Thursday, December 26, 2013

The Not So New Unemployment Norm

Paul Krugman has never been shy about sharing his opinions on what is behind the long-term unemployment rate and why it has been so stubbornly high for so long. Demand, or lack thereof, has certainly played a major role. But Krugman believes there maybe another reason lying under the data that hasn't been looked at closely enough. Corporate America might actually want it that way. Krugman explains:

Now, you may believe that employment is a market relationship like any other — there’s a buyer and a seller, and it’s just a matter of mutual consent. You may also believe in Santa Claus. The truth is that employment is, in many though not all cases, a power relationship. In good economic times, or where workers’ position is protected by legal restraints and/or strong unions, that relationship may be relatively symmetric. In times like these, it’s hugely asymmetric: employers and employees alike know that workers are easy to replace, lost jobs very hard to replace.

But even more telling is the effect this is having on those who are actually employed. Krugman elaborates further:

Leave or lose your job, and the chances of getting another comparable job, or any job at all, are definitely not good. And workers know it: quit rates, the percentage of workers voluntarily leaving jobs, remain far below pre-crisis levels, and very very far below what they were in the true boom economy of the late 90s.

In a nutshell an awful lot of economists have been wrong about the economy from the beginning. They have maintained it is weak or depressed based almost solely on GDP, which had it not been for cuts to public spending would've been a full percentage point higher than it currently is, and the unemployment rate. But if one takes a look at profits, it is far from depressed.  Indeed, if you look at its balance sheets, corporate America appears to be having the time of its life. Here, Krugman sums up brilliantly:

The point is that we have a depressed economy for workers, but not at all for corporations. How much of this is due to the bargaining-power issue is obviously something we don’t know, but the disconnect between the economy at large and profits is undeniable. A depressed economy may or may not actually be good for corporations, but it evidently doesn’t hurt them much.

Assuming nothing much changes next year - the Republicans keep the House and the Democrats hold the Senate - we can expect demand to remain pretty much where it is at present. Unemployment may tick down a bit, maybe even down to 6 percent, but hardly enough to break the cycle. And even if more people join the workforce, all that will likely produce is a corresponding rise in the labor force participation rate, thus offsetting any positive gains. Translation, the long-term unemployed will, for the most part, remain that way and a good chunk of the employed will be sufficiently cowed enough into keeping their mouths shut or face the consequences.

And the employers? They'll just have to grin and bear it all the way to the bank.


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