economy

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unemployment“The fact that it has not disappeared from the planet, and could potentially return to countries like the U.S. under the right conditions,makes sector analysis as a measure of structural unemployment look more like the cyclical model”

By Holly A. Bell

In a recent article, Paul Krugman asked: “Is there any point to economic analysis?”.  The reason for his frustration is that “Beltway conventional wisdom has settled on the proposition that high unemployment is structural, not cyclical, even though there is now a bipartisan consensus among economists that the opposite is true.” Using the narrow definition of structural unemployment, Dr. Krugman is exactly right. When utilizing economic models for structural unemployment, we would expect employment disruptions in specific industries and areas of the country, including high unemployment in the vanishing sectors and shortages of workers in the emerging area of the economy. The shift from a manufacturing to a service economy would be one example. Absent these factors, economists assume a cyclical rather than a structural unemployment problem. So technically, like when John McCain said during the 2008 Presidential campaign that we were not in a recession because the U.S. had not yet recorded 6 months of negative growth, the models indicate something different from what the pundits are pronouncing. But let us not forget that in the case of the recession, the pundits were correct and the models were lagging.

A Different Form of Structural Unemployment

 Is it possible that the narrow focus of traditional economic models of structural unemployment are not adequate to measure the complexities of the dynamic economic structures of a contemporary economy? Gone are the days when national economies were isolated entities that could be measured based on the assumption that all economic activities that exist are taking place within their borders. In the case of manufacturing, the world did not quit producing things, it simply moved to other locations. The fact that it has not disappeared from the planet, and could potentially return to countries like the U.S. under the right conditions, makes sector analysis as a measure of structural unemployment look more like the cyclical model.

So what factors might need to be considered in a domestic economy in a globalized environment to determine if its “structure” has changed? For purposes of discussion, we will call this “configuration unemployment” to differentiate it from the traditional structural model. The first factor to consider might be the proportion of full-time to part-time jobs in the economy. Structural unemployment models suggest that at a given wage, the quantity of labor supplied exceeds the quantity of labor demanded because there is a ‘mismatch’ between the number of people who want to work and the number of jobs available. Under the configuration unemployment model it could be argued that a structural problem exists when, at a given wage rate, the quantity of labor desiring full-time employment exceeds the quantity of full-time workers demanded. This is an economic structure problem that may be the result of a mismatch between the number of full-time employees the company could hire at full capacity and the disincentives in the economy to hire additional full-time workers.

A second factor to consider in configuration unemployment is the labor force participation rate, which has been steadily declining. Structural unemployment is considered to be a more permanent form of unemployment, with the only hope of improvement coming in the long run. If the labor force participation rate is declining because people have given up looking for work, this is an indicator of a long-run configuration unemployment problem that is consistent with a structural problem, not a cyclical one. This is because the structure of the labor force is changing. One issue is the inability of young people, even those with college degrees, to get jobs in their field. This has the potential to be a long-run configuration unemployment problem, as eventually older workers will be forced out of the workforce, while younger workers will be underprepared to take their place. There may be an entire decade or more of college graduates who because of their timing in entering the workforce may never work in their fields, as more recent graduates take the new jobs when they become available.

A third factor to consider is the degree of globalization of the domestic economy. While globalization is recognized as a factor in structural employment, it is viewed a bit differently than considered here. The fact that there are not enough jobs and no shortage of employees in the new service sector indicates that unemployment in the U.S. is not a traditional structural unemployment problem. But the analysis of sectors needs to be done at a global level, including the percent of that sector that resides in the national economy as there remains more labor supply at a given wage rate than there are demands for labor in the service economy. One way to fill that gap is to increase the percent of the manufacturing sector—or any other underrepresented sector—that resides in the U.S.. Under configuration unemployment, available sectors on a global scale should be considered a structural problem if the existing domestic sectors are not creating enough jobs, at a given wage rate, to employ all those who want to work. This implies that the U.S. might not have the right mix of available sectors, which is an economic structure problem.

Many economists argue we don’t want these underrepresented sectors back because the jobs won’t pay as well as they have in the past. Regarding manufacturing, one pundit compared the $15 hourly rate paid by manufacturing jobs to what a babysitter makes in New York City. I would encourage him to visit my hometown in Wisconsin, where the median household income is $41,000 a year. If a manufacturer came to town offering permanent full-time, $15 an hour jobs with benefits people would be lined up for miles to apply. Plus, the only way to increase wage rates across in all sectors is to increase the number of jobs available across sectors.

A final factor to consider is the ratio of domestic company capital that is remaining overseas rather than being reinvested in the domestic economy. Traditional models of structural unemployment did not take into consideration the fact that domestic economic capital could remain overseas. This creates a capital structure issue that should be considered in configuration unemployment. Are profits being invested outside the country reducing the capital expenditures that would have produced jobs domestically? And, have they kept U.S. corporate tax revenue lower than it would have been, shifting a greater portion of the tax burden to citizens. Where capital resides, and how it is used, impacts the structure of the domestic economy.

