America

Alan Berube and Elizabeth Kneebone — Mon, 20 May 2013 00:00:00 -0400

Brookings Institution Press 2013 184pp.

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Presentation - Confronting Suburban Poverty in America

Synopsis:

In Confronting Suburban Poverty in America, Elizabeth Kneebone and Alan Berube take on the new reality of metropolitan poverty and opportunity in America. For decades, suburbs added poor residents at a faster pace than cities, so that suburbia is now home to more poor residents than central cities, composing over a third of the nation’s total poor population. Unfortunately, the antipoverty infrastructure built over the past several decades does not fit this rapidly changing geography. The solution no longer fits the problem. Kneebone and Berube explain the source and impact of these important developments; moreover, they present innovative ideas on addressing them.

The spread of suburban poverty has many causes, including job sprawl, shifts in affordable housing, population dynamics, immigration, and a struggling economy. As the authors explain in Confronting Suburban Poverty in America, it raises a number of daunting challenges, such as the need for more (and better) transportation options, services, and financial resources. But necessity also produces opportunity—in this case, the opportunity to rethink and modernize services, structures, and procedures so that they better reflect and address new demands. This book embraces that opportunity.

Infographic; What’s Driving the Rapid Rise of Poverty in the Suburbs?:

(Click to expand)

The authors put forward a series of workable recommendations for public, private, and nonprofit leaders seeking to modernize poverty alleviation and community development strategies and connect residents with economic opportunity. They have created an Action Toolkit so that anyone can be apart of confronting suburban poverty.

Event:

On May 20, the Metropolitan Policy Program at Brookings hosted an event marking the release of Confronting Suburban Poverty in America, co-authored by Elizabeth Kneebone and Alan Berube. Below, you can watch a piece of the event with Elizabeth Kneebone, as she discusses how the landscape of poverty in America has changed.

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ABOUT THE AUTHORS

Alan Berube

Elizabeth Kneebone

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Should the United States Have 2.2 Million More Jobs?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 03 May 2013 10:30:00 -0400

Employers added 165,000 jobs in April, according to the Bureau of Labor Statistics, following upwardly revised gains of 332,000 in February and 138,000 in March. The three-month average pace of job gains of 211,000 was slightly above the average pace of 173,000 jobs over the last twelve months. The unemployment rate edged down to 7.5 percent, and the fraction of the population reporting a job edged up. The unemployment rate has now declined 0.6 percentage point since last April, although much of this change can be attributed to declining rates of labor-market participation rather than increases in employment.

These numbers continue a pattern of steady growth in the labor market, but they also confirm that America’s recovery from the Great Recession is still very much a work in progress. The public sector, especially, has been a drag on the economy in recent months. While the private sector has added roughly 2.2 million jobs over the past year, employment in state, local, and federal governments has declined by 89,000, including significant losses to teachers and emergency responders. In this challenging economic climate, there is growing concern about how sequestration—the across-the-board budget cuts to discretionary spending that took effect on March 1—may negatively impact the recovery even more. Indeed, forecasters at the Congressional Budget Office project that the sequestration could reduce overall GDP growth in the United States by 0.6 percentage point and cost the economy 750,000 jobs by the end of 2013.

In this month’s employment analysis, The Hamilton Project examines the trajectory of public-sector employment since the onset of the Great Recession and contrasts this decline to periods of economic recovery after previous recessions. We find that the last several years’ policy choices are starkly different from those following previous recessions. Specifically, there are 2.2 million fewer jobs today, relative to what would have occurred with the policy response typical of the five preceding recessions. We also continue to explore the “jobs gap” and find that the country needs to add about 10.0 million jobs to return to pre-recession employment levels.

Government Employment Since the Recession

The downward trend in public-sector employment, described in a Hamilton Project report last summer, has continued into the opening months of 2013. While the private sector has added jobs to the economy in every month since March 2010, a total increase of approximately 6.8 million jobs, the public sector has contracted. To put this in perspective, federal, state, and local governments added jobs in only twelve of the thirty-eight months since March 2010 and have lost more than 625,000 jobs over this period.

The graph below shows the ratio of government employment to the civilian non-institutional population (every civilian in the United States sixteen and older who is not in prison or a live-in care facility) going back to 1980. For the twenty years prior to the Great Recession, this ratio stayed relatively constant, but since then it has dropped precipitously, except for the temporary uptick in 2010 when government employment rose to accommodate demand for U.S. Census workers.

This figure shows that the percentage of individuals working for federal, state, and local governments is at a decades-long low. In fact, the ratio of government employment to population has not been below 9 percent since the mid-1960s. The result, as detailed in last summer’s Hamilton Project report, is over 200,000 fewer teachers, 50,000 fewer policemen, and 6,000 fewer air-traffic controllers since 2009.

Government Policy: It's Different This Time

By cutting jobs during a period of already high unemployment, budget policies have contributed to the tepid pace of labor-market recovery and stand out as a departure from typical policy responses after recessions. The figure below shows the change in government employment forty-six months after every recession in the United States going back to 1970. (The double-dip recessions of 1980 and 1981, which ended in November 1982, are counted as a single event.) The bars are scaled by the population of the United States in June 2009 so that the magnitudes of employment changes are comparable.

The ongoing recovery, which began when the Great Recession ended in June 2009, dramatically deviates from the usual pattern. In the forty-six months following the end of the five other recent recessions, government employment increased by an average of 1.7 million. During the current recovery, however, government employment has decreased by more than 500,000. Put together, the policy differences have led to 2.2 million fewer jobs today. Such a large contraction of the public-sector during a recovery is unprecedented in recent American economic history.

The April Jobs Gap

As of April, our nation faces a jobs gap of 10.0 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Policymakers are currently faced with the unenviable task of simultaneously increasing employment and addressing America’s long-term budget deficits, but—at a time when the rate of government employment is at a historic low—sequestration threatens to further slow the growth of the public sector and lengthen the time it will take to close America’s jobs gap. Even when ignoring any indirect impacts, a typical policy response to the Great Recession would have led to a jobs gap that is 2.2 million jobs smaller than current gap of about 10.0 million and commensurately reduced the amount of time until the economy returns to full employment.

It is critical to achieve both employment gains and fiscal stability. The textbook approach is for government to continue to support the recovery and credibly enact deficit reduction that will not take hold until the employment crisis has been mitigated substantially. With respect to deficit reduction, The Hamilton Project recently released a collection of fifteen proposals that seek to reduce the deficit while improving efficiency and promoting broad-based economic growth. To see how these proposals could impact the long-term deficit, you can try our interactive budget calculator here. The Hamilton Project also continues to explore policies to boost employment, including a recent discussion paper on improving worker training programs.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Mike Segar / Reuters

Unemployment Projected to Remain at 7.6 Percent for April, But Expected to Drop Faster in Near Future

Regis Barnichon — Thu, 02 May 2013 10:30:00 -0400

This post discusses my monthly update of the Barnichon-Nekarda model. For an introduction to the basic concepts used in this post, read my introductory post (Full details are available here.)

Over the past months, the Barnichon-Nekarda model has been surprised by lower than expected unemployment numbers. Taking the positive news from the March report on board, the model now foresees a faster labor market rebound, and anticipates a rising rate of decline in unemployment over the next six months. I now expect a jobless rate of 7.1% in September 2013, compared to 7.6% as of last month.

In March, the unemployment rate dropped to 7.6%, noticeably lower than the model’s forecast (7.8%, see Table 1). As was already the case last month, the model was surprised by the rate of improvement in the job separation rate: the EU rate, comprised mostly of layoffs (Figure 2), has been declining faster than anticipated over the past couple months.

