jobs report | Normative Narratives

Original article:

Developing countries that invested in quality jobs from the early 2000s grew nearly one percentage point faster every year since 2007 and were better able to weather the economic crisis than comparable economies, according to a new report by the United Nations labour agency.

The annual report of the International Labour Organization (ILO), The World of Work 2014, focuses this year on the relationship between good jobs and national development through analysis of 140 developing and emerging nations.

“Decent work opportunities for women and men help trigger development and reduce poverty,” Guy Ryder, Director-General of the ILO,” said in a news release on the launch of the report, subtitled Developing with Jobs.

“Social protection, respect for core labour standards and policies that promote formal employment are also crucial for creating quality jobs that raise living standards, increase domestic consumption and drive overall growth,” he added.

“In view of the evidence, it is essential to make decent work a central goal in the post-2015 development agenda,” stressed Raymond Torres, Director of the ILO Research Department.

Quality jobs are an important tool for escaping poverty traps. In a recent post, I said that economics is always context sensitive; this does not mean, however, that certain things–such as quality jobs–are not important in all contexts. Whether in a rich or poor country, societies poorest are unable to escape poverty traps because they do not save–they either spend their entire income on survival or short-term luxuries to distract them from life’s problems. While “extreme poverty” (living on less than $1.25 /day, adjusted for purchasing power parity) is confined to the world’s least developed countries (LDCs), relative poverty exists everywhere. While the exact income level needed to escape a poverty trap (the inflection point on the graph above) is context sensitive, the general relationship holds in all contexts.

Underpinning the universality of relative poverty is the inverse relationship between marginal propensity to consume (MPC) and income; the lower ones income, the greater percentage of it they will consume. The flip side of this is low savings–the higher one’s MPC (ranging from 0-1), the lower one’s MPS (MPS + MPC = 1). This inability to save perpetuates a vicious cycle of low productivity, low wages, and low savings resulting in inadequate investment in “human capital” (education, healthcare, etc), which is what causes the low level of productivity in the first place–a poverty trap. While different income groups in different countries have different levels of MPC/S, this general relationship between income, consumption, savings, investment and poverty holds in all contexts.

The U.N. report cited at the beginning of this post focuses on quality job creation in developing countries; I would like to shift the focus to America’s political economy. No politician, particularly in a democracy, would ever say they are opposed to creating quality jobs. Therefore, we must assess the different ideological / policy approaches to quality job creation, in order to determine which approach is most likely to succeed:

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Liberals:

Invest in human capital, particularly needs-based investment (which, due to low levels of income / savings, these people cannot afford themselves) to boost worker productivity, physical capital (infrastructure projects), and growth markets (such as renewable energy) to boost economic output and create jobs in a depressed economy (counter-cyclical fiscal policy).

Raise the minimum wage and support collective bargaining (unionization) to increase take home pay for “blue collar” workers.

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Conservatives:

Cut spending to reign in the deficit, restoring confidence in the economy so “job creators” (those who hold financial capital) will reinvest into the economy. Perpetuate a “race to the bottom” by discouraging collective bargaining and subsidizing private job creation by providing tax breaks / subsidies to private companies .

Reduce taxes and regulations as much as possible (starve the “beast”). Rely on private actors, market forces, and trickle-down economics to result in the optimal allocation of resources.

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Conservatives will point to a low unemployment rate (currently 6.3%) to prove that additional stimulus spending is not needed. Liberals will counter with evidence of wage stagnation and “working poor” to argue that greater labor market intervention is needed. The question then becomes, what is a quality job? Is it simply having a job, or is a minimum salary (perhaps that inflection point) needed? Further clouding the issue is the apparent disconnect between productivity and wages, implying that simply training low wage workers–the typical remedy for escaping “poverty traps”–may be insufficient to create “quality jobs” (and hence the growing minimum wage movement).

History has resoundingly and repeatedly debunked the concept of “trickle down economics” yet it keeps coming up in mainstream political economy discussions–something Paul Krugman would call a “Zombie Idea”. The reason this “zombie idea” persists is relatively straightforward–vested interests with large levels of wealth perpetuate this view through the mainstream media. They state any additional costs (taxes, regulations, wage increases) will cause massive job loss despite record high corporate profits (after taxes) and stock values , and (relatedly) historically low corporate income tax rates.

