Workers’ malaise foreshadows wider social issues

By Mohamed El-Erian
September 2, 2011

By Mohamed El-Erian
The opinions expressed are his own.

This weekend’s Labor Day celebrations in America mark a difficult time for workers. Having experienced a multi-year decline in their share of national income, they are now suffering the brunt of the current economic malaise; and there is little to suggest that the situation will improve any time soon. As a result, the country’s economic hardships risk morphing from pressuring specific segments of the population to undermining more general aspects of social justice.

The numbers are striking — and worrisome. Over the last 30 years, labor’s share of the national pie has declined to 44 percent from 52 percent, with profits growing at twice the annual rate for average wages.

This morning’s monthly employment report adds to the concerns. Unemployment remains very high, whether measured by the most-quoted unemployment rate (9.1 percent), the less partial under- and un-employment rate, (16.2 percent) or, most comprehensively, the proportion of total adults who are not working (42 percent compared to 35 percent 10 years ago).

The duration and composition of joblessness is very troubling. The average unemployed American has been without a job for 40 weeks, a record level, and 44 percent of the unemployed have been out of a job for more than 26 weeks. The incidence of joblessness is severe among those lacking a college degree (11 percent compared to 4 percent for college graduates). For 16-19 year olds the unemployment rate is a horrible 25 percent.

Whichever number you look at, America’s labor market problems constitute a full-blown crisis with far reaching economic, social and political consequences. If current trends continue, joblessness will become stubbornly embedded in the system and, distressingly, some of the unemployed will become unemployable.

We all know that such a crisis fuels rising poverty and misery. Shelter is an issue, too, as mortgage and other debt payments are harder to meet. And credit will become even scarcer for those who are already struggling.

Regrettably, there is little to suggest that, left to its own devices, the economy would improve any time soon. It is mired in low growth and insufficient job creation; and the balance of risks is increasingly tilting toward a recession.

Since economic growth will not solve the issue, what about government action? Here, initial conditions are far from ideal.

Budgets — be it state, local or federal — are generally stretched. Indeed, rather than reduce the challenges facing workers, current budgetary policies accentuate them through cuts in education, health care, emergency benefits and other social services. Meanwhile, active redistribution policies are off the table with our extremely divided Congress vehemently disagreeing on what constitutes appropriate policy responses. And the Federal Reserve is already in full policy experimentation mode, with limited durable impact on economic growth.

It is tempting to blame all this on what economists call an “exogenous factor” – a phenomenon that is outside direct societal control. The two most cited factors are globalization and technological advances.

Globalization has brought hundreds of millions of low paid workers into the global labor force, thus putting pressure on higher paid ones in advanced countries such as the US. Technological progress has allowed companies to raise productivity, helping them generate record profits with fewer employees.

Before embracing this explanation wholeheartedly, it is wise to recall Reinhold Niebuhr’s prayer asking God to grant us the serenity to accept the things that cannot be changed, the courage to change those that can and the wisdom to know the difference.

It is not feasible to reverse either of those two phenomena (globalization and technological advances). It is neither desirable to do so either given that, overall, they have beneficial impact on global welfare.

Think of the millions of people around the world who have been pulled out of absolute poverty and misery. Think also of the wider range of affordable goods available to consumers globally (the largest segment of which is in the US). And think of innovations that have saved lives and improved the quality of life.

Rather than try to unwind globalization and technological progress, the challenge for the US is to adapt its labor force and its economy to these realities.

Through better policy making at both the national and international levels, America should — and can — be a bigger beneficiary rather than a helpless victim. No wonder President Obama’s speech next week is so eagerly anticipated, and rightly so.

While we must not underestimate the significant design and implementation difficulties facing the President, many look to him for restoring America’s economic leadership. This involves three challenging and complex steps (especially given today’s economic, financial and political environment): propose a set of policies that decisively lift structural impediments to growth; mobilize sufficient political support to start the multi-year implementation process; and, as the data evolves, provide for timely mid-course corrections as appropriate.

Better off segments of the population may be tempted to dismiss all this as irrelevant to their particular reality. After all, they are doing well — in several cases, extremely well. But such an attitude is short-sighted. It is not just about fairness; the rich have genuine self-interest in reversing the country’s economic malaise and the worsening of income and wealth inequalities.