Going forward, the model now sees the recent labor market improvements as signaling a faster rebound in the labor market. It now projects a faster decline in unemployment over the next 6 months, with a progressive increase in the rate of decline. In fact, the jobless rate is now projected to reach 7.1 % by September 2013, significantly lower than the 7.6% projected as of last month’s forecast (Figure 1).

The intuition for this forecast is easily understood by looking at the projected behavior of the “steady-state” unemployment rate. The steady-state unemployment rate, the rate of unemployment implied by the underlying labor force flows—the blue line in figure 5— stands currently at 7.1% (versus7.4% in the previous forecast). Our research shows that the actual unemployment rate converges toward this steady state. With a steady-state unemployment rate significantly lower level than the actual rate, this "steady-state convergence dynamic" is now pushing the unemployment rate down. As the difference between actual and steady-state rates increased since last forecast, the force pushing the unemployment rate down is now stronger, implying a faster decline in unemployment than previously anticipated.

In addition, the model now also foresees a faster decline in the steady-state unemployment rate itself, with a rate of 6.7% in September, significantly lower than the 7.3% anticipated as of last month (Figure 5). The "steady-state convergence dynamic" pushing the unemployment down will gain in strength and generate a rising rate of decline in unemployment.

More specifically, the model propagates forward its best estimate for how the flows between employment, unemployment and out-of-the labor force will evolve over time, and constructs the implications for the steady-state unemployment rate and hence the actual unemployment rate. With continued improvements on the hiring and job separation fronts over the past months, the model now anticipates a markedly faster increase in workers’ job finding rate over the next 6 months (UE, figure 3) and even (for the first time in months) a small decline in the rate of job separation (EU, figure 2). As a result, the steady-state unemployment rate is now projected to decline much faster.

Authors

Regis Barnichon

Can Egypt’s Transition and Economy Be Saved?

Hafez Ghanem — Wed, 01 May 2013 12:19:00 -0400

The Egyptian economy is unlikely to collapse suddenly. However, in the absence of a serious macroeconomic stabilization program it will continue to deteriorate gradually, with low growth and increasing unemployment and inflation. Even corruption appears to be on the rise. The Egyptian people are also feeling the pinch in terms of higher prices and shortages of some imported necessities. If this continues, the transition to democracy could be jeopardized. On the other hand, politics in Egypt is so polarized that it is difficult to see how serious economic reforms could be implemented without first reaching compromises on some thorny political issues. Perhaps the recent agreement on a coalition government in Italy could serve as a model for Egyptian politicians.

There are signs that the democratic transition is in danger. Loud grumblings can be heard all over Egypt. There is even nostalgia for autocratic rule and some are calling for a return of the military. According to the Pew Center’s “Global Attitudes Project” more than 70 percent of Egyptians are unhappy with the way the economy is moving, 33 percent feel that a strong leader is needed to solve the country’s problems, and 49 percent believe that a strong economy is more important than a good democracy. The number of people disillusioned with the revolution is likely to increase as the economy weakens further.

In addition to freedom and dignity, the young people who started the Egyptian revolution on January 25, 2011 were demanding better living conditions and greater social justice. Their demands are far from being met as economic growth has declined and unemployment has risen (figure 1). Industrial growth which was at a healthy 5-7 percent a year before the revolution has fallen to about 1 percent, and the official unemployment rate rose from 9 to 12.5 percent. About 95 percent of the unemployed are youth with at least a secondary education. Nearly three-quarters of those who are lucky enough to find jobs end up working in the informal sector where wages range between $2.60-3.70 per day.

The Egyptian government’s fiscal policy has not been conducive to growth and employment generation. Figure 1 shows that the government deficit rose from about 8 percent of GDP in 2010 to nearly 11 percent in 2011. It could exceed 12 percent of GDP in 2013. The increasing deficits have been financed almost entirely domestically, and the public domestic debt rose from some 60 percent of GDP in 2010 to 70 percent in 2012. At some point in 2012, the Egyptian government was paying 16 percent interest on its short-term domestic debt. That is, the government has been sucking liquidity from the domestic financial system and crowding out the private sector; discouraging investment, growth and employment creation.

Surprisingly, corruption seems to have increased after the revolution. Ending corruption has been a key demand of the revolutionaries, and the country witnessed more than 6,000 corruption investigations and several high profile incriminations since February 2011. Investigations and police action send a political signal, but they do not constitute an effective anti-corruption program. In 2010, Egypt was ranked 98th on Transparency International’s Corruption Perception Index. Its ranking deteriorated to 112th in 2011 and 118th in 2012. Data for 2011 from the Worldwide Governance Indicators (WGI) also shows deterioration in corruption control. The WGI 2012 data is not yet available.

Falling tourism and foreign direct investment, together with increasing capital flight, led to a decline in foreign reserves from more than $35 billion in 2010 (covering 7 months of imports) to less than $15 billion in 2012, which covers less than three months of imports (figure 2). As a result foreign exchange has become scarce and the Egyptian pound started depreciating rapidly. It has depreciated against the US dollar by about 15 percent in the past three months. Moreover, a black market in foreign exchange has emerged. In addition, Egypt’s credit rating suffered a setback as Moody’s downgraded Egypt’s debt to “caa”, which means it is of poor standing and entails very high risk.

Imports are becoming more expensive and increasingly difficult to procure. Egypt is highly dependent on the imports of many necessities, including food and fuel. The Egyptian pound’s depreciation means that domestic prices for imports are rising; which affects millions of poor and middle class families. Scarcities of some imported goods (e.g. diesel fuel) are appearing as foreign exchange is increasingly difficult to obtain, and foreign banks are wary of providing credit to Egyptian importers. Some businessmen complain that it now takes more than six weeks to open a letter of credit, while it only took three days before the revolution.

It’s clear that Egypt is facing an economic crisis, and needs to implement credible reforms to stabilize the economy, control corruption, and lay the foundations for inclusive growth. Such reforms would normally include a reduction in the fiscal deficit to bring the domestic debt under control and a further depreciation of the Egyptian pound to encourage exports and tourism. The Egyptian government is negotiating with the IMF to obtain support for such a stabilization program. IMF support is desirable because it would open the doors for increased assistance from other bilateral and multilateral donors, and thus help ease the pain of stabilization.

But macroeconomic stabilization requires implementing unpopular measures such as reducing subsidies and raising taxes. The government, which is already facing stiff opposition and unrest, is, understandably, reluctant to adopt such measures. It has so far been able to postpone difficult decisions by getting exceptional financial support from regional allies. However, this has not been enough to turn the economy around.

The Egyptian government appears to be in a no-win situation. Implementing reforms could lead to greater unrest and political instability and jeopardize the democratization process. On the other hand, doing nothing will imply a deepening economic crisis and more hardship. This will also lead to unrest and instability, and ultimately jeopardize the transition process.

How then can Egypt’s transition be saved? A national consensus needs to be reached and the reforms have to be broadly owned and accepted. The opposition (which itself is divided between liberals, Nasserists and Salafists) will have to buy into the economic reform program. This is unlikely to occur unless a consensus is also reached on outstanding political issues (e.g. election law, revision of the constitution, reform of the judiciary, etc.). Both government and opposition will have to make compromises. But do they have the required level of political maturity to do that?

Authors

Hafez Ghanem

Image Source: © Asmaa Waguih / Reuters

In the Longer Run, the Short Run Matters

George L. Perry — Tue, 30 Apr 2013 14:28:00 -0400

The worst of the deadlock between the House and the White House has passed, and there are even signs that a compromise may now be reached addressing long-run budget issues. We are in a better place politically than we were late last year, but still in no position to get complacent about near term economic prospects. Chances of renewed recession are low, but so are prospects for vigorous expansion.

