Favour labour over consumption

November 13, 2013

Unemployment is a problem in most developed economies. Any politician, central banker or professional economist in the United States or Europe will admit that the published rates are unacceptably high, that too many people have left the paid labour force and that young people starting out have a particularly bad deal.

Americans often say their problem was caused by the 2008 financial crisis. That isn’t exactly wrong. After the failure of Lehman Brothers, many indicators of labour market depression – for example, the proportion of unemployed people who have been unemployed for more than six months – jumped to the highest levels on record (generally since 1948). Most of these indicators have improved, but remain uncomfortably high.

However, I think that the recession only uncovered longstanding structural weaknesses, and the problems I have in mind are not exclusively American. They just showed up in European statistics much earlier. Unemployment rates there have been persistently high, especially among the young, for decades. And the recorded unemployment numbers are flattered everywhere by the expansion of what might be called the non-labour force: those classified as suffering from incapacity, involuntary students and healthy retirees.

The problems all start with what I call labour market asymmetry: in advanced economies it is much easier to destroy jobs than to create them. On one side, hiring people is expensive and risky, thanks to generous wages, high taxes and the high cost of firing established employees. On the other side, additional employment often isn’t needed to increase production and consumption, thanks to the ever more efficient use of increasingly productive technologies.

In short, modern economies are always under job-destroying pressure. Of course, some forces work against what John Maynard Keynes called technological unemployment. Jobs are added by the spread of new products and by the increased production of existing goods and services. The trend to spend less time on the job – a trend which has stalled in the last few decades – spreads the available labour over more workers.

In most countries, the 2008 financial debacle so weakened the forces of job creation that job destruction swept through the economies like a bad storm. Most of the lost jobs are gone forever, because the productive side of the economy functions quite well without them. GDP is now close to or above pre-recession levels. If nothing changes, renewed GDP growth will gradually create substitute employment, but as the record of the last five years shows, progress is slow.

Unemployment could be eliminated much faster. There are more than enough beneficial jobs waiting to be done. To create them, though, a change in one fundamental economic idea is required. The limits of efficiency need to be recognised.

Labour efficiency – more output for less input – is a reasonable goal for harvesting crops or making cars. But labour inefficiency is often desirable. Small children basically flourish with more adult attention, schools improve with more teachers, sick people recover better with more nurses, and life is enriched by labour-intensive cultural and educational activities.

Creative inefficiency in the labour market would be good for the economy. Policymakers should recognise this and make the prime goal of economic policy finding ways for jobs which are socially beneficial but relatively unproductive to make economic sense. And it’s not hard to conceive of practical policies to achieve this.

Taxes are a good place to start. As consumption is ample and jobs are in short supply in modern economies, the current tax arrangements, which often penalise employment, are crazy. Taxes on employers and incomes should be cut and taxes on consumption can be raised. Tax breaks or direct government payments for employers could reduce the high cost and risk of job creation. Tax revenues could even be used to create government jobs directly.

Labour policies should be made more pro-employment. Some policies could encourage the unemployed to accept work. Others could reduce the cost of current workers, freeing up funds for new hires. That would be politically unpopular, since most voters have protected positions. However, this majority could be persuaded that they would ultimately live better in a less efficient economy where pay was spread more evenly. I admit, though, that in a world fixated on GDP and GDP growth, such a preference requires a radical change in values.

Today’s policy menu is insufficiently radical. Low interest rates, additional government benefits and the European tinkering with labour laws do not really address the profound labour market asymmetry. And while their firm support of the financial establishment does protect some highly paid, economically inefficient jobs, surely we could do better.


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The problem with this approach is that any reduction in consumption destroys jobs faster than they can be replaced. Per capita consumption and per capita employment are inextricably linked. A 50% reduction in consumption would have to be met with a 100% increase in employment per output just to break even.

The real root of the problem goes unrecognized by economists because it lies where economists dare not look – in population growth. Because economists adamantly refuse to even consider the subject, they haven’t discovered the inverse relationship between population density and per capita consumption. Beyond some optimum level, continued population growth drives down per capita consumption. The data shows that people who live in over-crowded conditions consume less simply because there is no room to utilize space-intensive products.

A simple example is the per capita consumption of dwelling space in Japan, whose population density is ten times that of the United States. The average Japanese lives in a dwelling less than one third the size of the average American’s, not because they can’t afford larger homes but because there is no room for anything larger. The result is that per capita employment in industries that build, furnish and maintain housing in Japan is reduced by two thirds. The consumption of almost every product, to a greater or lesser extent, is similarly affected.

This is precisely the reason that Japan and other badly overpopulated nations must turn to manufacturing for export in order to gainfully employ their bloated labor forces, robbing jobs from more reasonably populated nations. Almost without exception, densely populated nations either rely on manufacturing for export to maintain even a modest standard of living, or they exist in abject poverty.

There is no solution to the ever-worsening unemployment predicament that doesn’t begin with a return to an economically-sustainable population that allows for optimum per capita consumption.

