On April 1st 2012, my book,”Dagbok från USA”, came out in Sweden. It will also soon be published in English (as an e-book for Kindle and for other readers) with the title: “Diary from the United States – Notes on a society in crisis“. As an appetizer for English speaking readers, I will the coming weeks publish some excerpts from the book.

Why has U.S. unemployment remained at high levels since the last crises?

It has been unusually difficult for the U.S. economy to get back to normal unemployment levels after the financial crisis in 2008-2009. Judging by how things looked in the past three decades, from 1980 until today (autumn of 2011), “normal unemployment” in the U.S. has hovered around 5-6%. At best, unemployment dropped to 4-5% in the first few years of the last decade. At worst it was 11% during the first half of the 1980s. In August 2011, unemployment was 9.1%.

Is it possible to explain why this time it seems so hard to revive the economy and create jobs? Of course, the recession 2008-2009 was unusually deep, but the typical pattern for the recovery of such a strong and long downturn in the economy tends to be a quick return to growth and thus employment. When we talk about the U.S. economy, it’s more often than not just a return to the same employment level as before the recession. Even employment in absolute numbers usually begins to increase immediately. It’s amazing, not least for a European, how many new jobs that have been created in the United States in recent decades. In less than 50 years, employment (outside of farming) has more than doubled, from levels around 50-60 million, to now about 130 million.

Why has employment in the U.S. economy declined since the last crisis? Why has unemployment remained at high levels? Why haven’t we seen the historical pattern of a quick recovery repeated? I will try to explain, first from a macro perspective.

The Australian economist Steve Keen has in an interesting paper demonstrated that there’s a strong statistical relationship between unemployment level and the change in private debt in the economy. By private debt he means the sum of household and corporate debt. In other words, Keen has shown that unemployment rises when the private sector reduces its indebtedness. Conversely, we get falling unemployment rates when private debt in the economy increases.

Since the private debt in the U.S., and indeed in most Western countries, has far exceeded manageable levels and a balanced economy, almost all Western countries, and certainly the U.S., are at a stage of reducing private debt, what economists call deleveraging. This is offset to some extent by growing government budget deficits, which of course mean a growing national debt. (Despite all the talk about the necessity of reducing the national debt, such an endeavor inevitably must be a longer-term project in most countries including the U.S.) However, even if private and public sector debts are added together, the debt level in many Western countries is lower relative to what it was before the crisis, say at the end of 2007.

The relationship that Steve Keen shows can easily be understood. Aggregate demand in an economy in a given year is determined by the sum of GDP and the change in debt. Or put another way, if there’s no change in debt the country consumes exactly what it produces with adjustment for foreign affairs. If demand in the economy is going to increase, which is a prerequisite for employment to increase, either GDP or debt or both must grow. It’s the rate of change of GDP and debt that determines what will happen to growth. But since GDP changes only slightly from one year to another, over long periods GDP growth is at very low levels, one can understand that the very large annual changes in debt affect demand more, and thus employment more. Of course, the relationship is stronger when debt is very large relative to GDP, and so it is today. In 2010, private debt in the U.S. was about three times GDP, a little over $ 40,000 billion. It’s an almost incomprehensibly high figure, the equivalent of Sweden’s GDPx-100! Intuitively one understands that a change of growth in debt, whether positive or negative, is hitting demand and employment very hard. Steve Keen presents figures on the development of the U.S. economy that clearly demonstrate this relationship. For example, aggregate demand in 2010 decreased by 10%! No wonder that it’s difficult to get a job or keep the job you have.

What are the prospects for unemployment in the U.S. to decrease and move closer to “normal” levels of around 5-6% of the labor force? If we accept Steve Keen’s reasoning, and if we accept what most economists agree on – the need for the U.S. private sector to draw down debt – the outlook is not bright. The politicians and Federal Reserve are squeezed between two powerful forces – the private sector’s need to cut back its debts and the desirability of public debt stop growing. Inevitably, this will have a dampening effect on demand. Again, if employment is going to increase substantially, demand in the economy must increase.