Whichever way you look at it, the outlook for the wealthier cannot be divorced from society as a whole. Such considerations have already led some American billionaires to react in dramatic fashion.

Warren Buffet and Bill Gates are among those leading the way, through both actions and words. Howard Schultz, the CEO of Starbucks, has urged companies not to wait for government policy but instead to move more aggressively to employ and produce more. Many others are doing their part, albeit in a less public fashion. They know that national prosperity cannot, and should not, be sustained without social justice.

Unlike many parts of the world, America has experienced, until now, few if any meaningful eruptions of social tensions. Yes, there have been some “flash mobs”, but they pale in comparison to what has occurred elsewhere this summer.

This is not about the comparisons out there to uprisings in Arab countries driven by a thirst for social justice. Rather, it is about what the series of unthinkables that has already occurred in several advanced countries where, facilitated by social media that lowers traditional coordination problems, more people are taking to more streets to express frustration and, in some cases, a call for greater social justice.

Britain and Greece have experienced widespread rioting. Car torching in Germany is now way too common for comfort. France, Italy and Spain have had national strikes. Israel has seen the sudden emergence of a large social movement that has taken both local politicians and worldwide observers by surprise.

This weekend, American workers will understandably temper their celebrations. Their malaise is about more than the challenging economic headwinds. It is about fundamental social issues.

America is now on the growing list of advanced countries where social cohesion is coming under increasing pressure. If left to fester through inadequate public and private sector responses, this phenomenon will damage the welfare of current and future generations. Loud alarm bells should be ringing everywhere.


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Important point, it’s not so much about the absolute level as it is about the longer term direction. Yes we had tariffs 100 years ago, and yes we had world trade. We could raise tariffs tomorrow and we’d still have world trade. Changes happen and businesses adjust and a new equilibrium is reached. If we were to raise tariffs, we’d import less (and stuff would cost more), we’d also export less (and people would lose jobs) and net-net, we’d lose.

Posted by jambrytay | Report as abusive

I think maybe the net importers, like America, would win big-time with tariffs. China, a net-exporter, would lose.

American farmers, a tiny percent of America, grown rich lately, would lose. American workers would win big-time.

But the main point, by Mr. El-Erian, is that we are drawing close to an emergency situation, where mass-violence is a real danger. In Germany last month, people were placing firestarters under the tire of a car. That’s all it took. First they did it to luxury cars. A few days later they started doing it to poorer cars.

Now is the time for big action on jobs, not little action. A 50% American tariff on imported goods is very easy to grasp, especially by the masses, and it would certainly produce jobs in a big way.

Posted by AdamSmith | Report as abusive

Amazing, it’s 2011 and we’re debating tariffs!

Signing off to watch the lsu v. oregon finish….

Posted by jambrytay | Report as abusive

Create some electronic funny money out of thin air, and use it to do all kinds of public works construction projects. If you are collecting unemployment for a long time and are physically able to work, you take one of the public works jobs, or get cut off the dole.

Posted by Discovery451 | Report as abusive

Capitalism used to be responsible and healthy in the earlier days when their operations supported the local communities that they served.

The current state of capitalism functions with an ugly head that robs support of local systems with reckless disregard, weakens the politicall-will away from the public-good and puts the competitiveness of this nation at risk.

The cause is rooted in greed and purchase of any cheap goods is only the “temporary-result” of this greed and less to do with the “cause”. This cause too, runs its course, where it will meet its end in this self-correcting system, with an outcome such as the following -

“It was like riding a tiger, not knowing how to get off without being eaten” – quoted by famous global CEO to shareholders.

Posted by Mott | Report as abusive

That was a great discussion on tariffs. I agree that some small amount of tariffs should be put in place in certain sectors. They are not the only problem nor solution though. How do you put a tariff on a call center? Computer programming? Can you put a tariff on a technology R&D center? In fact, there are many problems that require many solutions. I believe Mr. El-Erian is eluding to the fact that there are large social changes afoot. We can’t just cut American middle class life styles to match those of other nations. We would have open rebellion if that occurred. We also can’t continue to be so far ahead of the developing countries, or they will rebel. As I mentioned in my previous post, if we continue on the path we’re on America will reduce it’s standard of living somewhat and the developing countries will continue to raise theirs. In a short time, perhaps another decade, the bumps will be ironed out. If you look at standards of living in a line chart, the American middle class is a bump in the line.