Pete Murphy
Author, “Five Short Blasts”

Posted by Pete_Murphy | Report as abusive

boiled down: cut taxes on corps and wealthy, cut wages of working people while increasing taxes on what we buy, and hope that jobs are created.
wouldn’t it make more sense to penalize companies that send jobs overseas and foster an “interest” in creating and/or bringing those jobs back here?
and pete murphy has valid points regarding exploding population growth.
consumption creates jobs – nothing else.

Posted by jcfl | Report as abusive

In the dangerous and uncharted waters of The New Economy, our economists feel completely, absolutely lost. That’s why I called to withdraw the Nobel Prize for the economy. Just not to nominate anybody until new and fresh solutions for 21st century economy are found and mapped.
Dr. Hadas gave us good insights (though not particularly revealing) about the problem of employment in the New Economy. True: those jobs REP-tiloids are talking about are gone. They will never come back. Correct, since 2009 the only sector where investments were huge and regular was one: the automation, in virtually all industries.
But what is Dr. Hades’s suggestion? Jeez… I couldn’t believe my eyes:
“Taxes are a good place to start. As consumption is ample (how is it ample; I am wondering? – OUTPOST2012) and jobs are in short supply in modern economies, the current tax arrangements, which often penalise employment, are crazy. Taxes on employers and incomes should be cut and taxes on consumption can be raised. Tax breaks or direct government payments for employers could reduce the high cost and risk of job creation.”

Thus, we have many decorated economy science veterans who can ensure a good diagnosis. In terms of cure the diagnosis, they are still in a “limbo” Keynesians vs. monetarists.
This is truly astonishing. They keep saying all over again: Krugman and Co are talking about “demand end,” while their opponents, including Dr. Hadas, are talking about “supply end.”
I will hardly be ever rewarded by the Nobel Prize. However, it is apparent even for me: even if taxes on 1-10 per centers are “zero”; even if the society pays them instead of taxing them – they will not create new jobs! Because the economy is lying flat. There is a perfect equilibrium between demand and supply; dividends are healthy; executives’ salaries and perks are sweet.
However, nothing is actually changing. Because we consider the economic activity of the society though the views of supply “enders” and the views of demand “enders.”
And this is really, really sad. Because alternative ideas would require profound societal changes. None of the “enders” want to write about it. They are satisfied with their way of life; their chairs at universities; their none-liability writings. They are happy.
And this is truly depressing.

Posted by OUTPOST2012.NET | Report as abusive

As usual Mr. Hadas speaks the truth, although this time around one must read further and dig deeper than usual to strike gold.

“Hiring people is expensive…[while]…additional employment often isn’t needed to increase production…thanks to the ever more efficient use of increasingly productive technologies”. In another current comment elsewhere on Reuters I have said the same thing using different words: “ Millions upon millions of “jobs” have disappeared as inexpensive computers and powerful software have almost infinitely increased personal productivity. “

I do not attribute this job loss to “the 2008 financial debacle…”. This economic sea change began back in the seventies as businesses large and small harnessed the power of personal computers. “Most of the lost jobs are gone forever, because the productive side of the economy functions quite well without them. GDP is now close to or above pre-recession levels.”

My “take was much the same: “Society is doing that which is necessary with less and less people (except government, of course), yet humans keep popping out far more babies that must compete for fewer and fewer “jobs”. The efficiencies of “just in time manufacturing and delivery made redundant countless warehouses, the people employed by them, and the trucks and truckers that were necessary
to the earlier, much less efficient “system”.

The positions of legions of lower management, clerks, construction coordinators, girls Friday, bookkeepers, draftsmen, designers, etc., all good middle-class positions that were the first step onto a progressive carousel of responsibility, were not “outsourced”. They just disappeared! Yes, forever.

Your advocation of “Creative inefficiency in the labor market would be good for the economy” misses an unfortunate truth. Putting more teachers in schools is akin to going faster to get to a destination when you’re on the wrong road. America’s “educational establishment” is a poster example of overcompensated dysfunction. Taxpayers pay more and more and get back “citizens” of less and less capability or commercial worth.

Sick people do NOT require “more nurses” any more than a healthy community requires more doctors. The key is to stick with a goal of efficiency. More nurses’ aides could lift much of the repetitive and routine work that trained nurses are saddled with, allowing them to perform on a higher level once qualified as “Nurse Practitioners”. THAT could compensate, at least in part, for an increasing shortage of family practice doctors.

So I would suggest that it is NOT “limits in efficiency” that need to be recognized, but “efficiency in process” needs to be our goal. Government and union bureaucracies have achieved a virtual monopoly on the processes that establish and maintain “quality control” on professions.

When those that judge success by the size of their staffs and budget have total control of necessary process, there is zero possibility improvements in efficiency. We keep doing the same things and expecting different results. That is one definition of insanity.

In fact, “…more…educational activities…” of higher quality are possible by having instructors/teachers/professors, etc. compete before their peers for the honor of producing “open university” type presentations to be available in electronic form through any library in the country. In time, only the best of the best of teachers would teach, just as today only the best of the best make a living singing, acting, or playing various sports.

