Why U.S. Unemployment Remains So High

April 11, 2011 - 0:0

Despite the dip in the national unemployment rate to 8.8% last month, unemployment has remained stubbornly high during the current economic recovery. According to the latest data from the Bureau of Labor Statistics, U6 unemployment (which includes discouraged workers, marginally attached workers, and part-time workers who want to work fulltime, but can't due to economic reasons) was 15.7% last month, and average number of weeks individuals remain unemployed extended to 39, up from 37.1 the previous month.

To get a sense of how bad those numbers are, consider a snapshot of the same three statistics from ten years earlier: in March 2001, national unemployment was 4.3%, U6 unemployment was 7.3%, and the average number of weeks the unemployed remained out of work was 12.8 (less than a third of the current 39 weeks). One explanation for why U.S. unemployment has remained so high, offered by Michael Lind in a Salon article earlier this year, Paul Tudor Jones in an investor letter last year (via Dealbreaker), and Ian Fletcher in a Seeking Alpha instablog post last year, is our trade deficit with China, abetted by its undervalued currency. Paul Tudor Jones, for example, highlighted the impact of China's 50% devaluation in 1994, and argued that the bursting of the credit bubble in the U.S. exposed the scope of the problem: The root cause of the unemployment woes is quite obvious. In the United States alone, in the last two decades, nearly six million jobs in manufacturing have been lost overseas. This equates to nearly four percentage points of the current 9.7% How did we get here? On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. That so many Americans continue to accept this suppression of a variety of exchange rates against the dollar is probably a function of the fact that for so long this suppression provided benefits such as cheap goods and cheap credit. In addition, for a while, manufacturing jobs seemed to be replaced by jobs in the service economy and construction industry without any economic disruption or any rise in the unemployment rate. However, the bursting of the credit bubble exposed the true structural decay that had occurred in the US economy. But, like zombies, many Americans still cling to the naive belief that we can return to the good times of the 90s and the earlier part of this decade, unable or unwilling to recognize that those high times were a debt-driven anomaly. Thomas Geoghegan, in a Harper's article last year, offered another explanation for high U.S. unemployment: our high degree of labor market flexibility. Geoghegan contrasted our labor market with Germany's:
[I]t's precisely because of our labor-market flexibility that we can't compete. Our workers have been flexed right out of their high-wage, high-skill jobs and into low-wage, low-skill jobs. That's bad for the workers, of course, and it's also bad for the economy. The German model—with worker control built into the very structure of the firm—keeps bosses and workers in groups, rubbing elbows with each other, and sometimes just elbowing. It creates a group interaction that over time builds and protects what economists like to call human capital, especially in engineering and quality control. It's precisely this kind of valuable capital that our atomizing ""flexible"" labor markets are so good at breaking up and dispersing.
Yes, there's much to like about the U.S. model. In global competition, the United States has almost every comparative advantage over Germany. We spend vastly more on basic research than the Germans do. We have much more land, more labor, more capital, much higher levels of formal education. But with our flexible labor markets we cannot develop human capital or knowledge to wean ourselves away from turning out crap and leaving the high-skill manufacturing to the Europeans. Geoghegan may have overstated the case in the second paragraph there -- the U.S. does still have some high-end manufacturing (e.g., at firms such as Boeing and United Technologies) -- but two articles in the Financial Times last week seemed to support Geoghegan's point about the effects of the respective labor policies in the U.S. and Germany.
In one article (""Caution holds back US hiring spree""), FT reporter Hal Weitzman quoted the CEOs of some small American manufacturing firms that supply companies such as Deere and Caterpillar and noted the vicious cycle started by steep layoffs in the U.S. during the worst of the global financial crisis: In a sense, the jobs outlook is a Catch-22-style conundrum. Companies say they would feel more confident – and start to hire in earnest – if unemployment were to fall below 8 per cent, yet unless they generate jobs, unemployment will not reach those levels. In another article (""German Spirits Sky High as industry soars""), FT reporters Ralph Atkins and Daniel Schäfer captured the contrasting situation in German manufacturing: The speed of the turnround takes German industrialists aback. “We learnt that not every freefall has to end with a crash,” says Thomas Lindner, VDMA president. One explanation is Germany’s system of “social partnership that actually works”, he says. Rather than laying off workers at the height of the crisis, when months passed without orders, companies hoarded labor and took advantage of government-subsidised, short-time working schemes. When global trade recovered, German companies were ready to roll out production.
)Source: seekingalpha.com(