Jobless recovery

Jobless recovery

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Encyclopedia
A jobless recovery or jobless growth is an economic phenomon in which a macroeconomy experiences growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...

 while maintaining or decreasing its level of employment
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

. The first documented use of the term was in the New York Times in the 1930s.

Causes


Economists are still divided about the causes and cures of a jobless recovery: some argue that increased productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...

 through automation
Automation
Automation is the use of control systems and information technologies to reduce the need for human work in the production of goods and services. In the scope of industrialization, automation is a step beyond mechanization...

 has allowed economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...

 without reducing unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

. Other economists state that blaming automation is an example of the luddite fallacy
Luddite fallacy
The Luddite fallacy is an opinion in development economics related to the belief that labour-saving technologies increase unemployment by reducing demand for labour. The concept is named after the Luddites of early nineteenth century England.The original Luddites were hosiery and lace workers in...

 and that jobless recoveries stem from structural changes in the labor market, leading to unemployment as workers change jobs or industries.

Historical context


Depressions and jobless recoveries were common in the 19th century, such as in the Long Depression
Long Depression
The Long Depression was a worldwide economic crisis, felt most heavily in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution in the decade following the American Civil War. At the time, the episode was labeled the Great...

; during the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

 unemployment remained high for years after GDP had returned to growing; and persistently high unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

 (10% or more for decades) has occurred in many countries over the 20th century – see depression
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....

 and unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

 for discussion.

The Post-World War II economic expansion
Post-World War II economic expansion
The post–World War II economic expansion, also known as the postwar economic boom, the long boom, and the Golden Age of Capitalism, was a period of economic prosperity in the mid 20th century, which occurred mainly in western countries, followed the end of World War II in 1945, and lasted until the...

 was characterized by historically low levels of unemployment and full employment
Full employment
In macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....

 in many countries, but following the end of the global expansion in the 1970s, unemployment increased in many countries.

Most US economic recoveries in the period 1945–1990 led to employment increases relatively rapidly. However, in the early 1990s recession, early 2000s recession
Early 2000s recession
The early 2000s recession was a decline in economic activity which occurred mainly in developed countries. The recession affected the European Union mostly during 2000 and 2001 and the United States mostly in 2002 and 2003. The UK, Canada and Australia avoided the recession for the most part, while...

, and late-2000s recession the employment recoveries have lagged increases in GDP.

Recent employment trends in the USA


Jobs are constantly being created and destroyed in a dynamic economy emphasizing competition like the USA currently has. As a statistical matter, the low number of net jobs created in the decade 2000–2009 is due to a low number of new jobs created, not due to an especially higher than usual number of jobs destroyed (net jobs is new jobs created minus old jobs destroyed). This was a trend observed even in 1987 and it has accelerated dramatically since, with many US communities dependent on textile manufacturing experiencing "severe hardships". But also during that time, a large number of service industry jobs have been created, such as in teaching, in prisons, in food services, in government, in hospitals, and in the computer industry, for an overall continued growth in employment. This reflects comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

.

In the years 2008 and 2009, initial jobless claims in the USA moved up from the usual 350,000 or so initial jobless claims per week in previous years to more like 500,000 or so a week. This reflected a situation where there was only one new job created for about every six unemployed workers; in some industries the ratio was higher and in others it was lower. This is sometimes depicted as like the "stalling" of some jobs creation engine. This stalling metaphor reflects a political emphasis in a dynamic US economy on creating new jobs rather than preserving existing jobs. It can often be pointless to try to preserve some specific old jobs, as many specific jobs may gradually become obsolete from technological change, like replacing some bank tellers with ATMs. Other jobs may become unneeded from demographic trends, like an aging population purchasing less baby clothes and more hearing aids. This constant turnover in what jobs need to be done is part of the reason that the average person born in the later years of the US "baby boom" (1957 to 1964) held 10.8 jobs from age 18 to age 42, according to the Bureau of Labor Statistics of the U.S. Department of Labor.