Let the first one be one on how to browse such courses as are available and utilize student time and priority to achieve competence in the subject matter. Let there be community-monitored periodic testing in which such students could demonstrate such appropriate mastery of selected subject matter as to be awarded accredited certification.

Remember always that unions represent the absolute opposite of efficiency. They value “connections” and seniority above skill, inventiveness and/or productivity. I submit that the latter three benefit society far more than the first two, and so such “method” as best encourages and produces these qualities should be what society demands.

It is the social programs of today that penalize employment that are crazy. In my humble opinion everyone getting any government subsidy should be required to contribute an appropriate amount of hours in exchange. Day care? No problem.

One mother could watch her child and a child of five others for one day a week. With reasonable accomodation from their employers, mothers could work five days of eight hours at a “job” and “pay for” necessary day care by working eight more hours watching the six children one day a week.

What jobs? Much of the work done by government union drones could be contracted out to “work at home” moms on a piecework basis. Much of the “work” associated with monitoring and caring for our aged does not require a high level of education or preparation.

The same can be said of the “grunt work” of greenery maintenance in and around public buildings, and the collection of trash from our roadways. Why does society tolerate the current stranglehold of union labor for such low skill jobs that anyone warm and breathing can do?

In short, I don’t think a world that understands and values efficiency is doomed so long as they think and innovate so as to create the type of society that “we, the people” want and can/will support.

Posted by OneOfTheSheep | Report as abusive

Thanks Mr. Murphy – Too many hu-mans!

Posted by Nurgle | Report as abusive

@Pete_Murphy must really hate Hans Rosling.
The population will stabilize at 11-12 billion barring unforeseen events like pandemics and global economic collapse. This can now be planned for. And yes @OOTS, your dream cam true and “they” are pumping out far less useless babies.

Posted by tmc | Report as abusive

@OOTS is right on this in many ways. I think he is reluctant to state the true answer though, and that is indeed more of those evil social programs. Not the old 20th century welfare state programs, but new 21 century social/economic programs. We must completely re-think how and who works at “jobs” and how people are provided a living wage. It must be a transitionary plan as even though the population will stabilize, automation will continue on its exponentially fast track. Just think, we now have the capability to create a “droid” that has the dexterity and intelligence of the average person (100 IQ). Soon we will be able to mass produce them. How do you think that will affect jobs?

Posted by tmc | Report as abusive

TMC, you answered your own question: the opportunities for employment – as we consider it traditionally – are getting elusive.

I think we are facing not an economic problem; it might be a social problem. Meaning that ‘socium’ (its all members) should decide how to change the parameters of economic activities of its members.

We may be going there, or we are already there.

Posted by OUTPOST2012.NET | Report as abusive


Right, and right. I’m impressed! Over time you have shown yourself an effective and persistent thinker willing to make your own conclusions and modify them as you find appropriate. And so you ‘force my hand” on a matter I have not publicly addressed.

Yes, I am “reluctant” to admit that in time social/economic programs will be the vehicle by which the “Star Trek” economy arrives. That reluctance springs from the ever-increasing percentage of our electorate that already believes the economy of the United States can today create and sustain a society in which not only needs, but wants are satisfied.

There has never existed over all of history a society that productive or that prosperous. Yes, that time will come. No, it’s not here; nor is it near. America will be first to make necessary choices. Even America must choose wisely.

It is only AFTER the financial benefits of automation are present is it feasible (or justified) to have government appropriate an equitable portion to see to the health and welfare of those citizens thus displaced from the work force. But in the beginning it will have to be like unemployment. You don’t get it if you were not productively employed for the requisite period in advance. So now is not the time to remove one’s shoulder from the wheel.

Only wayyyy down the road will people be born that will never work a day in their lives that a government of genuine efficiency will see their needs simply because the key to continuing prosperity will still be consumption by all citizens.

Posted by OneOfTheSheep | Report as abusive

Economists and leaders alike find themselves in a catch 22 trap regarding austerity vs stimulus, consumptions vs labour, trying to tackle unemployment, social inequality in the presence of stagnating growth.
Within the present paradigm, framework there is simply no solution.
The present socio-economic framework, regardless of culture, governing system or developmental level is based on unnatural and excessive demand, it is based on overproducing and over consuming completely unnecessary, obsolete goods “satisfying” artificially manufactured desires, it is based on a false promise of constant quantitative growth, and now that we reached market, cheap workforce saturation, and we are reaching the limits of human and natural resources, and as we evolved into a globally interconnected and interdependent human network where competitions, exploitation has turned self-destructive, the wheels are falling off.
All of the presented “solutions” are simply attempts for superficial, masking, “kick the can” manipulations without touching the core problems.
There will be no easing, rebound, solution until we finally understand that we exist within a closed and finite natural system that is based on strict, binding laws safeguarding general balance and homeostasis, that we, with our present system are opposing.
We cannot change the system, the only thing we can do is to adapt to it by changing ourselves, our attitude and our lifestyle.

Posted by ZGHerm | Report as abusive