The Bureau of Labor Statistics’s more inclusive U-6 unemployment rate is at about 17.5 percent (source). This does not include “discouraged” workers, so the real proportion of the expected-to-be-working population that is unemployed is probably 20 percent or more. More relevant is the number of Americans with jobs: 138 million in October 2009, down from approximately 146 million in 2007. The U.S. population, meanwhile, has grown from to 301 million to 308 million. In other words, an ever-smaller percentage of Americans are working, despite substantial growth in the number of government jobs.
Let’s assume that businesses ignore Barack Obama’s directives for them to hire more U.S. workers (see “Obama to push private sector to hire at forum”). Can the U.S. economy grow? Can U.S. businesses prosper? Current stock market investors seem to think so and have bid up the S&P 500 accordingly. Are these investors irrational?
Let’s try to find some historical examples of economic growth despite limited labor market participation. In the 1950s, our culture arbitrarily excluded a lot of people from the U.S. labor market because of sex. Many employers did not want to hire women. Many women did not want to work, especially after marriage. Pressures to exclude women from the labor market were stronger in countries such as Japan. Yet despite having a large fraction of the working-age population excluded from the labor market, both the U.S. and Japan achieved strong economic growth and investors received a healthy return (almost 17 percent real return during the 1950s in the S&P 500; source).
If these economies could grow just fine with 50 percent of the population discouraged from working, why shouldn’t the U.S. economy circa 2010 be able to grow even if the unemployment rate were to grow substantially? In fact, because our labor force now benefits from the contributions of the best educated and most skilled women, in some ways the economy should be better-poised for growth than it was in the 1950s.
How can an investor prepare for a U.S. economy in which an ever-increasing number of working-age citizens are staying home and living off parents or spouses? Perhaps it is time to buy Nintendo, cable television, Sony, broadband Internet, and Dell.
We are currently in a crisis of productivity.
Twenty years ago, how long would it have taken you to find out the owner of a particular house going through county records, or track down an old news story, or get information about the airport in Kansas City? Now you can do all three in an hour and have plenty of time left over.
We now do a week’s work in a day. I’m a computer programmer, and I can write a bunch of code in Java in one hour that would have taken me a full day to write in COBOL in 1979.
So do we cut back our working hours? No, we stick with 40 hour weeks and let each person produce the work of two or three and lay off the excess people.
“If these economies could grow just fine with 50 percent of the population discouraged from working, why shouldn’t the U.S. economy circa 2010 be able to grow even if the unemployment rate were to grow substantially?”
Let’s try a thought experiment. Suppose we have an economy with 100% labor market participation. Then suppose all women stop working. Assuming there’s no difference in productivity (output per worker) between men and women, the size of the economy–that is, the total economic output of all employed workers–would immediately shrink by 50%.
Am I missing something? There’s a difference between employment being at a low but static level (the case in the 1950s), and employment being high but declining (the case during a recession). All things being equal, as employment declines, the economy will shrink. I think it’d be pretty difficult to decouple economic growth from unemployment.
Mark: if productivity (output per worker) increases, what usually happens is that people consume more. The reason people have started saving more and spending less is because they’re afraid they might lose their jobs, not because they’ve stopped wanting more stuff.
Keynes once wrote, “Economics is a difficult and technical subject, but nobody will believe it.” We’re all familiar with work and money, so it’s easy to assume that economic reasoning isn’t that complicated. Paul Krugman argues that this is wrong–fundamentally, economics is based on mathematical models, and when you’re trying to reason things through with a purely verbal argument, it’s easy to get them wrong. You really need to look at the math.
Russil: I won’t disagree with your conclusions from your thought experiment. However, the shrinkage in the number of workers is already behind us. Investors in stocks received no return on their investment for the last 10 years. There was no growth in the number of private sector jobs over the same period (see http://philip.greenspun.com/blog/2009/08/07/private-sector-employment-growth-graphic/ ). If we write off the period from 2000 through 2009 as a lost decade for the private economy (excepting Wall Street), that doesn’t mean we are prevented from growing in the future.
We have a growing population in the U.S. If the number of workers remains constant, the unemployment rate will grow every year. Again, that does not necessarily spell doom for an investor. A company can become more profitable every year without increasing its workforce. The company can learn more efficient ways of doing things. The company can apply capital investment so that workers become more productive. Even if I believe that the unemployment rate will grow at the same rate as population growth (about 1 percent per year), I might still rationally believe that the S&P 500 will prosper.
Sometimes increases in productivity cause production to increase way beyond demand. In the 1980’s communications companies increased capacity and were able to increase demand up to a point — but only up to a point.
One thing we do with increased productivity is find new ways to waste it. In the 1960’s I think it was Vance Packard who predicted that we would fill ships with brand new appliances still in their crates, send them out to sea and sink them just to keep demand high.
