Thirty-Eight Million Unemployed or Underemployed in the Lost Economic
Cycle of the Global Recession with Economic Growth Underperforming Below Trend
Worldwide, Unemployment Rate at 10.2 Percent in Jul 2020 In the Global Recession, with Output in the
US Reaching a High in Feb 2020 (https://www.nber.org/cycles.html), in the Lockdown
of Economic Activity in the COVID-19 Event, Creation of 1.763 Million Nonfarm
Payroll Jobs and 1.462 Million Private Payroll Jobs in Jul 2020, Cyclically
Stagnating Real Wages, Job Creation, Cyclically Stagnating Real Disposable
Income Per Capita, Financial Repression, World Cyclical Slow Growth, and
Government Intervention in Globalization: Part II
Carlos M. Pelaez
© Carlos M. Pelaez, 2009,
2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.
I Thirty-Eight Million Unemployed or
Underemployed in the Lost Economic Cycle of the Global Recession with Economic
Growth Underperforming
Below Trend Worldwide
IA2 Number of People in Job Stress
IA3 Long-term and
Cyclical Comparison of Employment
IA4 Job Creation
II Stagnating Real Disposable Income and Consumption Expenditures
IIB1 Stagnating Real
Disposable Income and Consumption Expenditures
IB2 Financial
Repression
III World Financial Turbulence
IV Global Inflation
V World Economic
Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk
Financial Assets
VII Economic
Indicators
VIII Interest Rates
IX Conclusion
References
Appendixes
Appendix I The Great Inflation
IIIB Appendix on Safe
Haven Currencies
IIIC Appendix on
Fiscal Compact
IIID Appendix on
European Central Bank Large Scale Lender of Last Resort
IIIG Appendix on Deficit Financing of Growth and the
Debt Crisis
In the analysis of Hansen (1939, 3) of secular stagnation, economic
progress consists of growth of real income per person driven by growth of
productivity. The “constituent elements” of economic progress are “(a)
inventions, (b) the discovery and development of new territory and new
resources, and (c) the growth of population” (Hansen 1939, 3). Secular
stagnation originates in decline of population growth and discouragement of
inventions. According to Hansen (1939, 2), US population grew by 16 million in
the 1920s but grew by one half or about 8 million in the 1930s with forecasts
at the time of Hansen’s writing in 1938 of growth of around 5.3 million in the
1940s. Hansen (1939, 2) characterized demography in the US as “a drastic
decline in the rate of population growth. Hansen’s plea was to adapt economic
policy to stagnation of population in ensuring full employment. In the analysis
of Hansen (1939, 8), population caused half of the growth of US GDP per year.
Growth of output per person in the US and Europe was caused by “changes in
techniques and to the exploitation of new natural resources.” In this analysis,
population caused 60 percent of the growth of capital formation in the US.
Declining population growth would reduce growth of capital formation.
Residential construction provided an important share of growth of capital
formation. Hansen (1939, 12) argues that market power of imperfect competition
discourages innovation with prolonged use of obsolete capital equipment. Trade
unions would oppose labor-savings innovations. The combination of stagnating
and aging population with reduced innovation caused secular stagnation. Hansen
(1939, 12) concludes that there is role for public investments to compensate
for lack of dynamism of private investment but with tough tax/debt issues.
The current
application of Hansen’s (1938, 1939, 1941) proposition argues that secular
stagnation occurs because full employment equilibrium can be attained only with negative real interest rates
between minus 2 and minus 3 percent. Professor Lawrence H. Summers (2013Nov8)
finds that “a set of older ideas that went under the phrase secular stagnation are not profoundly
important in understanding Japan’s experience in the 1990s and may not be
without relevance to America’s experience today” (emphasis added). Summers
(2013Nov8) argues there could be an explanation in “that the short-term real
interest rate that was consistent with full employment had fallen to -2% or -3%
sometime in the middle of the last decade. Then, even with artificial stimulus
to demand coming from all this financial imprudence, you wouldn’t see any
excess demand. And even with a relative resumption of normal credit conditions,
you’d have a lot of difficulty getting back to full employment.” The US economy
could be in a situation where negative real rates of interest with fed funds
rates close to zero as determined by the Federal Open Market Committee (FOMC)
do not move the economy to full employment or full utilization of productive
resources. Summers (2013Oct8) finds need of new thinking on “how we manage an
economy in which the zero nominal interest rates is a chronic and systemic
inhibitor of economy activity holding our economies back to their potential.”
