Friday, July 2, 2010

Crib notes for G7 unemployment rates

Unemployment rates across the G7 illustrate a broad-based labor recovery. Fantastic - now let's get to the underlying stories.

(Note: The US is the first to release the June 2010 figures. All other unemployment rates, except for the UK, are current as of May 2010.)

Germany, France, and Italy
: Germany's labor market is ostensibly improving, as the unemployment rate continues its descent. However, don't be fooled by these statistics: the German government is subsidizing firms to drop hours in lieu of outright layoffs.

And across the Eurozone, fiscal tightening will drive unemployment rates up; look at what fiscal austerity got Ireland.

The United States: Spencer, as usual, gives his insightful take on the US employment release: not good. The real problem is that the US private sector is sitting on an iceberg of debt; and the only way to avoid the economic pain of large-scale default is by dropping leverage via nominal income (wages) growth.

Workers have NO pricing power. How can they when the employment to population ratio dropped 0.2% to 58.5% in June? Note that 58.5% is consistent with a 1970's-1980's style labor force with fewer females working. Wages are going nowhere until the labor market improves substantially, and the private sector can't do it atop the iceberg of debt. We need the government's help there.

UK: The pace of the labor market deterioration is slowing (not evident in the unemployment rate, which dates to just March, but more evident in the claimant count). However, the unemployment rate is expected to rise as the government's self-imposed austerity measures are put into play. Furthermore, look for weakening labor conditions to push further default amid big household leverage.

Canada: The labor market is strong as illustrated by the marked improvement in the employment figures. Expansionary policy was very likely too expansionary, and the Bank of Canada has initiated its tightening cycle. The economy is hot right now.

Update: A reader notes that April GDP was released a couple of days before this article published. Indeed the economy posted 0% economic gain in April - not hot over the month. However, the jobs picture remains solid on a month to month basis, as May 2010 employment gains were +25,000 and all (in net) in the "full time" category. Being a small-open economy, much of Canada's economic outlook depends on external factors, especially the outlook of the US economy.

Japan: The labor market is weak, as most industries posted job losses in May 2010 (access Japanese labor data here).

Rebecca Wilder

6 comments:

  1. Rebecca, I find it hard to believe that you are calling the data in that graph a "recovery."  On what grounds? 

    I recommend, to you and your readers, this somewhat different take by Brad DeLong: http://delong.typepad.com/sdj/2010/07/spin-is-bad-enough-but-when-you-believe-and-act-on-your-own-spin.html

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  2. James, did you even read the article?

    "Workers have NO pricing power. How can they when the employment to population ratio dropped 0.2% to 58.5% in June? Note that 58.5% is consistent with a 1970's-1980's style labor force with fewer females working. Wages are going nowhere until the labor market improves substantially, and the private sector can't do it atop the iceberg of debt. We need the government's help there."

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  3. Rebecca, I do not disagree with "The real problem is that the US private sector is sitting on an iceberg of debt", or, at least, that this is a big part of the problem.  But I have a question about how to approach this problem.

    If the household sector debt (about 1.25 times annual disposable income) were spread evenly, most people would be fine.  There are lots of people who would be quite happy if their mortgage were so low.  So the problem is partly the historically high aggregate level, but also partly a very uneven distribution.

    My question is this.  How do you tell the difference between these two effects, and how do you account for them in policy?  The survey of consumer finances helps a little but, to illustrate the difficulty, it shows that the middle and upper-middle classes are most leveraged.  Do you then design special help for well-off professionals who bought McMansions and ignore the poor?

    My point is that the debt is in pockets, and the solution should probably be fairly directed, and my question is how to do that.

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  4. Are you thinking about government intervention, again, like in the form of longer unemployment? That might cover some of the mortgage payments on houses that are underwater and owned by middle/upper middle unemployed. Those are folks who will also have maxed-out credit cards. When will we allow people to fail when they have to take the consequences of their mistakes and not be bailed out? It will have an effect on the economy but, man, we need to return to realism and accountability or the problem will recur. 

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  5. Doesn't that support the idea that you may want to call it a stalled recovery at best or a flubbed recovery at worst?  Why do you think we are still paying banks to keep from lending their excess reserves, and what is your opinion of the equivalent overnight rate prior to the institution of interest on reserves? I believe it is at least 8%.

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  6. Perhaps we need to improve the Gini coefficient of debt at least as much if not more than the Gini coefficient of income?  There are plenty of policy options easily available for both, and the big and easy ones involve increasing the top-bracket income tax rates.

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