Numberscruncher: The Recovery, Jobs or No Jobs

Written by Current Events, Numberscruncher

The March issue of The Atlantic has a thoroughly depressing article about how employment might not pick up when the economy recovers. As if that wasn’t enough to send you to the liquor cabinet, the article goes on to explain all of the spillover effects from reduced employment. People unemployed when they are young will always make less money. Blue collar workers will never have good jobs ever again. No one wants to marry a jobless slacker who sits on the couch all day, so marriage rates will fall. All of this will change our culture, society, and politics.

So pour yourself a double.

This recession is different from the usual post-World War II because it was brought on by a financial system crisis, not by a downturn in the business cycle. Because of that, it’s difficult to say what a recovery will look like. Maybe Don Peck of The Atlantic is nuts and employers will have to add tons of new employees to meet demand as soon as it picks up. Maybe.

When the business cycle is functioning normally, there is a tradeoff between inflation and employment. When inflation is high, so is employment, and vice-versa. And, of course, our high levels of unemployment right now are accompanied by extremely low inflation, bordering on deflation. A key number in macroeconomics is the natural rate of unemployment, also called the non-accelerating inflation rate of unemployment (known by the nifty nickname of NAIRU). It acknowledges that there will always be some people looking for work. No matter how good the economy is, some people will be in the wrong job and will be fired for incompetence. Students will graduate and look for jobs. Someone who took a break to travel or to care for a family member will decide to return to work. Some businesses will go under, leaving the workers unemployed. This baseline level of unemployment, thought to be about 5%, is the rate of employment that has no effect on inflation.

Inflation and employment are linked because wages are a big driver for prices. If there is a shortage of workers, employers will increase pay in order to keep staffers from jumping ship. That pay will be passed on to customers. Likewise, if employers have hundreds of applicants for a job, then they don’t need to pay very much. And if they have too many workers, they will let some go, driving those workers’ wages down to zero.

If we don’t have workers, then we don’t have wages. Without wages, people won’t spend money. If people don’t spend money, businesses can’t expand. It all goes back to employment.

Even when businesses do start to expand, it’s unclear if they can grow at the rate they did before this recession. One reason that the financial system collapsed is that too many people had too much debt, and the issuers of it didn’t understand the risk they had taken. The ability to people to spend money that they did not have is going away, and that will shrink the economy a bit, too.

There’s another long-term implication that is not in The Atlantic article, but that is that people are going to realize that they don’t have enough money saved to retire. Social Security was never designed to be a person’s only source of retirement funds, but rather to be a supplement to personal savings and pensions. Very few private sector companies have pensions these days, and personal savings won’t be enough for most people.

So what’s going to happen? We’re all going to form big extended families who eat a lot of rice and beans, that’s what. The youngsters can’t afford to move out, and the grandparents won’t be able to live on their own. This may not be a terrible thing; some may like having that extended multigenerational support in their lives. But it will represent a huge change in the way that Americans live. Huge.

And here’s how we’ll know if this scenario proves to be wrong: employment will pick up, we’ll get some inflation, and the financial markets will improve. And it will have to happen in the next year, because the longer that it takes for a broad recovery to happen, the more people will see their lives become very, very different.