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News : International Last Updated: Mar 5, 2010 - 5:33:12 AM


US employment prospects and policies to improve them; Recovery will not be jobless but gains will be tepid
By Michael Hennigan, Founder and Editor of Finfacts
Mar 4, 2010 - 2:30:27 AM

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The US recession is over but employment prospects and the policies to improve them is currently a big American focus. Is another jobless recovery in train?  Where will the jobs be?  And what can policymakers do to overcome obstacles to job growth? The recovery is not expected to be jobless but gains will be tepid.

Jobs growth in the United States in the past three decades has been largely driven by growing payrolls in the services and government sectors. For example, the number of jobs in the professional and business services category, rose by about 250% between 1980 and a peak of 18 million in January 2008 while public payrolls increased from 16.2 million in 1980 to 22.6 million at the early 2009 peak, most of the growth being in state and local area. During that time, manufacturing jobs fell from 19.3 million to 11.5 million and total US employment grew from 90 million in 1980 to 131 million in 2009.

The recession has hit men harder than women. The key reasons, Federal Reserve researchers say in a study published Tuesday: Male-dominated industries took a bigger hit in the downturn, and a disproportionate share of men who reentered the labour market failed to find a job. The jobless rate was roughly the same for men and women - - around 5% -- when the recession started. By August 2009, however, the gap was almost three percentage points: 11% for men and 8.3% for women. That difference was the largest in the postwar era.

Meanwhile, payroll employment declined 8.2% for men but only 3.9% for women from December 2007 to January 2010, authors Ayşegül Şahin and Joseph Song of the New York Fed and Bart Hobijn of the San Francisco Fed say. “As a consequence, for the first time on record, the number of women on US payrolls closely rivals the number of men.”

Prof. Peter Morici of the University of Maryland commented on Wednesday: "Fourth quarter GDP growth was 5.9%, but 66% of that was a slower pace in depletion in business inventories. Businesses continued to sell more goods off their shelves than they produced, but depletion of inventories fell from $157 billion in the third quarter to $20 billion in the fourth. The difference, $137 billion, counts as growth in the arcane world of GDP accounting.

Of the 5.9% increase in GDP, consumption, investment, government, and net exports contributed a paltry 2.0 percentage points to growth. That statistic is more indicative of the sustainable pace of GDP growth, and would indicate job losses will continue or gains will be too small to keep up with the natural growth of the labour force. Hence unemployment, however, will remain terribly high."

Morici says that in January manufacturers added 11,000 breaking a long losing streak, thanks to a 22,700 pickup in motor vehicles and parts production. Trailing auto sales and troubles at Toyota are expected to dampen gains or push manufacturing employment down going forward. Though industrial production has been rising overall, many gains are in durable goods industries that have learned to make many more goods with few workers.

Richard Berner, a managing director and co-head of Global Economics at US investment bank Morgan Stanley, says the recovery won't be jobless, but gains will be tepid.  MS expects annual job growth to average 1% (110,000 monthly) over 2010-11, excluding hires for the decennial census.  Even those modest gains are not a foregone conclusion. Job losses have abated, and some labour-market indicators have improved, but employment has yet to turn up. 

1. A long road ahead:  More important, Berner says there is a need for persistently strong economic and job growth over the next few years to regain the 8.4 million payroll jobs lost since December 2007, not to mention the 10.6 million jobs required to restore the employment rate (employment-population ratio) prevailing before the start of the Great Recession.   

Moreover, the US unemployment problem has become increasingly chronic. Two statistics document that fact: The median duration of unemployment has reached 20 weeks, more than twice the peak in the deep 1981-82 recession, and a record 41% of the unemployed have been jobless for six months or longer. 

MS outlined where job gains are likely to be over the next two years and why.  It  identifies  four specific obstacles to hiring.  Each of these hurdles has a cyclical and a structural dimension.  For each, therefore, policies that might help foster economic growth and job creation both in the immediate future are discussed - - the cyclical dimension - - and for the longer run - - the structural part.

2. Where will the jobs be?  What sectors of the economy are likely to grow in 2010 and 2011, and by how much?  How will employment growth vary in different regions of the country? What will be the likely state of the export market over the next two years, and the resulting impact on employment?

