Friday’s labor-force data brought liberal outcries, and a comment from Ben Bernanke, that the drop in labor-force participation indicates unemployment is really much higher, and the economy in worse shape, than the 7.3 percent unemployment rate might indicate. It is true that participation for men is at a postwar low and has decreased by 3-1/2 percentage points since the 2007 cyclical peak; and women’s participation stopped rising in 1999 and has fallen by 2 percentage points since the peak.
Is this so bad? Yes, if labor-force leavers are desperate to work and just get discouraged. But perhaps no; perhaps it has taken the Great Recession to get Americans to realize that we shouldn’t be working harder than people in other rich countries and should be enjoying more leisure. If this is so, perhaps there’s a silver lining in what so many people view as the economic doldrums of the last three years.
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In fact, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side. For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition and to pay for the pensions and health care of their aging populations. So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.
More evidence of the relationship between the housing market and the overall economy:
Construction makes up less than 5 percent of employment but accounts for more than 40 percent of the large swings in the job-filling rate during and after the Great Recession.
A new working paper (full version here) by Alan L. Gustman, Thomas L. Steinmeier, and Nahid Tabatabai examines the impact the Great Recession has had on the wealth and income of Baby Boomers nearing retirement. It finds, somewhat surprisingly, that their aggregate wealth decreased very little over the past few years:
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The retirement wealth held by those ages 53 to 58 before the onset of the recession in 2006 declined by a relatively modest 2.8 percentage points by 2010. … Very few in the population nearing retirement age have experienced multiple adverse events. Although most of the loss in wealth is due to a fall in the net value of housing, because very few in this cohort have found their housing wealth under water, and housing is the one asset this cohort is not likely to cash in for another decade or two, there is time for their losses in housing wealth to recover.
Note that Farmer doesn’t argue that the crash “contributed to” the recession, or “was a leading indicator” of the recession — but, rather, that the crash “caused” the recession. It’s worth acknowledging that a) Farmer attributes the housing-market crash as the direct trigger of the stock-market crash; and that b) he does this in service of the larger question: how to beat back unemployment.
From the abstract:
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This paper argues that the stock market crash of 2008, triggered by a collapse in house prices, caused the Great Recession. The paper has three parts. First, it provides evidence of a high correlation between the value of the stock market and the unemployment rate in U.S. data since 1929. Second, it compares a new model of the economy developed in recent papers and books by Farmer, with a classical model and with a textbook Keynesian approach. Third, it provides evidence that fiscal stimulus will not permanently restore full employment. In Farmer’s model, as in the Keynesian model, employment is demand determined. But aggregate demand depends on wealth, not on income.
The latest employment numbers have already caused plenty of consternation. But they are actually worse than you may realize.
Most attention focuses just on the headline number, which says that only 18,000 new jobs were created last month. But the employment report actually contains many indicators, which rarely line up perfectly. The problem is that this time they do. Read More »
A recent study by a team of economists at Northeastern University’s Center for Labor Market Studies argues that the current economic recovery is the worst since World War II for worker pay and job growth — but the best for corporate profits. The headline:
Over this six-quarter period [from Q2 of 2009 to Q4 of 2010], corporate profits captured 88% of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1% of the growth in real national income.
That’s right. Of the $528 billion in real national income gained between the second quarter of 2009 and the fourth quarter of 2010, pre-tax corporate profits accounted for $464 billion, while wages rose by just $7 billion. Read More »