Posted by tmc | Report as abusive

You should not forget that a massive shift in manufacturing capacity has been going on over the past 30 odd years primarily from The USA and followed by Europe into Asia. The economic problems being faced by the western countries, I believe, are due to this shift. This trend has not stopped and therefore the malaise being experienced now by the western countries should be viewed in the context of the impact of this shift. I am afraid that as long as there are arbitrage opportunities for a bigger profit margin, the trend will continue. I see not much hope for the demand side to pick up if the people who were once employed are just scraping by to survive today. Having access to a huge manufacturing market such as Asia with a much lower wage rate than the Western Countries will inevitably destroy the ability to create jobs at home as manufacturers rush in to take advantage of lax labor laws and a work force on the cheap. This trend may continue until an equilibrium is reached i.e. shifting more jobs will not result in greater profits for Corporations due to falling demand caused by the non existent purchasing power of the unemployed.
Without new trading regulations, I am afraid workers in high wage rate countries will be at risk.

Posted by EconObserver | Report as abusive

I have over many years unfailingly made money by shorting the whole US scheme of things. In my view the ownership class here have made the following mistakes, from which it is now impossible that the USA will ever recover.

First, corporate out-sourcing. Second, more or less unrestricted immigration. Third, failure to address peak oil and its implications. Fourth, over-reliance on military keynesianism, often accompanied by outright aggression and subversion of other nations: All at immense cost. Fifth, a willful effort to dumb-down the general population through a complicit media and a carefully crafted policy of economic restrictions on education. Sixth, a failure to provide for the aging of the population. Seventh, a failure to address the terrible costs of privatized health care, and much else that should be in the public sector from jails to street construction. Eighth, a bizarre and ideological form of financial and business deregulation and turning a blind eye to the political corruption fostered thereby.

In each of these factors, any one of which is worth a book in itself, and to any one of which various people will attach greater or lessor importance, we see the fine hands of a narrow, self interested and utterly cynical leadership class and an obsequious and utterly subservient intelligentsia.

No country can recover from such a perfect maelstrom of consequences stemming from nothing other than criminal conduct magnified by a near-compulsory, Soviet style ideological rigidity.

All of these factors have had the effect of wrecking the global economy, the polity and the general social underpinnings of the US state itself.

What comes next I cannot say; I have no crystal ball. But certainly we can expect still further descent into financial bankruptcy and political stultification.

Posted by ChrisHerz | Report as abusive

correction to my prior post – it should have said: “more to do with the cause”.

@tmc: Well put.

The real show-down would be in 40 years when the world population reaches around 10 billion. The city-systems of these developing nations will collapse by then. Food, water and clean-and-sustainable environment takes precedence with wars breaking in regions for resources. With US population at around 450 million by then, US will be able to seal its borders and ward-off any resource encroachment by others. Worlds rich will migrate to US.

In a strange way, the current pace of energy imports and offshore production plays to local advantage in the form of depleting the external resources first before tapping into internal. Regrettably, the environment of these foreign systems will be corrupted by then for the lack of environmental controls in these developing nations – and hence the cheap overall costs of these imported goods that we see today from these nations.

Regarding the professional jobs (R&D and other), I hope some sense prevails in the elected in instituting policies that curtail power-and-influence of large corporations, mandate local production of advanced complete systems of these high-end technical innovations that preserve technical competence that in-turn, fuel local innovation prowess and resulting enterpreneurism.

Posted by Mott | Report as abusive

The proletariat will rise up around the world this century. Capitalism (Oligarchical Fascism) as we know it will begin to be replaced with something new as were both slave and feudal economic systems during the last millenia. This is why the wealthy are trying to consolidate wealth and establish security forces around the globe through the governments they control. The United States is the most visible manifestation of this paranoid behavior.

Posted by coyotle | Report as abusive

A nation that cannot clothe and feed itself cannot survive.

Right now, all the goods in American stores say “Made in China.” All the American engineering jobs have been given to Indians immigrating on H1B visas.

This is not a “recession”. All those outsourced jobs are not coming back “when the economy picks up again”. They are gone forever.