3. Strong sectors:  Advances in export, infrastructure, capital goods, energy and healthcare related industries likely will account for most of the job gains in the next 18-24 months.  That forecast echoes Richard Berner's views regarding the sources of growth in the US economy.  The combination of strong global growth, the lagged effects of fiscal stimulus and improving financial conditions will promote improvement in many of those industries. And rising demand for healthcare services continues.  In contrast, employment in residential and commercial construction, retailing, and financial services likely will remain soft as those industries continue to restructure.

4. Strong regions:  Identifying regional strengths and weaknesses is difficult. For example, industries that likely will benefit from exports and other strong sectors are located in regions hard-hit by regional housing woes. Conversely, some regions that fared relatively well in the downturn, like the Midwest, are now doing less well. In MS' view, the Pacific Northwest, parts of the Rockies and Upper Midwest, parts of the Southeast, and parts of the Southwest seem likely to be the strongest regions. 

5. Export markets and employment:  Berner projects gains in export volumes of around 10% to be sustained over 2010. Paced by their domestic demand, growth in many of America's major trading partners in Asia and Latin America likely will average 6-7% this year, and Canada probably will expand at a faster pace than the US. Somewhat slower global growth seems likely in 2011 as the US and overseas policymakers exit from stimulus. 

In manufacturing, some 20% of employment in 2006 was directly or indirectly associated with exports, and Richard Berner expects that share to grow over the next two years. Capital equipment and industrial supplies exports likely will continue to do well, while consumer goods will represent a rising share of overseas demand. 

6. Obstacles to hiring:  MS says worries about the sustainability of recovery are legitimate and probably are holding hiring back. Such concerns are characteristic early in recovery, but this time they are worse because of the lingering fallout from the bursting of the housing and credit bubbles. As a result, it remains essential to pursue policies oriented towards reducing housing imbalances, reducing debt and improving the functioning of financial markets and financial institutions. 

In addition, MS says there are four obstacles to hiring that magnify the normal, early-recovery hesitation: Rising benefit costs; mismatches between skills needed and those available; labour immobility resulting from negative equity in housing; and uncertainty around policies in Washington.  Each has both a long-term structural and a shorter-term cyclical element.  For each, MS outlines the problem; the long-term solutions and what policymakers can do to help the economy and the labour market improve as quickly as possible.

Obstacle 1. Cost of labour resulting from escalation in benefits.  The problem: Thanks to the high ‘fixed' costs of health and other benefits, and of taxes on labour to pay for the social safety net, US labour costs are out of line with other countries when adjusted for living standards. ‘Fixed' costs are benefit costs which  don't vary with hours worked; they are paid on a per-worker basis. But as employers seek to cut the cost of compensation, these benefit costs drive a growing wedge between total compensation and take-home pay.  Unlike in other countries where healthcare benefits are not directly part of compensation, these rising costs likely have intensified employers' efforts to boost productivity by cutting payrolls.  The recession made the wedge between compensation and wages bigger, as cost-cutting private-sector employers cut take-home pay while leaving benefits intact. So relative labour costs go up versus other countries while median pay suffers.

Long-term solutions include comprehensive healthcare reform and innovation to boost productivity and labour skills. Healthcare reform to expand access and control costs will reduce the soaring costs of healthcare for employers and employees alike.  Policies that boost worker productivity will reduce labour costs in what will be a win-win for employers, employees and overall living standards, because real wages will rise. 

Short-run remedies: A refundable payroll tax credit, perhaps for firms that increase their payroll, would be among the most effective short-run remedies. The Congressional Budget Office (CBO) estimates that a well-designed credit could boost employment by about 9 years of full-time equivalent employment per million dollars of budgetary cost.   

Obstacle 2. Skills mismatch: The problem: For years, employers have complained that they don't find the skills they need in today's workforce.  Worker skills have greatly lagged technical change and tectonic shifts in the structure of the US economy. Immigration restrictions and massive dislocations in several industries in recession have magnified that mismatch as workers who have been trained for one occupation lose their jobs. And even in healthcare, an oasis of job growth, there is a growing nursing and nursing skills shortage that requires new training facilities.

In the US, the recovery of manufacturing has been one of the few bright stars of the recovery and demographics there are a problem as they are elsewhere - - in the loss of skilled workers - - even though the sector has lost 2m jobs in recent years. According to the Financial Times, about 19% of US manufacturing workers are 54 and older, roughly the same as for the workforce as a whole, according to the Bureau of Labor Statistics. However, only 7% of manufacturing workers are under 25 years old - - half that of the wider workforce. German engineering giant, Siemens, currently has about 600 vacancies for engineers in the US.