Former US Treasury
Secretary Robert Rubin (2014Jan8) finds three major risks in prolonged
unconventional monetary policy of zero interest rates and quantitative easing:
(1) incentive of delaying action by political leaders; (2) “financial moral
hazard” in inducing excessive exposures pursuing higher yields of risker credit
classes; and (3) major risks in exiting unconventional policy. Rubin (2014Jan8)
proposes reduction of deficits by structural reforms that could promote
recovery by improving confidence of business attained with sound fiscal
discipline.
Professor John B. Taylor (2014Jan01, 2014Jan3) provides clear
thought on the lack of relevance of Hansen’s contention of secular stagnation
to current economic conditions. The application of secular stagnation argues
that the economy of the US has attained full-employment equilibrium since
around 2000 only with negative real rates of interest of minus 2 to minus 3
percent. At low levels of inflation, the so-called full-employment equilibrium
of negative interest rates of minus 2 to minus 3 percent cannot be attained and
the economy stagnates. Taylor (2014Jan01) analyzes multiple contradictions with
current reality in this application of the theory of secular stagnation:
- Secular
stagnation would predict idle capacity, in particular in residential
investment when fed fund rates were fixed at 1 percent from Jun 2003 to
Jun 2004. Taylor (2014Jan01) finds unemployment at 4.4 percent with house
prices jumping 7 percent from 2002 to 2003 and 14 percent from 2004 to
2005 before dropping from 2006 to 2007. GDP prices doubled from 1.7
percent to 3.4 percent when interest rates were low from 2003 to 2005.
- Taylor
(2014Jan01, 2014Jan3) finds another contradiction in the application of
secular stagnation based on low interest rates because of savings glut and
lack of investment opportunities. Taylor (2009) shows that there was no
savings glut. The savings rate of the US in the past decade is
significantly lower than in the 1980s.
- Taylor
(2014Jan01, 2014Jan3) finds another contradiction in the low ratio of
investment to GDP currently and reduced investment and hiring by US
business firms.
- Taylor
(2014Jan01, 2014Jan3) argues that the financial crisis and global
recession were caused by weak implementation of existing regulation and
departure from rules-based policies.
- Taylor
(2014Jan01, 2014Jan3) argues that the recovery from the global recession
was constrained by a change in the regime of regulation and
fiscal/monetary policies.
In revealing research,
Edward P. Lazear and James R. Spletzer (2012JHJul22) use the wealth of data in
the valuable database and resources of the Bureau of Labor Statistics (https://www.bls.gov/data/)
in providing clear thought on the nature of the current labor market of the
United States. The critical issue of analysis and policy currently is whether
unemployment is structural or cyclical. Structural unemployment could occur
because of (1) industrial and demographic shifts and (2) mismatches of skills
and job vacancies in industries and locations. Consider the aggregate
unemployment rate, Y, expressed in
terms of share si of a
demographic group in an industry i
and unemployment rate yi
of that demographic group (Lazear and Spletzer 2012JHJul22, 5-6):
Y = ∑isiyi (1)
This equation can be
decomposed for analysis as (Lazear and Spletzer 2012JHJul22, 6):
∆Y = ∑i∆siy*i + ∑i∆yis*i (2)
The first term in (2)
captures changes in the demographic and industrial composition of the economy ∆si multiplied by the average
rate of unemployment y*i , or structural factors.
The second term in (2) captures changes in the unemployment rate specific to a
group, or ∆yi, multiplied
by the average share of the group s*i,
or cyclical factors. There are also mismatches in skills and locations
relative to available job vacancies. A simple observation by Lazear and
Spletzer (2012JHJul22) casts intuitive doubt on structural factors: the rate of
unemployment jumped from 4.4 percent in the spring of 2007 to 10 percent in
October 2009. By nature, structural factors should be permanent or occur over
relative long periods. The revealing result of the exhaustive research of
Lazear and Spletzer (2012JHJul22) is:
“The analysis in this
paper and in others that we review do not provide any compelling evidence that
there have been changes in the structure of the labor market that are capable
of explaining the pattern of persistently high unemployment rates. The evidence
points to primarily cyclic factors.”
Table I-4b and Chart I-12-b provide the US labor force
participation rate or percentage of the labor force in population. It is not
likely that simple demographic trends caused the sharp decline during the
global recession and failure to recover earlier levels. The civilian labor
force participation rate dropped from the peak of 66.9 percent in Jul 2006 to
62.6 percent in Dec 2013, 62.5 percent in Dec 2014, 62.4 percent in Dec 2015
and 62.4 in Dec 2016. The civilian labor force participation rate reached 62.4
in Dec 2017, and 63.1 percent in 2019.
