Saturday, 5 May 2012

Unemployment Woes

US unemployment fell slightly to 8.1% last month; partly attributed to the fall in the labour force size, which counts those who are working or are looking for work. Employment trends in Advanced Economies looks similarly paltry. British unemployment is set to go up this year, following on the heels of a double dip. Presently, the British economy has barely recovered to its pre-crisis 2007 Nominal GDP level let alone pre-crisis trend GDP level.

In effect, unlike the Great Depression in the 1930s when the US economy recovered to its pre-crisis level, we are seeing a structural shift to a new trend of stagnating non-negative output growth in the advanced world. Even in the Great Depression in the 30s, US unemployment rose from 3.4% pre-crisis to 25% at the trough of the business cycle in 1933, then settling around 15% by 1938. It was not till rearmament and public spending on World War II when US employment recovered to its pre-crisis level. Suppose we have the following simple employment identity:

output growth rate - growth in Labour force size - Labour productivity growth = growth in employment

We are seeing barely any output and labour force growth. Thus, positive labour productivity growth has led to negative employment growth. In other words, we are facing serious long term structural unemployment in the advanced world which cannot be undone unless high output growth brings the economy back to its pre-crisis trend GDP level. Additionally, if we take non-negative Labour force growth, unemployment would rise further. A whole generation of permanently unemployed workers are set to be born in the coming decade; a decade of what will feel like a 'recession' is to follow in the advanced world.