Unemployment: When Will It Go Away?





unemployment 



Unemployment is a nightmare for everyone: Generation X that can't find a job in line with their studies and training, a nightmare for those baby boomers who have lost their mid-career job and can't find another one at all or one paying at the same level.

Unemployment can turn ugly, a battle between generations:

Recently I read a letter from a reader of the Italian magazine L'Espresso that was directed to journalist and author Stefania Rossini, one of the magazine's advice columnists, herself clearly a baby boomer. Signed Costanza Altobelli,  the letter was bitter. Titled, "I am the daughter of an egocentric generation", she said she was 29, a Political Science graduate specialized in international relations, conversant in three languages, in principle destined to a good, perhaps even prestigious job in some international organization. Instead, here she was sitting at home, unwilling to work in a call center as so many of her friends did, while her parents ruminated that when they were young, life was nothing like that. You got a job easily, you never lost it, salaries increased every year.

She ended her letter with an unexpected jibe, asking the columnist whether she didn't feel any remorse - the implication being that baby boomers have helped destroy the job market, killing off opportunities for the young, that somehow they were responsible for the current mess. The answer from the columnist was equally surprising and strong: she told her that when she was young, "no presents were given" even then, and that she - and her whole generation - had to "fight for their rights". She suggested that if the young can't find jobs it's because they are no longer fighters, they don't go in for collective action, they each act in isolation from each other...

Really? So unemployment among the young would be caused by the young themselves, unwilling or unable to rise in arms? Come on! No amount of trade union action could solve the problem, and indeed trade unions (where they exist - and they do in Italy) are part of the problem: they defend the status quo, i.e. those who already have jobs. They certainly don't want to open the doors of the job market to outsiders, and especially not to the young...

Unemployment is sticky in a downturn:

There is no getting around that fact, and much of it is a direct result of our hard-to-budge labor institutions. It's sticky even in America that doesn't have the kind of trade unions you find in Europe. Economists say America is coming out of the Great Recession of 2008, yet jobs are not added at a sufficient rate to fill the gap left behind by the recession, much less to meet the new demand as the young enter the market. Indeed, there is an argument flying around the net that the real unemployment rate in the US is 23% rather than 7.8% - the official rate that doesn't take into account the long-term unemployed that has stopped looking for a job. Recently, the Federal Reserve of San Francisco has put out a paper that estimates that some 2 million Americans will start looking for a job again now that the economy is said to be out of the recession and that  the unemployment rate is dropping. Which means that the said rate will stop dropping!

Things are no better on the other side of the Atlantic pond. In the UK, long-term unemployment simply won't go away. As analyst Spencer Thomson convincingly argues, "it is increasingly apparent the initial shock of recession and continued stagnation in the economy has created a core of hard-to-reach unemployed". Ditto for the continent where news of horrendous rates of unemployment among the young keep assailing us: according to the Eurostat latest data (November 2012), the rate was 23.7 % in the EU-27, with the lowest rates observed in Germany (8.1 %), Austria (9.0 %) and the Netherlands (9.7 %), and the highest in Greece (57.6 %) and Spain (56.5 %).

There is a problem however with the way this data is calculated: the rates apply to youth between the age of 15 and 24 when many are still studying. Therefore the real problems in job-finding that young graduates face is not caught at all by the statistics. Yet Eurostat tries to sound reassuring: they tell us "Educational qualifications are still the best insurance against unemployment, which clearly increases the lower the level of education attained. This characteristic was noted in all Member States except for Greece and Cyprus in 2011, as the average unemployment rate in the EU-27 for those having attained at most a lower secondary education was 16.7 %, much higher than the rate of unemployment for those that had obtained a tertiary education qualification (5.6 %)."

Reassured? Personally, I'm not. We all know from experience and watching the difficulties of young graduates around us, that they do face serious difficulties. The round of job interviews has grown long and painful. By contrast, I remember being given a job after a single interview back in the 1970s. Now several interviews are the norm.

A whole class of job specialists has arisen - the so-called "head hunters" to assist in job finding - that hardly existed forty years ago. Back then, executive recruitment agencies were focused solely on finding candidates to fill key executive positions, now they are used to land first jobs and medium-level management positions. As noted by the Association of Executive Search Consultants in an article prepared on the occasion of its own 50th Anniversary, executive search which started as a by-product of management consulting just after World War II, has since grown into a global consulting industry with annual revenues of over $10 billion.

Ten billion US dollars!

Small wonder that some social media, in particular LinkedIn, has grown in part thanks to its ability to foster connections between employers and people looking for jobs. No question about it, the statistics may not show the extent of the unemployment problem and how it really affects both the educated young and old - yes, because if you're over 50 and you've lost your middle-level management job or your specialist post, your chances of landing another similar job are excruciatingly small, perhaps even worse than for a graduate fresh out of school.

What is worse is that these awful levels of long-term or "hard-core" unemployment have been around for quite a while now and have started long before the 2008 recession. Job growth in America has been unusually weak from 2001 to 2007 even though these were boom years: job creation simply failed to keep pace with population growth. The simple fact of the matter is this: the country has not developed any major new industries that employ large and growing numbers of workers. In the past, major innovations pulled the country out of the doldrums: the railroads in the1870s, the auto industry in the 1920s and more recently, the Internet sector in the 1990s. Now, there's nothing like it on the horizon. Indeed, high unemployment is beginning to look quite like the norm!