Long-term solutions include policies that keep students in school and improve access to education, reorientation of the US higher educational system towards specialized and vocational training and community colleges, and immigration reform. 

Short-term remedies: The current unemployment situation demands income support through unemployment insurance for those seeking but unable to find a job.  Jobless spells degrade worker skills, just when workers need re-training.  One remedy would pair training in basic skills that are needed for work with such income support.  Two other groups seeking employment - - newly minted college students and unemployed teachers - - could be an ideal nucleus for a Job Training Corps that would empower job seekers with new skills.  As is the case with Teach for America, the Job Training Corps would build a pool of training advocates who then go on to work in other occupations with the perspective and conviction that come from helping others to acquire needed skills.   

Obstacle 3. Labour immobility resulting from the housing bust: Richard Berner says America's workers have always been footloose. Even in the Great Depression, they looked for work wherever it was. Today, however, about one in four homeowners is trapped in their house because they owe more than the house is worth, so they can't move to take another job - - until they sell or walk away.  Unlike in the Depression, when homeownership was less prevalent, negative equity among a nation of homeowners leads to substantially lower mobility rates.  Owners suffering from negative equity are one-third less mobile according to one study.  That is leading to a wave of ‘strategic defaults', in which borrowers who can otherwise afford to pay decide to walk away.  Whether through foreclosure or default, this process is undermining the economic and social fabric of communities and reducing job opportunities. 

Long-term solutions:Financial and mortgage regulatory reform are essential to restore the health of housing finance. Significantly improving financial literacy is equally important.   

Short-term remedies:  Local efforts to stabilize communities plagued by foreclosure are essential, but they are not enough. Richard Berner says it is essential to reduce debt, writing off bad loans while not destabilizing the financial system.  Modifying existing mortgages seems appealing, but policies aimed at mitigating foreclosures under the Home Affordable Modification Program (HAMP) have not worked because they attempt to modify mortgage payments and not the amount of debt owed; re-default rates following modification are 50-60%.  Efforts to establish a protocol for short sales and/or principal reduction should be a useful tool in avoiding costly foreclosure and strategic default. 

Obstacle 4. Policy uncertainty is a negative for the economy and markets: Richard Berner says America's long-term challenges - - healthcare, budget and tax reform, financial regulatory reform, retirement saving, infrastructure, education, energy and climate change - - are not new.  Solving them is imperative.  But while the debates around major initiatives to address them are an important part of the democratic process, the uncertainty that accompanies major policy change is weighing on business and consumer decisions to hire, expand, buy homes and spend. 

Recent work confirms this intuition, underlining how uncertainty produces negative growth shocks. Stanford University's Nicholas Bloom shows how a rise in uncertainty makes it optimal for firms and consumers to hesitate, which results in a decline in spending, hiring and activity.  In effect, the rise in uncertainty increases the option value of waiting as volatility rises.  Moreover, this line of reasoning suggests that uncertainty reduces the potency of policy stimulus.  That's because the uncertainty can swamp the effects of lower interest rates, transfers or tax cuts.  In effect, uncertainty raises the threshold that must be cleared to make a business choice worthwhile, and as uncertainty declines, the threshold falls with it.  This notion squares with the MS long-held view that policy traction from easier monetary policy, improving financial conditions and fiscal stimulus was lacking through much of last year, but improved as uncertainty fell. 

Market participants are used to thinking that political gridlock is good, that it prevents politicians from interfering with the marketplace. Berner says the financial crisis clearly exposed the flaws in that reasoning with respect to appropriate financial regulation, whose absence allowed abuses.  Indeed, gridlock today is more likely to be bad for markets, as America's long-term economic problems are partly the result of past policies and can only be solved with political action. 

Long-term solutions involve bipartisan leadership to tackle these complex problems one-by-one, in steps that are fair and call for shared sacrifice and benefits. That means setting priorities, making hard choices, communicating the game plan, and getting buy-in for it in advance. Richard Berner says it is essential to support the work of the National Commission on Fiscal Responsibility and Reform - - the deficit reduction commission. 

Short-term remedies: Reducing policy uncertainty now could be a tonic for growth. That won't be easy or come quickly, given the political backdrop in this election year.  But even some incremental clarity on policies in any of these areas would offer investors a chance to assess the fundamentals again - fundamentals that we still see as improving.

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