Top 5 Problems Facing the Economy 5

The final problem among my “Top 5 Problems Facing the Economy” is endemic unemployment.  By “endemic,” I mean that the Great Recession seems to have created a permanent change in the employment landscape of the First World.

During the deep and sustained economic downturn of 2008-2009 many millions of employees in the United States and other countries lost their jobs.  Now that the economy has not only actually recovered fully, but also grown past pre-recession gross domestic product (GDP) figures, most of those lost jobs have not come back.

This is an indication that many of the jobs that were in place were either tied to the last economic bubble (i.e. real estate jobs, like construction or realty), or were part of the economic “fat.”

Lost Real Estate Jobs

It will take many years until the glut of properties that were built during the real estate bubble is fully absorbed by the economy.  That means those construction jobs just are not going to come back anytime soon.  For blue collar workers this type of loss of jobs is more critical than for white collar workers.  Why?  Because there seems to have been a permanent loss in demand for construction workers.  Let me explain further.

White collar work typically focuses on generic functions, such as data entry, information technology, management, accounting, human resources, and so on.  While the tasks here are specific, the industries in which they are executed are not.  In other words, you would expect a displaced IT worker at a construction firm to be able to find a similar job in a different type of business, say an insurance company.  So there is still demand for generic IT employees, just not necessarily within the same specific industry.

One of the hot careers in the lead up to the Great Recession was to be a realtor, or a mortgage broker.  With the collapse and subsequent real estate industry depression, these jobs also seem to be permanently lost.  However, unlike construction workers, sales positions exist in many industries.  So realtors and mortgage brokers should be able to eventually find new work.

The Fat

Given that corporations are generating record profits that now exceed the profitability levels pre-recession but with far fewer employees than before, you would have to conclude that many of the workers at firms were excessive.  What that means is that the businesses that are running lean and mean will only add employees commensurate with revenue and profit growth.

Since the GDP is growing at around 2-4%, you would expect employment to only grow along these same lines.  Unfortunately, the population grows at about 2-3% per year and the economy has to be able to absorb these additional workers.  Ultimately, that means that GDP growth in excess of population growth is around 1-2% per year.  So job growth that tracks economic growth is going to be slow, if not very slow.

What’s more, many companies now have very sophisticated information technology in place that tracks revenues and profits very specifically, along with employee productivity.  That means that businesses are highly unlikely to accidentally over hire.  So employment growth is likely to track economic growth for many years to come.  Normally that wouldn’t be a problem – but the economy still has 4 million people looking for work who cannot find it.  Ouch!

The Problem

Unfortunately, the economy seems to be re-entering the economic “game of chicken” that I spent much of 2010 writing about.  Here, consumers confronted with high national unemployment figures spend money only nervously.  This leads to stunted economic growth, which causes corporations to be cautious in spending money on hiring.  That cautiousness on the part of businesses means that the unemployment rate stays high, thus continuing to scare consumers.  Repeat.

But even if businesses do, in fact, begin to hire employees to track economic growth the economy has to absorb the slack of 4 million unemployed folks.  But even if that happens, many of the people who lost work during the Great Recession who now are re-employed, are now under employed.  That is, they have jobs but at pay and responsibilities levels well below their peak pay and responsibility levels.

All of this means that the Great Recession may very well have permanently shifted what we consider to be normal unemployment levels in the United States.  Previously unemployment levels of 5-7% were considered normal.  It may be the case for many years (say several decades) to come that unemployment levels of 7-9% are normal.

One of the overarching problems is that businesses have free-agency in terms of hiring, but employees do not.  That is, a corporation can outsource its jobs to other countries where workers are paid lots less money.  Unfortunately the same cannot be said for most employees.  Because of tough immigration laws all over the world, a displaced first world worker is trapped unemployed in his/her home country, unable to shop globally for work.  This asymmetry of opportunity spells doom for your average citizen.

What can be done?

• Governments could enact payroll tax holidays to provide economic incentive for employers to hire new workers.  Unfortunately, in an environment of tremendous “spending beyond our means” there is very little budgetary room to do this.
• Businesses are currently sitting on trillions of dollars of excess cash and not: hiring new workers, investing in new highly profitable growth engines, and paying dividends to shareholders.  Though it would be hugely unpopular with businesses for a government to do so, a political leadership with backbone could pass a one time 55% “excess cash reserves” tax.  That would induce businesses to: whine, hire new workers, whine, invest in new highly profitable growth engines, whine, pay out dividends to shareholders, whine, or do nothing.  If businesses are motivated to spend the money it eventually will find its way into the economy and eventually spur hiring or result in higher wages.  If the businesses do nothing then the Federal government will collect a huge amount of money that would instantly – to the tune of about $2 trillion – reduce the Federal debt.
• Alternatively, and perhaps more digestible for businesses, would be passage of a law that forbids businesses sitting on cash for over two years.  In other words, if they don’t have productive use for the cash they are accumulating, then they should be required to pay that cash out as dividends to shareholders.  Normally businesses justify not paying dividends because it is “tax inefficient.”  That’s because once those dollars are paid out to shareholders the monies will have been taxed at least three times before making it into the economy.  So passage of a dividend tax holiday would make this more attractive to businesses.
• Employees, if they have borrowing capacity, can borrow money to learn new, highly marketable job skills.
• Global anti-immigration laws could temporarily be relaxed to allow for the free flow of human capital around the world.  This could be done for jobs that only pay above $100,000.  Why that threshold?  Let’s be blunt, most anti-immigration laws are a way of limiting the flow of human capital of people that most nations find undesirable.  That is, low-income workers/those on the verge of poverty.  So if global anti-immigration laws were relaxed to allow for the free flow of white collar positions it might be more palatable and might even get the support of the business community.
• Businesses could temporarily (say 2-5 years) be forbidden from hiring outside of their home countries are off-shoring employment.  That would force businesses to absorb employees in their home markets commensurate with the economic growth in their home markets.  This creates a virtuous circle.  Businesses will whine that this will hurt their productivity as they are forced to hire employees that are more expensive than they could have hired in another country.  However, perhaps new tax incentives for research and development, or some other compensatory mechanism, could be put in place to reward businesses for their hiring.

As the situation stands right now, it appears to me that we may be facing permanently higher, endemic unemployment in the United States.  Fixing this is not going to be easy.

Jason