Why is unemployment so sticky?

Yet most economists still cling to the idea that unemployment is cyclical. Give a boost to the economy, kick start investment, get consumer demand going and economic growth will absorb the slack. Sure, growth would help, but it is illusory to believe that it will be enough to solve it. Unemployment reflects a secular crisis. A famous piece of academic research by Carmen M. Reinhart and Kenneth S. Rogoff has demonstrated that a financial crisis (like in 2008) typically leads to a decade of high unemployment. 

This means that, at best, unemployment won't get better before circa 2018. I would argue that is could even take longer because unemployment has become largely structural and here is why.

(1) increasingly specialized skills are required to find a job in the modern, technologically-driven economy. Even though the media often reports on jobless graduates (the overqualified bartender makes good copy), the evidence is in: graduates still land jobs more easily than non-graduates and ten years later they are found to have higher incomes. This does not detract from the fact that those who do not have the skills will find themselves out of the ball game unless somebody (the government, producers' associations) finance their training/re-cycling. So the answer to this particular conundrum requires time and money. And the willingness on the part of the individual to go back to school.

(2) technological innovation is a double-edged sword: the theory is that America is particularly strong and likely to give rise to the "next great industry" because it has (a) the world’s best venture-capital network, (b) a well-established rule of law, (c) a culture that celebrates risk taking and as a consequence (d) an unmatched appeal to immigrants, particularly those who are well-trained "big brains". Fine and good. But for the moment, we are in the midst of a maturing IT revolution - really not a revolution anymore - and no one sees where the next great industry might be coming from. In the past, technological progress, in  creating jobs in new sectors, moved the economy from agriculture to manufacturing to services. There were lags and hard times, there was unemployment but eventually a new equilibrium was achieved.  That model is kaput. The economy has become globalized and we are witnessing the double-edged sword of the digital technology at work: jobs to produce computers and other IT devices have been exported abroad, mostly in Asia (China, Taiwan, Korea); the Internet and computers replace physical workers, suppressing jobs in factories, typing pools, travel agencies etc. i.e. in both manufacturing and the services industries.  Job creation structurally lags behind job demand and that is not a situation that is likely to change anytime soon.

(3) consumer demand is at risk: it used to be sustained by middle classes rising incomes and jobs, but no more. This is an increasingly unequal society and the move away from equality started some 30 years ago. The data is in: the 2008 recession has further cemented income inequality and I won't bore you with the numbers (if interested, click here). The ultra-rich is getting richer, the middle class is disappearing, or rather, it finds itself squeezed (see above two points). Therefore demand for consumer goods may be unstable or weak and in any case is likely to rise at a slower pace than in the past. The one percent, no matter how profligate, cannot make up for the shortfall in demand from the 99 percent, in particular the middle classes. This long-term trend linked to rising inequality was successfully countered in the 2001-2007 period when consumer demand was doped with easy credit (particularly home mortgages). But we have seen with what results when the subprime mortgage crisis hit in 2008!

(4) the financial world is increasingly syphoning out savings from the real economy: this is hard to prove but there is evidence that private equity firms, hedge funds, even family investment offices all increasingly pursue financial investments that are further and further removed from the real economy. In simple terms: investors prefer to put their money in derivatives rather than loans to businesses. Even venture capitalists have become risk-adverse and more demanding before investing in a start-up. Wall Street has turned into a gambling casino and the divide with Main Street has grown into a chasm. Central banks, notably the Federal Reserve and the European Central Bank have moved in with quantitative easing measures to try and encourage banks to return to their primary role as business lenders. Whether this will work in the long run remains to be seen.

Solutions? Based on the above analysis, it is clear that any solution must address:

(1) training: upgrade skills, recycle/refresh so that people develop a profile of skills adapted to the available jobs

(2) job creation: putting up walls against globalization is politically tempting but it can easily backfire as other countries adopt retaliatory measures. In short, it's not as effective as actual job creation . The latter however requires a broad range of support measures from the government, ranging from training (see point above) to fiscal incentives and labor policy changes to support start-ups and innovative investments, especially in promising new areas like clean energy

(3) Returning banks to their role of business lender: this is very important because the government can't do everything and shouldn't. The private sector must fill its role in the economy, particulary as the main investment agent. In practice, this means the banks should quit playing with derivatives and return to their primary role of lending to businesses.

(4) strengthening consumer demand: we know now that doping it with easy credit is not a viable solution. Austerity measures in times of recession further kills consumer demand as it suppresses government jobs. In fact, any policy choice that excludes the government from the real economy will make overall demand weaker than it need be. This said, in the face of rising income inequality, it is difficult to see how to solve this problem.

There is however another possibility: demand from the BRICS countries is increasing, new middle classes are on the rise in China, India, Brazil etc. But of course, those countries are also in the hands of the ultra-rich...A vicious circle!

Any suggestions welcome...
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