The civilian labor force participation rate was at 62.9 percent in Nov
2018 and 62.8 percent in Dec 2018. The civilian labor force participation was
63.0 in Dec 2019. The civilian labor force participation rate was 62.0 in Jul
2020. The civilian labor force participation rate was 63.7 percent on an annual
basis in 1979 and 63.4 percent in Dec 1980 and Dec 1981, reaching even 62.9
percent in both Apr and May 1979. The
civilian labor force participation rate jumped with the recovery to 64.8
percent on an annual basis in 1985 and 65.9 percent in Jul 1985. Structural
factors cannot explain these sudden changes vividly shown visually in the final
segment of Chart I-12b. Seniors would like to delay their retiring especially
because of the adversities of financial repression on their savings. Labor
force statistics are capturing the disillusion of potential workers with their
chances in finding a job in what Lazear and Spletzer (2012JHJul22) characterize
as accentuated cyclical factors. The argument that anemic population growth
causes “secular stagnation” in the US (Hansen 1938, 1939, 1941) is as misplaced
currently as in the late 1930s (for early dissent see Simons 1942). There is
currently population growth in the ages of 16 to 24 years but not enough job
creation and discouragement of job searches for all ages (https://cmpassocregulationblog.blogspot.com/2020/07/collapse-of-united-states-dynamism-of.html and earlier https://cmpassocregulationblog.blogspot.com/2020/06/global-recession-with-output-in-us.html). “Secular stagnation” would be a process over many years and
not from one year to another. This is merely another case of theory without
reality with dubious policy proposals.
Table I-4b, US,
Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2020
|
Year |
Mar |
Apr |
May |
Jun |
Jul |
Dec |
Annual |
|
1979 |
63.2 |
62.9 |
62.9 |
64.5 |
64.9 |
63.8 |
63.7 |
|
1980 |
63.2 |
63.2 |
63.5 |
64.6 |
65.1 |
63.4 |
63.8 |
|
1981 |
63.5 |
63.6 |
63.9 |
64.6 |
65.0 |
63.4 |
63.9 |
|
1982 |
63.4 |
63.3 |
63.9 |
64.8 |
65.3 |
63.8 |
64.0 |
|
1983 |
63.3 |
63.2 |
63.4 |
65.1 |
65.4 |
63.8 |
64.0 |
|
1984 |
63.6 |
63.7 |
64.3 |
65.5 |
65.9 |
64.3 |
64.4 |
|
1985 |
64.4 |
64.3 |
64.6 |
65.5 |
65.9 |
64.6 |
64.8 |
|
1986 |
64.6 |
64.6 |
65.0 |
66.3 |
66.6 |
65.0 |
65.3 |
|
1987 |
65.0 |
64.9 |
65.6 |
66.3 |
66.8 |
65.5 |
65.6 |
|
1988 |
65.2 |
65.3 |
65.5 |
66.7 |
67.1 |
65.9 |
65.9 |
|
1989 |
65.7 |
65.9 |
66.2 |
67.4 |
67.7 |
66.3 |
66.5 |
|
1990 |
66.2 |
66.1 |
66.5 |
67.4 |
67.7 |
66.1 |
66.5 |
|
1991 |
65.9 |
66.0 |
66.0 |
67.2 |
67.3 |
65.8 |
66.2 |
|
1992 |
66.0 |
66.0 |
66.4 |
67.6 |
67.9 |
66.1 |
66.4 |
|
1993 |
65.8 |
65.6 |
66.3 |
67.3 |
67.5 |
66.2 |
66.3 |
|
1994 |
66.1 |
66.0 |
66.5 |
67.2 |
67.5 |
66.5 |
66.6 |
|
1995 |
66.4 |
66.4 |
66.4 |
67.2 |
67.7 |
66.2 |
66.6 |
|
1996 |
66.4 |
66.2 |
66.7 |
67.4 |
67.9 |
66.7 |
66.8 |
|
1997 |
66.9 |
66.7 |
67.0 |
67.8 |
68.1 |
67.0 |
67.1 |
|
1998 |
67.0 |
66.6 |
67.0 |
67.7 |
67.9 |
67.0 |
67.1 |
|
1999 |
66.9 |
66.7 |
67.0 |
67.7 |
67.9 |
67.0 |
67.1 |
|
2000 |
67.1 |
67.0 |
67.0 |
67.7 |
67.6 |
67.0 |
67.1 |
|
2001 |
67.0 |
66.7 |
66.6 |
67.2 |
67.4 |
66.6 |
66.8 |
|
2002 |
66.6 |