As the author Mohamed El-Erian points out, the social cohesion in America is coming under increasing pressure. Loud alarm bells should be ringing everywhere.

Human societies can endure pain, loss and hardship peacefully, but they must have HOPE for the future. If they have no hope, the social cohesion evaporates.

We need courageous, decisive action now, today, by our president. America needs to immediately institute an American tariff 0f 50% on all imported goods.

Posted by AdamSmith | Report as abusive

Why is it that everyone forgets to mention the fact that Educational attainment has been slowing since the 1970s? The demand for skilled labor has been increasing faster than the supply causing an increase in the wage premium for skilled versus unskilled labor. The average college grad in the 1970s earned 50% more than the average high school grad, today it is 100% more. Medical field professionals, computer programmers, and engineers are still seeing robust job and wage growth while those who have chosen not to invest in their own human capital have seen their job opportunities and wages decline. State funding to schools has been declining as a share of college and university revenue for decades not just since the recent financial crisis, and people wonder why tuition is increasing. If the gov’t puts less money into schools, and the schools continue to provide the same, or in some cases more services, then tuition has to increase to compensate. And yet still the average student graduates with only approx. $25,000-30,000 in student loan debt. Before you say ONLY and point out that that is a substantial amount of money remember that it is less than the average price of a new SUV, truck, or even most sedans. Why is it that people have no problem spending $30,000 on a brand new car, which doesn’t increase ones lifetime earnings potential at all, but shudder at the thought of spending the same on an education that substantially increases ones lifetime potential earnings? Until Americans get their priorities straight and start spending more effort on education in general, and math in particular, they will continue to see their annual earnings rise slower than inflation, or until the developing world catches up to the developed in terms of per capita GDP, whichever happens first.

Posted by hindumuninc | Report as abusive

I find recent corporate messages from the likes of ATT and Amazon that use jobs as a bargaining tool to sway government decisions to be particularly disheartening.

Maybe we need to change the work week – all Mondays could be holidays. It might help but seems kind of unthinkable.

Posted by geonel | Report as abusive

Thank you Mr El Erian for that insightful post. Yes, this economy is going to get the rich as well, one only needs to look at Wallmarts US sales declines to see the writing on the wall already.
As for Tariffs, you need to understand, the Annual US trade deficit for 2011 so far is $576 Billion, well close to $500 Billion of that alone is Oil imports, in short US would have only a $76 Billion deficit without Oil.
Americans are smart people, at least I hope they still are, why not make science and technology work. EV vehicles are not experimental any longer, you see them on the highway now every day, at least in Cali you do. Companies like Nissan and Tesla GM Ford are all starting to build these vehicles here.
Solar Power will soon be cheaper than grid ($1.20/Watt currently), combine the two, not only do you have massive jobs, you also save tons of cash both as a commuter and a Nation.
Lastly Wall street should be further regulated to ensure all bets on Risk are traded over the counter so everyone knows how the banks,Hedge Funds are fairing to prevent another Lehman Bros AIG crash

Posted by Dyota | Report as abusive

There is no need for trade. Goods can be manufactured where they are sold. A company can supply its American markets from U.S. plants, Chinese markets from Chinese plants, Brazilian markets from its Brazilian plants, etc. In each market goods are sold at prices that make sense, taking into consideration all of the costs. So the Chinese prices are going to be low, and U.S. prices are going to be high. At the present time the system benefits only the manufacturer who owns these plants, as they manufacture in the country with lowest costs, and make a killing. This is what is wrong with the present system. But even if the market is too small, they can pay high tariffs on imported products if they choose to supply a market so that they they don’t destroy jobs.
But even the discussion we are having here shows that the pendulum is beginning to swing in the other direction. Five years ago if someone had mentioned tariffs, they would have been laughed at, they would be told that we can never go back.

Posted by contrarianview | Report as abusive

You should not forget that a massive shift in manufacturing capacity has been going on for over the past 30 odd years primarily from he US and followed by Europe into Asia. The economic problems being faced by the Western Countries should be viewed in the context of this shift. I am afraid that as long as there are arbitrage opportunities for a bigger profit margin the trend will continue. I see not much hope for the demand side to pick up in the US if the people who were once employed are just scraping by to survive today. Having access to a huge manufacturing base such as exists in Asia with much lower wage rates than the Western Countries will inevitably destroy the ability to create sufficient jobs at home as manufacturers rush to take advantage of lax labor laws and a work force on the cheap. This trend may continue until some form of equilibrium is reached, i.e. shifting more capacity to the East will result in negligable gain due to falling demand caused by insufficient purchasing power of the throng of unemployed.
Without new trading regulations, I am afraid workers in high wage rate countries will be at risk.