Globalization and jobs

The micro perspective on job creation, job creation from the point of view of the firm, has to do with globalization and the impact of technological developments. By and large, same forces that provide ever-increasing income inequality in an open, highly developed economy like the U.S., also determine employment. The model that Nobel laureate Michael Spence and his associate Sandile Hlatshwayo used to explain changes in U.S. income distribution could also be used to clarify what’s happening to employment. As we recall, Spence divided the economy into two sectors, the tradable sector (the exporting sector) and the non-tradable sector (the domestic sector), and showed that by outsourcing, employment in the tradable sector in the U.S. in recent decades has stagnated, and in high-tech industries it has even declined sharply. Conversely, in the domestic sector employment has increased a lot, both in the private area (not least in health care) and in the public sector. Of the 27 million new jobs that were created in the United States between 1990 and 2008 almost all, 98%, were in the domestic sector.

As globalization and technological development continue, the number of jobs in the exporting sector is reduced if measured as a share of total jobs available in the country. This is inevitable. Of course, the interesting question is what will happen to jobs in absolute numbers. Are we likely to see more people working in the tradable sector? It will be very difficult, in practice impossible, provided that globalization and technological development continue. Developing countries like China, India and Brazil will make great efforts to move up the value chain, making it profitable for American companies to move ahead with outsourcing. Apple is an interesting example. When an Apple product like the iPad leaves the subcontractor Foxconn in China, it’s packed and ready for the consumer. No job involving the manufacture and assembly of an iPad is done in the U.S.! My conclusion is that it will be very hard for the United States to even maintain the number of jobs in the exporting sector in the coming years, let alone increase the number of jobs.

In contrast, employment in the domestic sector can increase, at least in theory. In practice, however, it will probably look different. In the short term, say until 2015, it’s highly doubtful whether there will be many more jobs created in the domestic sector in the U.S. – for several reasons. First, the high government debt will surely require austerity in the public sector, with fewer jobs, at least not more jobs, as a consequence. Second, health care, the other major employment generator after 1990, won’t continue to employ at the same rate as before, also for cost reasons. Furthermore, U.S. households are saving more and paying down their debt, which means less spending on private consumption and fewer jobs in such areas as retail.

To sum up, it’s unlikely that employment in the United States over the next 3-4 years will increase significantly. Or expressed in another way, it will be very difficult to come down to “normal” unemployment levels of 5-6% from the current level of 9%. If Western economies go into a new recession, which cannot be ruled out, or if they just struggle along with relatively low growth rates, it will probably be impossible. It’s my assessment that unemployment in the U.S. in the coming 2-3 years will remain at the level of 7-9%.

The explanation for the U.S. job crisis, which at first seems to be entirely economic, is also linked to politics and values. Had American politicians not been so afraid of taxes, and had they not funded too much of the reforms with loans, the situation today would be under better control, and there would be more room for Keynesian stimulus policies. Just to take one example, there is an almost infinite need for investments in roads, bridges, and other infrastructure. Unquestionably, such investments would be economically well-founded ventures. Now that opportunity has passed, at least the possibility for big loan-funded public spending is limited.

Furthermore, it’s worth considering once again that, according to Michael Spence and Sandile Hlatshwayo, the public sector and health care (which is approximately 50% tax-funded) are responsible for the majority, 40%, of the new jobs in the U.S. between 1990 and 2008. Ten million of the newly created 27 million jobs were added in the public sector and health care during this period. Virtually no new jobs were created in the exporting sector. The latter is remarkable since the conventional wisdom upheld by economists and politicians says something quite different, namely that almost all new jobs are created in the business sector, particularly by small businesses, not least by exporting high-tech high-growth companies. This is obviously not true.

Literature:

Keen, St., 2010, “Deleveraging, with a twist”, September 20th, 2010, (http://www.debtdeflation.com/blogs/);

Spence, M. & Hlatshwayo, S., 2011, “The Evolving Structure of the American Economy and the Employment Challenge”, Working Paper, March 2011, Council on Foreign Relations, New York;

First published (in Swedish): September 7, 2011