66.4 |
66.5 |
67.1 |
67.2 |
66.2 |
66.6 |
|
2003 |
66.2 |
66.2 |
66.2 |
67.0 |
66.8 |
65.8 |
66.2 |
|
2004 |
65.8 |
65.7 |
65.8 |
66.5 |
66.8 |
65.8 |
66.0 |
|
2005 |
65.6 |
65.8 |
66.0 |
66.5 |
66.8 |
65.9 |
66.0 |
|
2006 |
65.8 |
65.8 |
66.0 |
66.7 |
66.9 |
66.3 |
66.2 |
|
2007 |
65.9 |
65.7 |
65.8 |
66.6 |
66.8 |
65.9 |
66.0 |
|
2008 |
65.7 |
65.7 |
66.0 |
66.6 |
66.8 |
65.7 |
66.0 |
|
2009 |
65.4 |
65.4 |
65.5 |
66.2 |
66.2 |
64.4 |
65.4 |
|
2010 |
64.8 |
64.9 |
64.8 |
65.1 |
65.3 |
64.1 |
64.7 |
|
2011 |
64.0 |
63.9 |
64.1 |
64.5 |
64.6 |
63.8 |
64.1 |
|
2012 |
63.6 |
63.4 |
63.8 |
64.3 |
64.3 |
63.4 |
63.7 |
|
2013 |
63.1 |
63.1 |
63.5 |
64.0 |
64.0 |
62.6 |
63.2 |
|
2014 |
62.9 |
62.6 |
62.9 |
63.4 |
63.5 |
62.5 |
62.9 |
|
2015 |
62.5 |
62.6 |
63.0 |
63.1 |
63.2 |
62.4 |
62.7 |
|
2016 |
62.8 |
62.7 |
62.7 |
63.2 |
63.4 |
62.4 |
62.8 |
|
2017 |
62.9 |
62.8 |
62.8 |
63.3 |
63.5 |
62.4 |
62.9 |
|
2018 |
62.8 |
62.7 |
62.8 |
63.4 |
63.5 |
62.8 |
62.9 |
|
2019 |
63.0 |
62.7 |
62.8 |
63.4 |
63.6 |
63.0 |
63.1 |
|
2020 |
62.6 |
60.0 |
60.7 |
61.8 |
62.0 |
Source: US
Bureau of Labor Statistics
Chart I-12b, US, Labor Force Participation Rate, Percent of
Labor Force in Population, NSA, 1979-2020
Source: Bureau of Labor Statistics
Broader perspective is in Chart
I-12c of the US Bureau of Labor Statistics. The United States civilian
noninstitutional population has increased along a consistent trend since 1948
that continued through earlier recessions and the global recession from IVQ2007
to IIQ2009 and the cyclical expansion after IIIQ2009.
Chart I-12c, US, Civilian Noninstitutional Population,
Thousands, NSA, 1948-2020
Sources: US Bureau of Labor Statistics
The
labor force of the United States in Chart I-12d has increased along a trend
similar to that of the civilian noninstitutional population in Chart I-12c.
There is an evident stagnation of the civilian labor force in the final segment
of Chart I-12d during the current economic cycle, with growth below historical
trend. This stagnation is explained by cyclical factors similar to those
analyzed by Lazear and Spletzer (2012JHJul22) that motivated an increasing
population to drop out of the labor force instead of structural factors. Large
segments of the potential labor force are not observed, constituting unobserved
unemployment and of more permanent nature because those afflicted have been
seriously discouraged from working by the lack of opportunities.
Chart I-12d, US, Labor Force, Thousands, NSA, 1948-2020
Sources: US Bureau of Labor Statistics
The
rate of labor force participation in the US is in Chart I-12E from 1948 to
2020. There is sudden decline during the global recession after 2007 without
recovery explained by cyclical factors (Lazear and Spletzer2012JHJul22) as many
potential workers stopped their searches disillusioned that there could be an
opportunity for them in sharply contracted markets.
Chart I-12E, US, Labor Force Participation Rate, Percent of
Labor Force in Population, NSA, 1948-2020
Sources: US Bureau of Labor Statistics
© Carlos M. Pelaez, 2009,
2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.
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