For the past two years, the need for fiscal and monetary stimulus has been debated both in Washington and Wall Street. One thing that has been missing from these debates is the potential for longer run damage if the sluggish economy persists. When a recession is brief and the economy returns promptly to high rates of employment, the long-run costs are minimal. But when recovery is weak and joblessness persists for many workers, the long-run costs become meaningful. And they include worsening the long-run fiscal problems that concern everyone.

The economy’s economic potential depends on the size and skill of the work force, the size and quality of the capital stock it works with, and the technical innovations that accompany the new capital. Although future investment can provide the needed capital and innovation, losses on the labor side are likely to be more lasting. In a prolonged slump, unemployment spells become long, discouraged workers stop looking for jobs, and job skills erode or become obsolete. Older workers retire earlier than they had intended. Young workers find few career path job openings and miss the on the job training that is part of the transition from school to the workplace.

Problems remain

All these problems are present today. The job market has improved greatly since the depths of the recession, but there are still 5 million more unemployed than before the recession started. Over this period, the number of people unemployed more than half a year has risen by 3.5 million. Furthermore, the labor force participation rate is 2.3 percentage points lower than it was in 2007. If the overall participation rate had not changed, the labor force would be nearly 6 million larger today. However, this difference reflects both natural changes in participation for various demographic groups and a large number of discouraged workers who have stopped looking for work because of economic conditions. A return to a strong job market would bring back some of these discouraged workers. But the longer the slack labor market continues, the more permanent these effects are likely to be.

The Congressional Budget Office continually updates its projections of potential GDP, and those projections are heavily influenced by its estimates of these labor force developments. Comparing its most recent estimates of potential for 2012 with the projections for 2012 that it made in 2007, we can infer that the recession and slow recovery have reduced potential GDP by $800 billion. Because tax revenues are correspondingly lower and transfer payments somewhat higher, the structural budget deficit, which measures what the deficit would be if cyclical factors were removed, is higher by about $160 billion this year and by perhaps $1.75 trillion over the next ten years. A rapid recovery would improve these prospects and sustained high unemployment could worsen them.

Toward a solution?

All this raises the question of what to do about it.

The Federal Reserve can be expected to continue its monetary easing for as long as necessary. Its example is winning over some foreign central bankers even if not its critics at home. The recent decline in commodity prices, and the persistent low yield on long bonds, provide continuing market evidence that Bernanke and his colleagues are on the right track.

But they need help from the fiscal side. After the initial stimulus package that was passed in 2009, resistance to budget deficits has led to some fiscal tightening in each subsequent year. Last winter’s budget deal that avoided the extreme tightening of the fiscal cliff itself imposed a considerably tighter budget this year.

That’s not good.

Near term fiscal policy should be guided by the doctors’ oath: first, do no harm. While pursuing measures to reign in deficits in the fairly distant future, immediate budgets should be as expansive as politics allows.

Authors

George L. Perry

Publication: Yahoo! Finance

Creating Jobs Where Institutions Matter: Addressing South Africa’s Unemployment Problem

Anne W. Kamau and Andrew Westbury — Fri, 26 Apr 2013 16:30:00 -0400

The South African think tank the Development Policy Research Unit (DPRU) at the University of Cape Town recently conducted some thoughtful analysis on what exactly occludes employment in South Africa. According to DPRU Director Haroon Bhorat, “Institutions matter and nowhere more so than within the labor regulatory environment.” Under the auspices of South Africa’s Labor Relations Act, the Commission for Conciliation, Mediation, and Arbitration (CCMA) is charged with handling all employment disputes in the country. Each year, this group manages nearly 5,300 such claims, with cases ranging allegations of wrongful dismisals to contract violations and requests for wage increases. DPRU’s analysis of these claims indicates empirically that the faster these disputes can be resolved, the more jobs created in the market. In contrast, when these are drawn out, employment rates suffer severely. Indeed, according to the DPRU working paper, Do Industrial Disputes Reduce Employment? Evidence from South Africa, even slight changes with the efficiency of CCMA processes can produce dramatic results. For example, DPRU estimates that a 1 percentage reduction in the agency’s own efficiency index effectively terminates employment for nearly 2,702 South Africans.

Fortunately, the CCMA is actually quite capable. A majority of cases are adjudicated within approximately one month, and the high usage rates of the system demonstrate “the accessibility and legitimacy of the institution”. Unfortunately, despite the crucial role the CCMA plays in South Africa’s labor market, the entity is under-resourced. CCMA is currently funded on the “basis of previous financial year’s caseload”, which allow for little flexibility when the volatility of the current world economy precipitates increase layoffs or other unforeseen market action. Either way, more secure funding and better support of the CCMA seems almost a prerequisite for increased employment in South Africa. The DPRU writes in their working paper, A Nation in Search of Jobs: Six Possible Policy Suggestions for Employment Creation in South Africa: “That an institution as central to labor market efficiency in the country as the CCMA needs to worry about cash flow is an example of a labor market rigidity which can be avoided.” With South Africa suffering from nearly 25 percent unemployment, funding institutions seems like a simple step that can support both workers and employers.

For more information, you can also read recent commentary on South Africa’s rapid economic growth but continued challenges with inequality by scholars from the Brookings Africa Growth Initiative and DPRU in the February edition of Yale Global Online.

Authors

Anne W. Kamau
Andrew Westbury

Image Source: © Siphiwe Sibeko / Reuters

Africa Answers: Five Questions about Sustainable Inclusive Growth in South Africa

Julius Agbor — Tue, 23 Apr 2013 16:22:00 -0400

Last week, the Africa Growth Initiative at Brookings hosted an event with South African Finance Minister Pravin Gordhan. The goal of the forum was to explore ways to support inclusive growth in South Africa, where unemployment stands at nearly 25 percent.

After the forum, I discussed these issues with Haroon Bhorat, director of the South African think tank the Development Policy Research Unit. Below are Haroon’s answers to my questions. The DPRU, a partner think tank of the Africa Growth Initiative, is a great resource on employment and inequality in South Africa and across the region. Read more about the DPRU on their Web site and also follow them on Facebook.

Julius Agbor: During his recent visit to Brookings, the South African Finance Minister, Honorable Pravin Gordhan, underscored the challenges of inclusive growth in South Africa. In order of importance, what are these challenges and do you think they are surmountable in the short term?

Haroon Bhorat: The key challenges revolve around an insufficiently high level of economic growth and the extreme levels of income inequality and unemployment: South Africa has one of the highest levels of inequality in the world, and, in the sample of emerging markets, possibly the highest. The Gini coefficient for South Africa is currently 0.66. Unemployment, using the International Labor Organization’s definition of joblessness, currently stands at about 25 percent for the fourth quarter of 2012. Following the Great Recession where close to 1 million jobs were lost in South Africa and in an environment where economic growth has yet to breach the 3 percent level, solving these twin distributional problems in the short run will be extremely difficult.

This new growth path would necessarily require both a signficant increase in the levels of economic growth and a sharp departure from the current growth trajectory. The current trajectory is based on a dependence on heavy manufacturing, the resources sector and foreign equity to finance the current account deficit, while the retail sector is the key provider of long-run employment. Obviously, this deficit-financed, consumption growth model is not an optimal strategy for long-run welfare gains in South Africa.

Agbor: South Africa’s current macroeconomic fundamentals and microeconomic framework leave much to be desired. For instance, the yield on a South African 10-year government bond is at a record high of 6.2 percent while the high incidence of HIV/AIDS coupled with an acute shortage of skilled man-power is seriously undermining both the productive potential of the economy and its ability to attract foreign investors. Do you think that the South African government needs to respond differently to these challenges? If so, how would you recommend it respond?