With further overall employment reduction in 2009 not reflected in the chart above (changes since March 2009), there ultimately was zero net job creation in the 2000-2009 decade in the USA. This is even worse than it seems, given US population growth during that time with no new jobs created for them, creating a shortage of about 18 million jobs relative to previous decades by one estimate by Paul Krugman if this ground was to be made up in five years. To understand such a calculation from another perspective, looking at the chart above, about 17 million net new jobs were created in the 1990-1999 decade relative to population growth. Assuming continuing population growth at about the same rate, for the USA to return to the level of employment of 2000 relative to population, starting from a lost decade, overall about 34 million net new jobs would need to be created by the end of the 2010-2019 decade (new jobs beyond replacements for jobs that are normally lost). By whatever calculation, this vast "jobs deficit", completely unpredicted by almost all mainstream economists, is causing "leading economists and policymakers to fundamentally rethink the underpinnings of the nation's growth.".

Still, even with no net new jobs created during the 2000-2009 decade, the US GDP increased from about US$10 trillion a year in 2000 to about US$14 trillion a year in 2009 (according to the US Bureau of Economic Analysis). This increase in GDP came from several sources. Much came from increased productivity (more produced per worker through automation) and from improved design (with new designs being easier to make or use). Some came through technical issues with GDP calculation, since goods or services produced mostly abroad are still credited to the USA's GDP when they are resold locally with some value added (like when Walmart sells goods made in China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...

 with some markup to cover profit and the cost of operating distribution centers in the USA, so the markup contributes to the GDP). Some came from what Jane Jacobs
Jane Jacobs
Jane Jacobs, was an American-Canadian writer and activist with primary interest in communities and urban planning and decay. She is best known for The Death and Life of Great American Cities , a powerful critique of the urban renewal policies of the 1950s in the United States...

 termed "transactions of decline" like increased spending on prisons, wars, and care for the long-term sicken, which is why GDP may be a problematical indicator as to societal well-being.

With the rest of the world rising in productivity of goods and services like Hans Rosling
Hans Rosling
Hans Rosling is a Swedish medical doctor, academic, statistician and public speaker. He is Professor of International Health at Karolinska Institute and co-founder and chairman of the Gapminder Foundation, which developed the Trendalyzer software system.-Study and career:From 1967 to 1974 Rosling...

 documents, it is hard to imagine where the USA will get 34 million new jobs over the 2010-2019 decade. With so many people around the globe ready to make goods and services for themselves or supply them to others through globalization, it seems unlikely the US could increase commercial exports significantly or increase demand significantly for consumer goods and services produced locally (even with hopes for millions of local new "green" jobs or in some other high-tech industries).

Some mainstream economic analysts suggest the US consumer may be permanently shifting to a lower level of consumption. For example, Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment-banking firm, said: "Suddenly consumers are focused on buying what they have to have as opposed to buying what they want to have... This is a permanent change for Americans, who will face a declining standard of living over the next 20 years..."

Industrial consolidation


Some have argued that the recent lack of job creation in the United States is due to increased industrial consolidation and growth of monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

 or oligopoly
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...

 power. The argument is twofold: firstly, small businesses create most American jobs, and secondly, small businesses have more difficulty starting and growing in the face of entrenched existing businesses (compare infant industry argument
Infant industry argument
The Infant industry argument is an economic rationale for trade protectionism. The core of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar...

, applied at the level of industries, rather than individual firms).

As a matter of policy, this is particularly attributed to Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....

, in whose presidency (1981–1989) anti-trust enforcement was sharply reduced and industrial consolidation increased. The intellectual background comes from the Chicago school of economics, which advocates laissez faire policies and little or no anti-trust policy, and these policies continued under George Bush
George H. W. Bush
George Herbert Walker Bush is an American politician who served as the 41st President of the United States . He had previously served as the 43rd Vice President of the United States , a congressman, an ambassador, and Director of Central Intelligence.Bush was born in Milton, Massachusetts, to...

