America at a dead end on jobs
A woeful participation rate has been the driver of US unemployment falls and the next president will have to hit 3 per cent GDP growth just to break even on jobs.
Most analysts see the unemployment rate steady at 8.3 per cent, while a few see an increase. The wildcard is the number of adults actually working or seeking jobs – the measure of the labour force used to calculate the unemployment rate.
Adding adults on the sidelines, who say they would re-enter the labour market if conditions improved, and part-time workers, who would prefer full-time positions, the unemployment rate becomes 15 per cent.
The increased number of adults who have quit looking for work and left the labour force altogether are responsible for 100 per cent of the reduction in the unemployment rate since October 2009 when it peaked at 10 per cent.
If the adult participation rate were the same today as when President Obama took office unemployment would be 11 per cent.
Many adults have reason to be discouraged – new jobs pay lower wages than did those lost during the recession and job openings remain scarce.
New policies favouring bank consolidation limit access to credit for small and medium-sized businesses, and government health insurance mandates drive up the hiring costs. Together, those significantly discourage jobs creation in manufacturing and many service activities.
In the second quarter, the economy expanded at an anemic 1.7 per cent annual pace and added only 127,000 jobs per month, as pessimism curbed consumer spending and the huge trade deficit continues to pull down demand for US goods and services.
Longer term, the economy must grow 3 per cent annually to keep unemployment steady, because advances in technology permit labour productivity to increase 2 per cent each year and population growth pushes up the labour force about 1 per cent.
The economy must add 13.3 million jobs over the next three years – 370,000 jobs each month – to bring unemployment down to 6 per cent. To accomplish that, GDP would have to increase at a 4 to 5 per cent pace. That would be possible after a long deep recession but for chronically weak demand for US made goods and services.
During his first term, Ronald Reagan faced a similarly troubled economy, and unemployment peaked at 10.8 per cent in November 1982. However, when he faced the voters in 1984 the jobless rate had fallen to 7.3 per cent. During his recovery, GDP growth was averaging a brisk 6.3 per cent in contrast to President Obama’s 2.2 per cent.
The $600 billion trade deficit gap – driven almost entirely by imports of oil and consumer goods from China – is a major drag on demand. Each dollar sent abroad that does not return to purchase US. exports is lost demand for US-made goods and lost jobs.
The congress and president have significantly curtailed production of oil offshore and in Alaska, and refused calls from economists across the ideological spectrum to act more forcefully to effectively pressure China to stop manipulating its currency, curb mercantilist import restrictions and export subsidies. Together, reversing those actions would create at least five million jobs.
Cutting the trade deficit in half would increase GDP, including multiplier effects, by some $500 billion and create five million jobs. Without fundamental changes in banking, health care, energy and trade policies little progress may be expected.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland School, and a widely published columnist.