Bhorat: Foreign investors, both in equity markets and in the real economy, are concerned in part about social instability in a society borne out of high levels of crime, unemployment and inequality. In addition, a vocal, strong trade union movement viewed as politically influential as well as a signficant skills constraint have caused foreign investors to remain coy about South Africa. On the other hand, those who have invested or are invested in the economy often note South Africa’s strong rule of law, globally leading financial sector, and transport and telecommunication infrastructure which rivals that found in the West. In turn, high dividend streams with a relatively high real interest rate differential keep foreign investors interested in South Africa. In the short-run then, these strong companies and other South African endowments will keep foreign investors interested in the economy. In the long-run, however, a more creative growth trajectory and policy environment is required from government. We need a strategy and an environment that makes those difficult decisions in order to shift the economy on to a more labor-intensive and competitive growth path. Supply- and demand-side policies ranging from improving the quality of schooling to anti-trust interventions are all necessary.

Agbor: For quite a while now, low wages seem to characterize South Africa’s labor market, which is consistent with the high level of unemployment in the country. At the same time, there is no evidence of marked improvements in labor productivity and competitiveness of the South African economy. What is going on in South Africa?

Bhorat: We are in a low-level equilibrium trap of tepid growth and signficant labor disequilibrium in the factor and product markets. Certainly a more competitive wage environment, as well as more deregulated product markets, must be part of the answer. Bold industrial policy that is narrowed to very specific sectors and provides some form of infant industry protection is essential. No country has managed to build prosperity without the growth of the light manufacturing sector—and South Africa will be no different. Building a light manufacturing sector will be critical to generating the levels of employment this economy desperately requires.

Agbor: Many believe that anti-trust legislation is weakly enforced in South Africa and that corporate bodies and unions are too strong. To what extent do you think a rebound of the South African economy depends on reforms in these key areas?

Bhorat: There is a view that strong business and strong labor are able to divide the rents from growth in some semi-consensual form. That view then extends to the notion that this situation has generated a growth path built essentially on high dividends and high wages to the exclusion of the unemployed. This is obviously an undesirable outcome yet the solution does not necessarily lie in lower wages, which would generate the kind of social instability South Africa cannot afford. Rather, an acceptable outcome would come from a conscious effort by the South African government at generating creative solutions that include the unemployed and those in the informal economy into the growth process.

Presently a social compact is assured through a highly redistributive state. Hence, this government spending on social assistance constitutes 10.4 percent of total expenditure and 3.4 percent of GDP, which is high by middle-income country standards. This is not fiscally sustainable nor incentive compatible with the requirements of a competitive developing country economy. Hence, a key part of the reform package is not only more aggressive anti-trust legislation, but also interventions designed to improve the opportunities and capabilities of the informal economy as well as the unemployed. These can range from re-engineering state procurement policies to reducing the search costs of the unemployed.

Agbor: Does South Africa have a particular economic role to play in Africa? Is it a faciliator of investment in the region and beyond?

Bhorat: As Africa’s largest economy, South Africa remains central to the region and the continent’s future. That being said, Africa’s largest economy remains locked into a low-growth trap within a continent with some of the world’s fastest growing economies. South Africa’s short-run opportunity is to utilize its strong physical, financial and telecommunication infrastructure as a platform to attract foreign firms seeking a foothold in Africa. The 20 percent purchase by the Industrial and Commercial Bank of China of Standard Bank of South Africa in 2008 is indicative of this type of indirect impact the growth of African economies is having on South Africa.

That being said, South African firms are dominant in retail, mining and telecommuncations on the continent. The long-run growth question is whether these companies are able to capitalize on their early mover advantage and become the dominant investors in a region where FDI flows from China, India, Malaysia and other emerging markets are expanding rapidly.

Authors

Julius Agbor

Image Source: © SIPHIWE SIBEKO / Reuters

Youth Policy and the Future of African Development

Kwabena Gyimah-Brempong and Mwangi S. Kimenyi — Mon, 15 Apr 2013 13:44:00 -0400

INTRODUCTION

One of the greatest challenges facing governments and policymakers in Africa today is how to provide opportunities for the continent’s more than 200 million youth so that they can have decent lives and contribute to the economic development of their countries. According to the United Nations (2012), Africa’s 2011 population was estimated at 1.05 billion and is expected to double by 2050. Africa is the youngest continent in the world: About 70 percent of its population is 30 years of age or younger. In 2011, youth, who are defined here as those between 15 and 24 years of age, constituted 21 percent of the more than 1 billion people in Africa, whereas another 42 percent was less than 15 years old. Slightly more than half of the African youth population is female, and there are more rural dwellers than urban dwellers. With such a large proportion under 15 years of age, Africa’s youth population is expected to grow in the years to come while the youth population in other parts of the world shrinks.

Undoubtedly, the challenges for youth that are central to Africa’s economic development are numerous and varied—they include employment, health and political participation.

Undoubtedly, the challenges for youth that are central to Africa’s economic development are numerous and varied—they include employment, health and political participation. These issues differ among groups within countries (by gender, education level, ethnicity and health status), and across countries and regions. Conversely, the size, energy, enthusiasm, innovation and dynamism of youth are assets that can be harnessed for Africa’s development with appropriate policies that deal adequately with the issues facing them.

The potentially important role of youth in Africa’s development cannot be overemphasized. Youth could be a source of labor inputs as well as human capital in production, which would improve total factor productivity in a region of the world where capital formation is limited. When employed, youth could be a reliable source of demand for the economy through their consumption activities. In addition, the youth of Africa could be critical for the development of a new class of entrepreneurs that African countries need to prosper. Furthermore, Africa has an opportunity to harness a “demographic dividend”: With the projection that most countries in Africa will have more working-age adults per child in 2030 than in 2006, there will be a large workforce supporting fewer children and the elderly. This trend would result in a lower dependency burden, freeing up resources for development; see, for example, Ashford (2007).

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Authors

Kwabena Gyimah-Brempong
Mwangi S. Kimenyi

Image Source: © Stringer . / Reuters

Comments on David Blanchflower, David Bell, Alberto Montagnoli, and Mirko Moro, “The Effects of Macroeconomic Shocks on Well-being”

Carol Graham — Fri, 12 Apr 2013 09:52:00 -0400

Editor's Note: Carol Graham spoke at the Boston Fed's 57th Economic Conference, held April 12-13, on "The Effects of Macroeconomic Shocks on Well-Being" by David Blanchflower, David Bell, Alberto Montagnoli, and Mirko Moro.

For the purposes of full disclosure, I admit to being one of the early outliers that began working on happiness economics and well-being over a decade ago. I am thus continually intrigued by the range of questions that the approach is now being applied to. The latest is in the legal domain, where lawyers are now considering well-being metrics as the basis for contingency valuations – which takes me from intrigue to worry! Perhaps happiness economics has gone too far? In contrast, the question that is the subject of the conference and of the paper by Danny and his co-authors is a natural one for the metrics and the approach, and a good example of the kind of policy question where a new approach can broaden our thinking. Thus my comments reflect my reactions to the substance of the paper, but also an interest in what the approach can contribute to the more general topic.

This is a great paper. It adds new thinking to the standard discussions about macro-economic policy, and at the same time contributes to the literature on well-being in economics. Specifically, it provides a methodological contribution by combining the unemployment rate and the coefficient on individual unemployment together into one measure of the aggregate, societal level costs of unemployment, and adding it to the standard misery index. Most previous work has simply compared the coefficients on the unemployment and inflation rates, holding individual unemployment constant, but has not factored in the relative costs at the individual level into any kind of aggregate assessment. I think this is a very nice innovation.