I leave my readers with this question; which plan to create quality jobs sounds more likely to work to you? Take that answer to the voting booth with you during the 2014 midterm elections, because quality jobs are the key to sustainable human development, economic growth, and social cohesion.

The jobs report for March came out today, and it was not pretty:

“American employers increased their payrolls by 88,000 last month, compared with 268,000 in February, according to a Labor Department report released Friday. It was the slowest pace of growth since last June, and less than half of what economists had expected.”

“The unemployment rate, which comes from a different survey, ticked down to 7.6 percent in March, from 7.7 percent, but for an unwelcome reason: more people dropped out of the labor force, rather than more got jobs.

The labor force participation rate has not been this low — 63.3 percent — since 1979, a time when women were less likely to be working. Baby boomer retirements may account for part of the slide, but discouragement about job prospects in a mediocre economy still seems to be playing a large role, economists say.”

There are a number of reasons for this dismal jobs report. The most obvious explanation would be the sequester, but this is incorrect. The sequester has not had enough time to work its way through the economy enough to significantly affect unemployment–most economists agree unemployment will spike at the end of the year due to the sequester. The payroll tax holiday expiration is a more plausible cause; part of the “fiscal cliff” deal, the tax increase disproportionately hit low income American’s disposable income starting in January. Both policies compromise aggregate demand (the payroll tax through consumption, sequester through government spending), reducing any incentive businesses might otherwise have to increase hiring.

Is it surprising we have had stagnant growth and stubbornly high unemployment given the current conditions? Any economist who understands basic macroeconomics could have predicted the growth-recession that has come to define post-Great Recession America, given the current global economic environment and political gridlock here at home. Paul Krugman, who always seems to focus on the most pertinent indicators and explain complex economic issues in an accessible way, does it again:

“But is this really a surprise? I mean, it’s true that the incipient housing recovery has made many people somewhat optimistic — I’ve been one of them — but when all is said and done, we are following strongly contractionary fiscal policy in an economy in which monetary policy is still ineffective because of the zero lower bound. How contractionary? Look at CBO’s estimates of the cyclically adjusted budget deficit (third column):”

” That deficit has declined from 5.6 percent of potential GDP in 2011 to 2.5 percent in 2013 — that’s 3 percent of GDP, which is a lot of austerity. Not all of that cut has even hit yet — the sequester isn’t in the macro numbers yet — but the rise in the payroll tax is very clearly driving the latest bad numbers, which show big declines in retail.

This is really stupid; as long as we’re at the zero lower bound, austerity is a huge mistake.”

Driving most of this deficit is lower budget revenues, a legacy of the G.O.P.’s failed “starve the beast” theory of governance.

But enough finger pointing. The real issue here is how much austerity has been pushed through (3% of GDP) at a time when the private sector cannot make up the slack of reduced government spending (what the zero lower bound essentially means, that even at a 0% interest rate, the private sector still cannot provide enough capital for the economy to run at full capacity).

How far from full capacity are we? According to the CBO, America has produced under capacity by a large margin since 2009 (-6.8% in ’10, -6.2% in ’11, -5.7% in ’12 and an estimated -5.9% this year). If we multiply those numbers by the GDP of those years, we get this much lost output: $896.24 billion in ’10, $883.28 billion,$ 779.19 billion in 2012. That’s a whopping 2.558 trillion dollars over the last 3 years. If the U.S. government had captured 20% of that in tax revenue, that would’ve been an additional $511 billion in revenue over those 3 years (actually, these numbers are an underestimation, as the GDP gap is based off potential GDP I used real GDP).

Also alarming is that the 2013 projected output gap is supposed to go up, from 5.7% in 2012 to 5.9% in 2013. Not only is our economy recovering, austerity measures are actually pushing the economy in the wrong direction.

There is a large cost to both the government and the people with so much idle production capacity. The government has to pay more benefits and receives less tax revenue, exacerbating the federal deficit. People are sitting idle, their skills are deteriorating, not to mention the psychological effects of long term unemployment.

Once you correct for these automatic stabilizers, the U.S. is basically on a stable fiscal path. Automatic stabilizers are cyclical, they do not have to be addressed by policy as they adjust automatically based on the economy. Low revenue from inadequate taxation is structural, and requires tax reform. Spending on social programs and government employment did not get us into our current problem, and cutting these programs will not get us out of it–it will actually dig us into a deeper hole.