, Bill Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...

, and George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....

.

Globalization


Free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

 has also been suggested as a possible driver of structural changes contributing to a jobless recovery. In this view, during lean times companies in developed countries are more likely to move factories and lower-skill jobs offshore
Offshore outsourcing
Offshore outsourcing is the practice of hiring an external organization to perform some business functions in a country other than the one where the products or services are actually developed or manufactured. It can be contrasted with offshoring, in which the functions are performed in a foreign...

, given the higher pressure to cut costs and lower likelihood remaining employees will leave the company. This results in the need for the workforce to shift to different manufacturing and service jobs (often higher-skill), but it takes time for these new jobs to be created (sometimes requiring the creation of new companies or the scaling up of startups) and for workers to be retrained or credentialed. For this to work out well, there must be demand for new products and services to justify new businesses, and most workers must be able to adapt to these new jobs.

Offshoring
Offshoring
Offshoring describes the relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Even state governments employ offshoring...

 has affected these jobs numbers above for the past decade in the USA. In theory, as national currencies and wages reach an equilibrium (like by a significantly increase valuation of the Chinese yuan and Indian rupee relative to the US dollar), offshoring by itself should not permanently effect employment (ignoring any temporary problems or deindustrialization
Deindustrialization
Deindustrialization is a process of social and economic change caused by the removal or reduction of industrial capacity or activity in a country or region, especially heavy industry or manufacturing industry. It is an opposite of industrialization.- Multiple interpretations :There are multiple...

). Still, offshoring is making the particular US jobs situation worse right now.

The offshoring situation may improve for the USA over the next decade or two from currency adjustments, the increased cost of shipping from rising oil prices, or from government policy changes relating to national security or protectionism. If so, the actual production of many goods and services may come back to the USA from abroad. If those jobs are not automated when they are brought back, then, assuming demand did not change, there would be a net increase in jobs in the USA and a decrease of jobs in other countries. However, it is possible that increasing automation and better design would allow jobs returning to the USA to be filled by robots and other automation, as current domestic firms begin to use idled capacity requiring little additional labor, or as they continue to figure out how to produce more with less human involvement and less energy and materials. This would free up workers to produce other goods & services.

Indian jobless growth hypothesis



Indian economic growth has been driven by the expansion of services that have been growing consistently faster than other sectors (Eleventh Five Year Plan 2007–12). It is argued that the pattern of Indian development has been a specific one and that the country may be able to skip the intermediate industrialization-led phase in the transformation of its economic structure. The interpretation of this pattern of development is however ambiguous. While for some of the authors the boom of services and the relative lag of manufacturing evokes an optimistic view towards Indian development perspectives, serious concerns have been raised about the jobless nature of the economic growth. The latter warn of an insufficient demand for the rapidly growing labor
force (a steady 2% annually) of which only a fraction is employable in the newly emerging service activities. In 2008 the sector of IT-BPO (Information Technologies and Business Process Outsourcing) services directly employed less than 0.5% of the Indian labor force and indirect job creation is estimated at 1.8%. On the other hand, the IT-BPO sector accounted for almost one-fourth of
Indian export (Indian IT-BPO Industry 2009). Moreover, even within the manufacturing sector, the growth has been based relatively more on skill-intensive rather than labor-intensive activities, at least when compared to the trajectories
of other rapidly developing (Asian) countries. These structural imbalances are vital to increasing inequality (in its
various dimensions) which, in turn, worsens the growth elasticity of poverty
Growth Elasticity of Poverty
Growth elasticity of poverty is the percentage reduction in poverty rates associated with a percentage change in mean income.Mathematically;where PR is a poverty measure and y is per capita income...

reduction when even high aggregate growth rates do not themselves lead to an adequate decline of poverty.