Is the US labor market broken?

October 2, 2009

US unemployment has been far worse than economists would have expected given the magnitude of GDP decline. Has something structurally changed with the American labor market? An interesting angle on this from Brian Wesbury and Bob Stein of First Trust Advisers:

The employment situation has remained much weaker much longer than the overall economy. In September, the jobless rate rose to the highest level since 1983, total hours worked fell at a 5.9% annual rate, and wage gains were a soft 0.1%. Payrolls came in worse than anticipated, falling 263,000, although payrolls fell a smaller 210,000 in the private sector. There are two reasons for the disconnect between the economic recovery and the labor market. First, productivity growth has been rapid of late, part of the ongoing process of technological change that rivals (and may surpass) the industrial revolution. Second, corporate leaders still think the recent spurt in growth will be short-lived and so are being overly cautious. In the short term, productivity growth lets companies raise production even as they continue to cut jobs. Over time, though, higher output with lower labor costs mean more profits, which will help stimulate rapid job growth once companies become more confident about the staying power of the recovery. When the labor market eventually turns positive, it will do so with a vengeance.


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Companies are quickly seeing that with the right mix of technology, they may not need to rehire many of those recently laid off. This strategy would preserve profits in the near term, while the long term is debatable.

Also, from my perspective, many of the layoffs have affected older workers, who were forced into early retirement. Even if they are replaced, it will be at lower wages.

So, either there will not be a big hiring binge since the companies can operate successfully with a smaller workforce, or if they do hire, it will be at lower headcount and lower wages. Both of these scenarios would ensure that employment and wages will not recover to pre-crisis levels for a long time.

Posted by Greg | Report as abusive

Does the term “union thug corruption and greed” mean anything? Therein lies the problem folks.

Posted by Frank | Report as abusive

As much as people think and hope things will not improve fast, It wil be 3-5 years before we will get back to 5-6% unemployment, if there is no major Fiscal Draft.What you need now is Tax Cuts and eliminate fiscal erosion. Tax on international goods, and focus on lax internal regulation in the manufacturing and especially agriculture. Get back to the “basics of capitalism”. But the Cap and Trade tax is already killing the will of companies to make profit.

If ObamaCare goes into effect, Healthcare companies will have massive layoffs, higher taxes already imposed will not work, that will more likely get us in a deeper recession of 7-10 years and unemployment up to 20%.

If that happens we will be most likely have the dollar replaced. Basically the world is sick and tired of US always beying sucessful, so they wait to make the most damage to our economy if we are not watchful.

Posted by Ian | Report as abusive

@ Frank:

Although I’m not a fan of unions, when it comes to any comparison between corporate management and unions the greater levels of douche baggery exist on the management side of the equation.

The rest of the unemployment problem rests with our government which enabled the abandonment of the American worker. America is no longer the greatest force to be reckoned with thanks to political infatuation with cash and power among the very few. Is America better than it used to be? Not from where I’m standing! Thanks a lot you guys!

Posted by Unemployed | Report as abusive