A central finding of the paper, meanwhile, and also a novel one, is that while most publics in the sample are bothered more by unemployment than by inflation, in a small number of “inflation hawk” countries, where governments and government rhetoric focus much more on inflation (and for the most part unemployment rates are lower), concerns about inflation dominate the well-being effects.

Perhaps not coincidentally, in our work on Latin America in the late 1990’s, a time period when many countries had undertaken serious macroeconomic reforms designed to combat high or hyper levels of inflation, concerns about inflation dominated the well-being effects (our unemployment rate coefficient was insignificant, that on the inflation rate were significant and negative). Public concerns about inflation were heightened due to recent experience in many countries. At the same time, the same countries were characterized by high levels of informal employment, which reduces the relevance of the formal unemployment rate for much of the labor force. In the case of the findings of Danny’s paper, the issue of unemployment is paramount in the public mind in most of the European countries in his sample and time frame, while inflation is an issue (in terms of well-being) only in a small sub-set of better performing economies.

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Carol Graham

Publication: Boston Federal Reserve Bank Conference on Monetary Policy and the Labor Market

The Paradox of Worker Shortages at a Time of High National Unemployment

Darrell M. West — Wed, 10 Apr 2013 16:56:00 -0400

At a time of high national unemployment, it has become a truism that there are few worker shortages and employers have numerous applicants for every available slot. After all, that is the very definition of joblessness. High unemployment results when there are many more workers seeking positions than available jobs.

Yet the paradox of the contemporary situation is that in this time of stubbornly high unemployment, a number of fields report a shortage of American workers and problems filling key positions. For example, even as the country as a whole experiences high unemployment, the Bureau of Labor has found that there are over 3.5 million open jobs – openings across the country and across sectors. In some specialized sectors, such as high-tech, advanced manufacturing, and medical specialties, unemployment rates are as low as three, four, or five percent. And on the labor-intensive side of the economy, agricultural companies report difficulty finding workers to pick vegetables and fruits, and hotels and restaurants indicate they have problems filling key positions.

The ripple effects of job vacancies spread throughout the economy. Companies that have been unable to fill key positions have closed down, moved entire operations abroad or delayed expansion plans. Conversely, filling worker shortages allows companies to better compete, grow, and create more jobs for American workers.

This report aims to provide a roadmap for where worker vacancies exist, and how they can most effectively be filled to help companies grow and expand. Labor shortages are identified through analysis of job outlook surveys, government reports, and interviews with business and labor leaders. To estimate the impact of filling these shortages in specific industries across the economy, interviews were conducted with business and labor leaders in the accommodation, agriculture, food service, health care, manufacturing, technology, and life sciences sectors.

The data and interviews confirm that worker shortages exist in each of the sectors, and that these shortages cannot be filled by available American workers, even with high unemployment across the nation, due to retirements, demographic gaps, geographic differentials, and the failure of educational institutions to deliver employees in key sectors. Examples of the costs of shortages in various industries include:

Agriculture: Lack of access to workers has led to (1) food processing operations for frozen broccoli and cauliflower moving to Mexico, (2) some of the nation’s most productive farms closing down, and farmers from states like Wisconsin, North Carolina, Maryland, Louisiana, and Washington delaying expansion plans.
Health Care: At a time where increased retirements and new mandatory health insurance promise to dramatically increase the demand for medical care, 30 percent of hospitals are already reporting shortages in specialty services. The shortages of nurses alone are estimated to top 115,000. 80 percent of hospital CEOs are currently making efforts to increase the number of primary care physicians.
Manufacturing: Employers in the manufacturing sector report difficulty filling available high-skilled positions. Even at the height of the Great Recession in 2010, companies reported 227,000 open jobs. Factory owners note that is difficult to bring manufacturing jobs back when they cannot find the talent they need to expand.
Technology: Microsoft has 200 employees in its software center in Vancouver because it couldn’t get engineers into the US. Google developed its news aggregator outside the US for similar reasons, and companies like ON Semiconductor in Phoenix are revving up their overseas hiring because they cannot find workers in the US. The problem is especially acute at the governmental level, where more than half of state governments (54.8 percent) report difficulty filling vacant IT positions.

There are two potential ways to fill these gaps, and both should play an important part in the country’s economic recovery. The first is to retrain American workers to ensure that their skill sets match the needed requirements. The second is to take advantage of foreign workers with the skill set and mobility to fill the existing gaps.

These two solutions to worker shortages—training American workers and bringing in foreign-born workers—need not be in opposition. There are two competing theories on the role of immigrant labor in America – do they compete with or complement American workers? In the framework of compete, the American economy and labor force are seen as a zero-sum game and every job taken by an immigrant workers is one less job for an American worker. But economies are more complex than that, growing and generating new jobs as companies innovate and expand, creating new jobs, or in some cases, new industries and sectors of the economy. In this context, immigrant workers can be seen as complementing American workers. Immigrants tend to have different skill sets and different education levels than American workers.

They are more likely to have a PhD and less likely to have finished high-school. As a result, immigrant workers can complement American workers by filling in specialized roles at both ends of the economy.

The findings presented in this paper are consistent with prior research in this area. For example, research by the World Economic Forum and the Boston Consulting Group projects that within the decade there could be as many as “20 million vacant U.S. jobs unless the current education-to-employment system undergoes significant changes.” The takeaways from these findings are clear. Addressing worker shortages — whether through job retraining or immigration—is a necessary part of our economic recovery that will create more American jobs.

When skill and labor shortages aren’t met, the economy suffers. A smart immigration system can help prevent this by filling needs so companies can expand operations in the U.S. and don’t have to move them overseas. But America’s immigration system is not designed for today’s economy, and remains largely unchanged since 1965. In fact, of the approximately one million green cards given out by the U.S. in 2011, around 139,000 (or 13 percent) were given out for economic reasons, a number far too small to meet the needs of the world’s largest economy. By comparison, Canada provides a much higher percentage of employment-based visas than the U.S. even though it has a much smaller population. America’s immigration system must always help families reunite and provide a safe harbor for refugees and asylum-seekers. But as America rethinks its immigration system, there is a unique opportunity to secure growth and prosperity by ensuring that it meets the needs of a 21st century economy.

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Darrell M. West

Image Source: © Marvin Gentry / Reuters

Unemployment Projected to Rise Very Slightly to 7.8% for March

Regis Barnichon — Wed, 03 Apr 2013 00:00:00 -0400

The unemployment numbers for February were in line with last month's forecast: The labor market keeps improving thanks to a slow but steady improvement in hiring. However, progress remains very slow, and I project a jobless rate of 7.8% in March, going down to 7.6% by September 2013.

This post discusses my monthly update of the Barnichon-Nekarda model. For an introduction to the basic concepts used in this post, read my introductory post (Full details are available here.)

In February, the unemployment rate was 0.2 percentage point lower than in January, in line with my February forecast (see Table 1), but the decline was a little faster than anticipated. This is mostly due to a stronger than expected decline in the rate of job separation (the EU rate, comprised mostly of layoffs), as can be seen in Figure 2.

Going forward, the model sees that stronger decline in layoffs as transitory, and I anticipate the unemployment rate to tick back up slightly to 7.8% in March (specifically, from 7.74%, rounded to 7.7% in February, to 7.79%, rounded to 7.8% in March), reversing some of the gains on the layoff front. Thereafter, improvements in the labor market will continue, albeit at a slightly slower pace than anticipated in February, and I project the unemployment rate to decline slowly over the next 6 months to reach 7.6 % by September 2013.