Maybe that hasn’t happened yet, but tax preparation software has made us so much more productive at tax time that the government has been able to increase the complexity of the tax code to the point that it takes you ten hours with a computer to do your taxes, when in 1970 it took you ten hours by hand.
It seems like comparing growth vs historic employment rates doesn’t give a very clear picture. Wouldn’t it be more meaningful to directly compare GDP instead of the rate of change in the GDP? According to measuringworth.org the real GDP per capita in 1950 with half the population working was $13,225 (in 2005 dollars) compared to 2008 when it was $43,714. I imagine if we found ourselves with a GDP one third of what it is, then yes, growth would be possible with half the people out of work.
Russil,
You’re engaging in pure cargo cult thinking and ascribing causality where none exists.
You could hire 100% of the population, without increasing the productive output of society by a micron. Have half dig ditches, have the other half fill them in.
You could fire 50% of the population, so employed, without affecting the productive output.
Granted after the layoffs you’d have deeper holes or higher piles of dirt, but since both of these goods are not particularly valuable, I predict no net economic harm.
Try thinking about the amount of tradeable goods and services produced by people. That will help you avoid cognitive errors as committed above. Its not the status of their ’employment’ that governs their spending. A building contractor, for example, rationally understands that the value of his tradeable output is currently impaired. Its rational for him to consume less.
If your theory about employment and economic growth were true, we could make ourselves wealthy by burning down major cities so that the unemployed could rebuild the ruins.
Best wishes.
Philip: thanks for the clarification.
If you’re puzzled by the behavior of the stock market, it’s useful to remember that the stock market is mostly anticipating future conditions, not looking at current economic conditions. An investor who anticipates a return to more “normal” economic growth in the next year or two will invest now. By the time that economic growth actually materializes, the stock market may actually be heading down. Andrew Tobias quotes Martin Zweig:
So are investors anticipating jobless economic growth? Personally, as an investor myself, that’s not the scenario I’m expecting; I’m anticipating that economic conditions will return to normal over the next year if we’re lucky, over the next five years or so if we’re not, and that headline unemployment will decline from 10% back to 5% (considered full employment). And I’m expecting substantial economic growth from that fact alone. There’s a rule of thumb (the grandiosely named Okun’s Law) that for every 1% drop in headline unemployment, there’s a 2-3% increase in GDP. Since headline unemployment is a full five points higher than normal, we should see a one-time GDP increase of 10-15%.
For a graph showing the “output gap” caused by lower-than-normal capacity utilization (including high unemployment), see Menzie Chinn.
Rellag: A year ago, when the unemployment rate was 5%, all of these additional laid-off workers were employed. I’m assuming they were doing useful work (not digging ditches and filling them in!) – if they weren’t, they would presumably have been laid off earlier.
Mark, there is no “crisis of productivity.” That’s ludicrous. That could only happen if there was magical fixed amount of work to be done. There is not.
Furthermore, productivity simply has not grown much, despite your personal anecdotal observations. Any positive effect of IT technology in the productivity statistics is actually famously non-existent. Economists have been trying to explain this for some time, but it is a fact.
Russil: I don’t have a crystal ball, so I’m not predicting future unemployment rates. I’m only pointing out that business profits could increase even if the percentage of working-age Americans who are actually working remains constant at today’s level and therefore there is some investment opportunity (assuming the managers don’t take all of the profits home!). If the unemployment rate were to fall, that would be welcome, of course, for society, but my point was that I don’t think it is obviously necessary for economic growth.
mjk: There were academics who evaluated corporate IT systems in the pre-Internet age and found that productivity benefits were hard to find. I believe that many of these studies were revised more recently and concluded that there has been a productivity boost from the Internet. Whatever an economist might conclude, I think the anecdotal experience of being able to get information and perform tasks instantly is undeniable evidence of improved productivity.
mjk, you may be right. When Stephen King bought a Wang word processor, instead of using it to write five 200-page books each year he used it to write one 1,000-page book each year.
When a five-minute short film cost $20,000 and a crew to produce, the market (movie theatres) could absorb only a few of them. Now that one person with $500 worth of equipment can shoot, produce and upload a five-minute movie in less than an hour, YouTube will absorb all that can be made.
I guess Vance Packard’s ships are already here. The only thing is that the people in the factory making the refrigerators and washing machines to be sunk at sea are unpaid volunteers.
So today I went to the supermarket and they have a new thing. You scan your loyalty card at the door and take a little Motorola gizmo that’s a hand-held scanner with a screen. There is also a bunch of bags you can take. As you go through the store you scan the items as you select them and put them in your bags. When you’re done you go to the self-service register, scan the “done” bar code and pay with your credit card.
Great. They make me do the work of the cashier and the bagger so they can lay off more employees.