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Mar 13 2012

US Labor Market Is Still a Mess

(4 pm. – promoted by ek hornbeck)

Wages have not matched inflation, unemployment for those without work for more than six months is topping 40% while real unemployment (U-6) sits at 14.9%, the housing market continues to tumble. The cost of housing, food, health care, education, transportation has gone up while wages have gone in the other direction.

That is the reality of the US economy and it does not bode well for a sustainable recovery, not without a boost from the government. Nobel Economist Joseph E. Stiglitz writes that “the labor market is a shambles” and it’s not going to improve anytime soon without a boost from the government:

Let’s assume that job creation continues at the rate of 225,000 jobs a month. That is only about 100,000 beyond the number required to provide jobs for the average monthly number of new entrants into the labour force. At that pace, it would take 150 months to reach full employment – 13 years, some time around 2025. The independent Congressional Budget Office is more optimistic, forecasting the return of full employment by 2018. [..]

Before the crisis, 40 per cent of all investment was in property. We had a housing bubble that left a legacy of excess capacity. Continuing weakness in the property sector is reflected in high foreclosure rates and low home prices. [..]

Finally, US states and local governments are constrained, to a large extent, by having to balance their budgets. They depend heavily on property taxes, so both revenues and expenditures have plummeted. This is why there are a million fewer public employees than before the crisis. Government as a whole is being procyclical, not countercyclical. [..]

Unfortunately, little has been done about the underlying structural problems. Indeed, the downturn, during which wages have not kept pace with inflation, has in many ways made US inequality worse.

Today the American economy faces three big risks. First, a steeper European downturn, as a result of the excessive austerity and the euro crisis. Second, complacency that the economy will recover quickly without government support. Though every downturn comes to an end, that should not be of much comfort. Third, that we accept that an unemployment rate above 7 per cent is inevitable.

If my Cassandra forecast turns out to be wrong, stimulus can be cut. But if it turns out to be right, and we do too little, we will live to regret it.

We need Congress and the President to stop listening to “Washington Consensus” and the “main stream” economists that are preaching “austerity” that will only prolong the economic decline and increase poverty.

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