The intuition for this forecast is easily understood by looking at the projected behavior of the “steady-state” unemployment rate. The steady-state unemployment rate, the rate of unemployment implied by the underlying labor force flows—the blue line in figure 5—stands currently at 7.4% (unchanged from February). Our research shows that the actual unemployment rate converges toward this steady state. With a steady-state unemployment rate at a lower level than the actual rate, this "steady-state convergence dynamic" is now pushing the unemployment rate down. However, because the difference between actual and steady-state rates is small (7.7% versus 7.4% in February), the force pushing the unemployment rate down is weak, and the decline in the unemployment rate is slow.

Over the next six months, the model propagates forward its best estimate for how the flows between employment, unemployment and out-of-the labor force will evolve over time, and constructs the implications for the steady-state unemployment rate and hence the actual unemployment rate. In February, job openings decreased, indicating a possible moderation in the (already slow) pace of hiring. Taking this new information on board, and compared to February, the model now predicts an even slower increase in workers’ job finding rates (figure 3) over the next 6 months. As a result, the steady-state unemployment rate is now projected to decline to only 7.4% by September 2013, instead of 7.2% in my February forecast, implying a slower decline in the actual unemployment rate.

Finally, let me end this post with a few words of congratulation for the model’s remarkable performance over the past 6 months: Back in October, for the first update of this series of monthly forecasts, the model predicted that "Unemployment [was] Likely to Stay Around 7.8% for Six Months," and this is exactly what happened. Of course, this need not always be the case, but this is a notable achievement that speaks for the potential of this new approach to forecasting unemployment.

Authors

Regis Barnichon

Image Source: © Brendan McDermid / Reuters

Unemployment Insurance in South Africa: A Descriptive Overview of Claimants and Claims

Haroon Bhorat, Sumayya Goga and David Tseng — Wed, 03 Apr 2013 11:22:00 -0400

INTRODUCTION

The South African economy suffers from the debilitating effects of very high unemployment rates, with African workers, women, youth and those with incomplete schooling disproportionately affected (DPRU, 2011). Not only are official unemployment rates astoundingly high—standing at 25 percent in the third quarter of 2011 (DPRU, 2011)—but many of the unemployed in the South African economy have also never worked before (Banerjee et al., 2008). The unemployment insurance system is a system offering subsistence income to eligible recipients to alleviate the harmful economic and social effects of income loss due to unemployment shocks. It is prevalent in many industrialized economies in the world but much less so in developing countries. In South Africa, both employers and employees contribute to the Unemployment Insurance Fund (UIF), and this fund is then used to provide income replacement benefits such as unemployment, illness, maternity, adoption and dependant’s benefits. In this descriptive overview, we are only concerned with the unemployment insurance aspect of the UIF. The UIF system plays a key role in South Africa’s social security architecture, particularly since it is the only arm of South Africa’s social security that caters for the unemployed—more specifically, the portion of the unemployed that were previously employed. Administratively, unemployment insurance is collected by the UIF, which falls under the auspices of the Department of Labour.

While unemployment insurance is meant to smooth consumption, importantly, it is also meant to improve the transition process of labor market participants from unemployment to employment.1 This research mainly considers the impact of the unemployment insurance system on the labor market through a descriptive analysis of claimants and claims. The administrative data utilized in this paper—and obtained from the UIF—covers all UIF claimants quarterly from 2005Q1 to 2011Q3. The paper is organized into three sections: Section 2 provides an institutional overview of the unemployment insurance system in South Africa, highlighting the main aspects of this system in South Africa as well as changes to the system over time. In Section 3 we undertake a four-part descriptive overview of UIF claimants and claims between 2005 and 2011: First, we briefly dwell on the data and some challenges with it before considering the evolution of the claimant pool over time. Then, we analyze how different subsects of claimants are represented in the claimant pool in comparison to potential contributors. In the final subsection we consider access to the UIF system, potential moral hazard effects and system incentives through an analysis of potential benefits days, credit exhaustion rates and average income replacement rates. Section 4 concludes.

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Haroon Bhorat
Sumayya Goga
David Tseng

Metro Monitor - March 2013

Alec Friedhoff and Siddharth Kulkarni — Thu, 28 Mar 2013 00:00:00 -0400

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Alec Friedhoff
Siddharth Kulkarni

Addressing Long-Term Unemployment for America’s Next Generation of Workers

Elisabeth Jacobs and Joshua Bleiberg — Mon, 25 Mar 2013 17:18:00 -0400

The labor market news this month has been impressive, with above-expected job creation numbers, a continued dip in the unemployment rate, and falling jobless claims all giving reason for optimism about the state of the economic recovery. However, the encouraging top-line figures mask persistent fragility in the labor market. Notably, long-term unemployment remains stubbornly high, particularly for young workers. Early jobs are critical for establishing future earnings and employment trajectories, thus the health of the labor market for younger workers may serve as a harbinger for the economy’s longer-term vibrancy. Young jobseekers continue to face historically poor employment prospects, and the employment picture for these workers has not improved at the same pace as other age groups. While the conversation in Washington has focused on budget politics, policymakers who lose sight of the challenges facing young workers do so at great risk to the future health of the American economy. In addition to safeguarding basic protections for the long-term unemployed, Congress can help jobless younger workers by protecting and expanding AmeriCorps.

Long-term unemployment for young workers during the Great Recession spiked to historic levels, and remains at record-high rates even during today’s increasingly robust recovery.[i] Typically, long-term unemployment (defined as workers looking for a job for between six months and one year), has returned to pre-recession levels by this point in an economic recovery. Yet in February, 44 months into the current recovery, persistent unemployment amongst 20 to 24 year old jobseekers was 237% of historic rates. 646,000 young workers were out of work for six months or more.

Number of 20-24 Year Olds Unemployed for 27-51 Weeks (Seasonally Adjusted)

While extended unemployment remains a significant problem for the labor market as a whole, the depth of the problem for younger workers is particularly troubling due to the slow pace of improvement for this group. On average, long-term unemployment has decreased by 41 percent for all workers from its peak. Yet, for 20 to 24 year-old job-seekers, the extended unemployment rate has declined by just 23 percent since its peak. The older the worker, the more rapid the rate of improvement in the long-term unemployment rate relative to its peak. For instance, long-term unemployment has fallen far more sharply for prime-age workers: a 46 percent drop for 35 to 44 year olds, and a 59 percent drop for 45 to 54 year olds.[ii]

Percent Change in the Number of People Unemployed for 27-51 Weeks from Peak (Seasonally Adjusted)

Long-term unemployment for young job seekers has long-lasting impacts. Unemployment today predicts unemployment tomorrow, in addition to enduring impacts on earnings, particularly for those with long durations of joblessness.[iii] Recent research finds that unemployed young workers experience persistent effects on employment prospects for at least a decade, and highlights the long-term negative impact on earnings and employment prospects for college students who graduate during a recession.[iv] Long durations of unemployment for youth are likely to exacerbate these negative effects. For instance, workers in the early stages of their careers develop social networks that allow for upward career mobility, via internal promotion or external transition to a better position. Young workers also learn more about the labor market while on the job, discovering their strengths and weaknesses, as well as their personal preferences regarding industry and occupation. As a result, workers’ early jobs may be particularly important for establishing “job fit.” Prolonged joblessness at the beginning of a worker’s career may be particularly deleterious due to its negative impact on this iterative process. Effective and efficient matching of workers to jobs is a key element for a productive workforce for the future, thus prolonged joblessness for youth should be of particular concern to those worried about the country’s long-term economic growth.