So while the indicators of structural problems in the U.S. economy do not fit neatly into the narrow focus of the structural unemployment model, it does not mean there are not structural problems that are leading to unemployment. Perhaps the consideration of additional factors more consistent with in our dynamic, globalized economic environment might lead us to a better understanding of our unemployment challenges as well as solutions.

Holly A. Bell is a business and economics professor in the University of Alaska system and an author, analyst, manager, and blogger who lives in the Mat-Su Valley of Alaska. You can visit her website at www.professorhollybell.com or follow her on Twitter at @HollyBell8

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Unemployment image courtesy of Stuart Miles

CFOs are taking it slow as uncertainty is still present


Slow and Unsteady (via CFO.com)

The Economy | February 07, 2013 | CFO Magazine The U.S. CFO Optimism Index dropped yet again in the latest Duke University/CFO Magazine Global Business Outlook Survey, to 51 out of 100. Down from 52 last fall and 59 at the beginning of 2012, optimism levels among senior finance executives dipped late…


 

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ID-10080595California Dreamin’

By Holly A. Bell

A recent blog post by Michael provided 55 Reasons Why California Is The Worst State In America. Nonsense. California should be the model for the rest of the United States. Here are some reasons why:

1)    The adoption of Proposition 30 gave California the highest marginal state income tax rate at 13.3%. That means with all Federal and State taxes combined the marginal tax rate for Californians will be  51.9% if the Bush tax cuts are allowed to expire. California is making great progress toward income equality by eliminating the ability of the middle and upper classes to build wealth, and thereby eradicating greed.

2)    California has the highest gasoline tax rate in the country and taxes carbon emissions to ensure their state has the cleanest air in the world. Implementing these taxes nation-wide would ensure the U.S. has the same air quality as Los Angeles.

3)    The state has the most expensive traffic tickets in the nation, virtually eliminating speeding. You can see evidence of this on traffic cameras as responsible rush hour commuters restrain their driving to idle speed.

4)    California has the highest paid teachers in the U.S. and by focusing on teacher pay rather than student achievement (students rank 48th in math and 49th in reading), they have the best teachers in the country. By adopting this policy nationwide, we could attract teachers who desire a high salary and level the playing field for student achievement by eliminating rankings.

5)    While California has only 12% of the U.S. population, 33% of Americans receiving Temporary Assistance for Needy Families (TANF) live there. By adopting California’s tax policies nationwide we could assure that 100% of Americans on all forms of temporary assistance are able to transition to permanent assistance.

6)    California has the highest “minimum corporate tax” in the country, operating costs for businesses are 23% higher than the national average, and the small business failure rate is the highest in America at 69%. By migrating California’s business environment—including their tort and regulatory policies—nationwide, we will be able to attract more high-tech businesses to the U.S. who keep their servers and profits off-shore, thereby giving their workers the freedom to carry the majority of the state and national tax burden. After all, we’re all in this together.

And finally, California has Jerry Brown and what could be better than that!

Holly A. Bell is a business and economics professor in the University of Alaska system and an experienced author, analyst, manager, and blogger who lives in the Mat-Su Valley of Alaska. You can visit her website at www.professorhollybell.com or follow her on Twitter at @HollyBell8

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California image courtesy of koratmember



US Fiscal Moment: Cliff, Slope, or Wile E. Coyote? (via Market Shadows)

Courtesy of ZeroHedge. View original post here. The overhwelming majority of investors seem to believe that some compromise will be reached to resolve the looming fiscal drag, and as we noted here, this fact is more than priced into markets. As Barclays notes however, a big deal that encompasses entitlement…

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Are You Seeing What I’m Seeing? (via Market Shadows)

Courtesy of Jim Quinn of The Burning Platform Is it just me, or are the signs of consumer collapse as clear as a Lowes parking lot on a Saturday afternoon? Sometimes I wonder if I’m just seeing the world through my pessimistic lens, skewing my point of view. My daily commute through West Philadelphia…

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Economy image courtesy of suphakit73



Incorporating the Rentier Sectors into a Financial Model (via Market Shadows)

Incorporating the Rentier Sectors into a Financial Model Courtesy of Michael Hudson By Dirk Bezemer and Michael Hudson As published in the World Economic Association’s World Economic Review Vol #1. ABSTRACT Current macroeconomics ignores the roles that rent, debt and the financial sector play in…

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Has the U.S. Reached The Debt Saturation Point?

The linked article below is a couple of years old, but contains an interesting chart about our return on debt. It shows that when the change in U.S. GDP is divided by the change in U. S. debt, we actually reached the point of debt saturation in 2009. In other words we reached the point where our return on debt is actually negative. From the article:

“Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!”

While you might or might not agree with some of the other rhetoric in the article, it is worth a look just to see the chart. A company couldn’t operate with this sort of return on debt capital.

Click here to see the article

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Debt image courtesy of renjith krishnan