Protecting basic unemployment benefits, including the federal long-term unemployment benefits program, is a key first step that will not only benefit young jobseekers, but also the many older workers who continue to face challenges in the labor market. However, youth unemployment can be tackled through other avenues as well. Policymakers should address long-term unemployment among young people through an expansion of the AmeriCorps program – or, at a bare minimum, by protecting this program from cuts. AmeriCorps hires recent college graduates and others to address the critical needs in American communities. Corps members receive valuable labor skills. A study from the University of Texas found that participants in AmeriCorps were more likely to report they had basic work skills than their peers.[v] Furthermore, the program provides much needed support to communities still recovering from the Great Recession. For example, AmericCorps-funded CityYear corps members serve as tutors, mentors, and after-school programming staff for elementary school students in cash-strapped public schools in Detroit, where public funding has been slashed due to the deep impacts of the recession and slow recovery.

The budget sequester is slated to cut several thousand positions from AmeriCorps in the coming months.[vi] Prior to the sequester, AmeriCorps’ budget had already been trimmed by eight percent in the wake of the recession.[vii] Recent Republican budget proposals have zeroed out funding for the volunteer program. AmeriCorps is a relatively inexpensive federal program, costing about one billion dollars a year (compared to, for instance, $718 billion in annual defense spending), and yielding meaningful impacts for both its participants and the communities that it serves. Instead of slashing the program, Congress should signal a renewed commitment to America’s young workers and economically-devastated communities through a renewed and reinvigorated investment in AmeriCorps.

[i] Unless otherwise noted, long-term unemployment is defined as jobseekers who have been looking for work for 6 to 12 months. Young worker are defined as those ages 20-24.

[ii] It is worth noting that the decline in long-term unemployment for youth out of work for a year or more has been relatively commensurate with the drop in this rate for other age groups. This may be because young workers are dropping out of the labor market after a year of joblessness, or because younger workers are likely to take dead-end jobs rather than continuing to search for a job well-suited to their skill set. In either case, the more impressive decline in rates of long-term unemployment for 20-24 year olds out of work for a year or more is not necessarily a positive story about the labor market for these young workers. Another possible reason is the wording of the BLS survey. It is possible that young people who had fulltime unpaid internships would answer the questions as if they were not seeking gainful employment.

[iii] Arulampalam, Wiji, Paul Gregg, and Mary Gregory. "Unemployment scarring."The Economic Journal 111.475 (2008): 577-584.

[iv] Gregg, Paul. "The impact of youth unemployment on adult unemployment in the NCDS." The Economic Journal 111.475 (2008): 626-653; Kahn, Lisa B. “The Long-Term Labor Market Consequences of Graduating From College in a Bad Economy.” Labour Economics 17.2 (2010): 303-316.

[v] Grimm Jr, Robert T., Kevin Cramer, and Nathan Dietz. "AmeriCorps' Impact on Participants" Journal of Policy Analysis and Management 28.3 (2009): 394-416.

[vi] Cohen, Rick. “Sequestration’s Impact: The AmeriCorps Case Study.” Non-Profit Quarterly. March 4, 2013.

[vii] Ibid. A portion of this budget cut was due to the expiration of stimulus funding.

Authors

Elisabeth Jacobs
Joshua Bleiberg

Why Rising Financial Markets are at Odds with Political Events and Real Economic Indicators

Kemal Derviş — Wed, 13 Mar 2013 11:48:00 -0400

Since the second half of 2012, financial markets have recovered strongly worldwide. Indeed, in the United States, the Dow Jones industrial average reached an all-time high in early March, having risen by close to 9% since September. In Europe, European Central Bank President Mario Draghi’s “guns of August” turned out to be remarkably effective. Draghi reversed the euro’s slide into oblivion by promising potentially unlimited purchases of member governments’ bonds. Between September 1 and February 22, the FTSEurofirst index rose by almost 7%. In Asia, too, financial markets are up since September, most dramatically in Japan.

Even the Italian elections in late February seem not to have upset markets too much (at least so far). Although interest-rate spreads for Italian and Spanish ten-year bonds relative to German bonds briefly jumped 30-50 basis points after the results were announced, they then eased to 300-350 basis points, compared to 500-600 basis points before the ECB’s decision to establish its “outright monetary transactions” program.

But this financial market buoyancy is at odds with political events and real economic indicators. In the US, economic performance improved only marginally in 2012, with annual GDP rising by 2.3%, up from 1.8% in 2011. Unemployment remained high, at 7.8% at the end of 2012, and there has been almost no real wage growth over the last few years. Median household income in the US is still below its 2007 level – indeed, close to its level two decades ago – and roughly 90% of all US income gains in the post-crisis period have accrued to the top 1% of households.

Indicators for the eurozone are even worse. The economy contracted in 2012, and wages declined, despite increases in Germany and some northern countries. Reliable statistics are not yet available, but poverty in Europe’s south is increasing for the first time in decades.

On the political front, the US faces a near-complete legislative stalemate, with no sign of a compromise that could lead to the optimal policy mix: short-term support to boost effective demand and long-term structural reforms and fiscal consolidation. In Europe, Greece has been able – so far – to maintain a parliamentary majority in support of the coalition government, but there, and elsewhere, hyper-populist parties are gaining ground.

The Italian election results could be a bellwether for Europe. Beppe Grillo’s populist Five Star Movement emerged with 25% of the popular vote – the highest support for any single party. Former Prime Minister Silvio Berlusconi, confounding those who had forecast his political demise, re-emerged at the head of a populist-rightist coalition that ended up only 0.3 percentage points away from winning.

In short, we are witnessing a rapid decoupling between financial markets and inclusive social and economic well-being. In the US and many other places, corporate profits as a share of national income are at a decades-long high, in part owing to labor-saving technology in a multitude of sectors. Moreover, large corporations are able to take full advantage of globalization (for example, by arbitraging tax regimes to minimize their payments).

As a result, the income of the global elite is growing both rapidly and independently of what is happening in terms of overall output and employment growth. Demand for luxury goods is booming, alongside weak demand for goods and services consumed by lower-income groups.

All of this is happening in the midst of extremely expansionary monetary policies and near-zero interest rates, except in the countries facing immediate crisis. Structural concentration of incomes at the top is combining with easy money and a chase for yield, driving equity prices upward.

And yet, despite widespread concern and anxiety about poverty, unemployment, inequality, and extreme concentration of incomes and wealth, no alternative growth model has emerged. The opposition to the dominant mainstream in Europe is split between what is still too often an “old” left that has trouble adjusting to twenty-first-century realities, and populist, anti-foreigner, and sometimes outright fascist parties on the right.

In the US, the far right shares many of the characteristics of its populist European counterparts. But it is a tribute to the American two-party system’s capacity for political integration that extremist forces remain marginalized, despite the rhetoric of the Tea Party. President Barack Obama, in particular, has been able to attract support as a liberal-left idealist and as a centrist-realist at the same time, which enabled him to win re-election in the face of a weak economy and an even weaker labor market.

Nonetheless, without deep socio-economic reforms, America’s GDP growth is likely to be slow at best, while its political system seems paralyzed. Nowhere is there a credible plan to limit the concentration of wealth and power, broaden economic gains through strong real-income growth for the poor, and maintain macroeconomic stability.

The absence of such a plan in the US (and in Europe) has contributed to the decoupling of financial markets from inclusive economic progress, because it suggests that current trends are politically sustainable. But, while this disconnect could continue for some time if no alternative program emerges, the huge gap between financial markets’ performance and most people’s well-being is unlikely to persist in the longer term. When asset prices overshoot reality, eventually they have nowhere to go but down.

Authors

Kemal Derviş

Publication: Project Syndicate

Sizeable Job Gains, but a Long Way from Good Health

Gary Burtless — Fri, 08 Mar 2013 12:26:00 -0500

Employers added 238,000 workers to their payrolls in February, the 29^th consecutive month of job gains. Over the past six months employers have added 187,000 jobs a month, a rate of gain that is fast enough to reduce the ranks of the unemployed. The unemployment rate, which is calculated using a different survey, dropped to 7.7% in the month, its lowest level since December 2008.

As has been the case for most of the past year, the employer survey offers a brighter picture of progress than the Labor Department’s household survey. Reported job gains in the household survey were only 170,000 in February. An important reason the unemployment rate fell 0.2 percentage points in the month is that the number of adults who are employed or looking for work fell 130,000. Over the past year, the household survey shows that the labor force participation rate has declined 0.4 percentage points. Part of the decline is traceable to the aging of the population. A large number of workers in the Baby Boom generation are reaching retirement age each month, shrinking the percentage of adults who would be expected to work. Since the end of the last economic expansion in December 2007, the participation rate has fallen 2.5 percentage points. About half the decline is due to an aging population. The other half can be traced to a discouraged worker effect. The weakness of the job market discourages some adults from joining the workforce and induces others to give up their search for a job.

Nonetheless, employers continue to report sizeable gains in their payrolls. As has been the case since the labor market recovery began, all the gains have occurred in the private sector. In fact, the number of workers on government payrolls shrank in February. Notable employment gains were seen in professional and business services (+73,000 jobs), construction (+48,000), and retail trade (+24,000). The improvement in construction employment is especially encouraging because that industry has experienced very little net employment growth since the low point of the recession. In the past four months, seasonally adjusted job gains have averaged 34,000 a month.

The health care industry continues to add to its payrolls. In 2009 through 2011 health care payrolls increased about 20,000 a month. Last year they rose nearly 27,000 a month, and they have continued to increase a healthy clip so far this year. The job gains in health care appear strong in contrast to anemic payroll trends in most other industries. However, the payroll numbers show there has been a long-term slowdown in the pace of job gain in the health sector. Whereas health care payrolls climbed 2.7% a year between 1991 and 2007, they have only grown 2.0% a year since the end of the last economic expansion.

The household survey offers a mixed picture of the current state of the unemployed. The broadest measure of unemployment, the so-called U-6 measure which accounts for workers on involuntary short hours and discouraged workers who remain marginally attached to the labor force, fell to 14.3% in February, its lowest level since January 2009. However, both the average and median duration of an unemployment spell in progress edged up in February, mainly because of an increase in the number of unemployed workers reporting they were in long unemployment spells.

Long-term unemployment remains extraordinarily high by historical standards (see chart below). Spells of unemployment longer than 6 months are classified as “long-term.” Between 1967 and 2007 the fraction of the labor force in a long-term unemployment spell averaged 0.9%, and never exceeded 2.6%. Since 2008 the long-term unemployment rate has averaged 3.1% and rose as high as 4.3% in 2010. As the job market has improved, the number of long-term unemployed has shrunk. Even so, the long-term unemployment rate in February remained a bit above 3%. In spite of sizeable gains in payroll employment in recent months, the labor market remains a long way from robust good health.

Authors

Gary Burtless

Unemployment Projected to Decline to 7.8 Percent for February

Regis Barnichon — Tue, 05 Mar 2013 12:00:00 -0500

The unemployment numbers for January were in line with last month's forecast: The labor market keeps improving, and the January uptick only reflected the inertial dynamics of unemployment. With a slow but steady improvement in hiring, I project a slow but steady decline in the unemployment rate over the next six months, with a jobless rate of 7.8% in February going down to 7.4% by September 2013. The caveat on the projection is that there be no additional damage to the labor market (e.g., from large arbitrary spending cuts).

This post discusses my monthly update of the Barnichon-Nekarda model. For an introduction to the basic concepts used in this post, read my introductory post (Full details are available here.)

The January uptick in unemployment was expected (see last month forecast in Table 1 and my post here) and is no cause for worry, because it simply reflected the normal dynamics of unemployment. The intuition for that uptick can be understood by looking at the behavior of the “steady-state” unemployment rate. The steady-state unemployment rate, the rate of unemployment implied by the underlying labor force flows—the blue line in figure 5—hovered around 8 percent in the past couple months and was above the actual unemployment rate. This is mostly because workers' job finding rates (i.e, hiring) declined sharply in November (probably reflecting the effect of Hurricane Sandy) and because worker's separation rate (layoffs) increased sharply in November (probably also related to Sandy). Our research shows that the actual unemployment rate converges toward the steady state unemployment rate, and this convergence process generates some inertia in the behavior of unemployment. At December's level of 7.8 percent (Table 1), the unemployment rate was slightly above its steady-state rate, which pushed up the unemployment rate up in January. In other words, the January uptick is simply a late effect of Hurricane Sandy.

Looking forward, the current value of steady-state unemployment rate is now significantly lower (at 7.4%), and the "steady-state convergence dynamic" is now pushing the unemployment rate down. With a projected steady-state unemployment rate at 7.2 percent in September 2013, I project the unemployment rate to slowly decrease over the coming months and to reach 7.4 percent in September.

More precisely, the model propagates forward its best estimate for how the flows between employment, unemployment and out-of-the labor force will evolve over time, and constructs the implications for the unemployment rate. In January, job openings increased, and new claims for unemployment insurance continued their decline. Consequently, the model now projects sizable improvements in workers’ job finding rates (figure 3) over the next 6 months, and the outlook for the job separation rate (or layoffs) is improving (albeit, very slowly, figure 2). As a result, the steady-state unemployment rate is now projected to decline to 7.2% by September 2013, bringing the unemployment rate down with it.

To read more about the underlying model and the evidence that it outperforms other unemployment rate forecasts, see Barnichon and Nekarda (2012).

Authors

Regis Barnichon

Creating a Virtuous Circle: Workforce Development Policy as a Tool for Improving the Prospects of America’s Unemployed Workers

Elisabeth Jacobs — Wed, 13 Feb 2013 00:00:00 -0500

In the 2013 State of the Union Address, the president stressed the strong bond between quality education and job security. In keeping with the correlation between investing in workers and resultant economic gain, Elisabeth Jacobs outlines the need for job training opportunities for displaced workers, with a focus on the long-term unemployed, and analyzes ideas behind positive economic reinforcement of, what she terms, the “virtuous circle.” This cycle, Jacobs writes, includes investing in a culture of “lifetime learning,” creating more productive and profitable employees, and therefore improving the prospects of America’s unemployed workers and their families. She also addresses the policies currently in place for serving the unemployed, and offers a set of suggestions for future reforms that would better serve the large population of out-of-work individuals who could be expected to benefit from improvements to the nation’s workforce development policy architecture.

As Jacobs notes, the latest jobs reports suggest that the labor market is continuing its slow but steady recovery. For the first time in three years, the unemployment rate is below 8 percent. The private sector added 5.1 million jobs between 2009 and 2012, and nearly a third of that job growth occurred last year alone. Yet unemployment, particularly long-term unemployment, remains at near-crisis levels. While Washington’s attention has shifted away from jobs and onto deficits, 12.3 million people remain unemployed, 4.7 million have been out of work for six months or more, and over 3 million people have been out of work for a year or longer. These remain historically high figures, and suggest that the labor market’s woes continue to inflict real pain on many American workers and their families.

To combat these troubling economic trends, Jacobs offers the following reforms to bolster the career prospects of the unemployed:

• Funding workforce development services

• Developing approaches to mitigate the (perceived) opportunity cost of training for displaced workers

• Shoring up funding for community colleges, the backbone of the nation’s adult education system

• Incentivizing employer-based training for unemployed workers

• Creating meaningful “bridge to work” programs

• Expanding the availability of wage insurance

• Emphasizing effective evaluation to track performance and better understand results