Posted by CitizenCtzn | Report as abusive


Your idea is so inane. No voters and consumers will stand for it. It will cause massive social crisis like what you see now in Israel or revolutions in the Arab world.

Posted by greenacres | Report as abusive

Catholic Schools need the money.

An interesting phenomenon. Catholic schools across America are enrolling large numbers of students from China, as we speak. A typical Catholic high school with 600 students, has enrolled 50 Chinese students for the school year just starting this week, September.

The Chinese are paying top dollar for tuition. The Catholic schools in America are strapped for cash, and cannot resist.

Most American colleges are doing a similar thing. In four more years the students graduate. American schools are training Chinese students, who will then compete for jobs with Americans who already can’t find jobs.

The Chinese have a gigantic store of American dollars from their exports to America.

Who can blame the Chinese? Who can blame the Catholic schools?

The trend is good for American international corporations, but not good for American workers. The corporations want cheap labor any way they can get it.

The best way, the only practical way, to turn the ship is to institute a 50% American Tariff. That would create new American jobs and balance the budget.

An American Tarrif worked for America for a hundred years:

Alexander Hamilton was a very intelligent, energetic leader.

Posted by AdamSmith | Report as abusive

Since the advent of the personal computer, American productivity has gone up like a parabolic curve. But for the first time in American history, wages were withheld from the workers who made such production and profits possible. Companies were then flush with cash. Ceo’s made insane bonuses. Where did they get the cash? From the withheld wages. Companies then bought each other. so on and so forth. Now the companies are flush with cash but are killing the goose that made this all possible. So much for the general welfare. If the workers have no money to spend where will the funds come from to stimulate the economy. It looks like a sick joke to everyone involved, black, white, brown, yellow, and red. We have all been made a nation of slaves.

Posted by intrigod | Report as abusive

“Rather than try to unwind globalization and technological progress, the challenge for the US is to adapt its labor force and its economy to these realities.”

This is simply not possible with our current president. The only tool in his toolbox is government action. He seems incapable of doing what it would take to make our businesses competitive. He is a one trick pony out of tricks.

Posted by AndyAE | Report as abusive

I believe people have lost their “reference points”. And mean their “faith” to their job, their money in the bank, the leadership of the government, globalization etc
This is not a US phaenomenon, it is almost global. If in US there is a conflict between the two parties, in Europe there are 25 or so governments trying to protect their own “corner”. European Union is at the “make it or break it point”. Either they will decide to issue the eurobonds and engage themselves in a common fiscal policy and a common treasury, or they will disolve the Euozone and will return to the 80′s. In both EU and US, middle-class is shrinking and aging, which means that the society is loosing its main pilar.
In Middle East echoes a cry for freedom and justice and the eyes are towards a secular-islamic state with capitalism flavor. But the largest impediment to growth there is poor education.
In Asia, the development of the middle-class has lost its steam and asset bubbles are kept artificially under control in a fine balance to maintain growth.
All in all, the world is changing, and it does so fast.

Posted by reuterskostas | Report as abusive

great article. one key issue that was glossed over is the pay-for-play system initiated by Newt Gingrich in the early 90′s. this has aggravated the downward trend for the middle class by allowing Lobbyists to completely take over the way elections are run. this encouraged candidates to start”campaigning” two years before an election! that is why they need millions for election/re-election. where will they get the funds from? I wonder. The troubles of this country are quite deep! where will real leadership come from? or,are we in an Idiocracy already.

Posted by rikfre | Report as abusive

Limited ideas for limited minds.

Posted by contrarianview | Report as abusive

5280hi, Please check the history of the repeal of Glass–Steagall. You will find this to be a very, very bi-partisan affair. Free your mind brother, or you will become captive to it.

Posted by newpairodimes | Report as abusive

Are you proposing a tariff on education? On cheap international labor? Currency holdings and manipulation? You are ranting about 21st century globalization issues, yet proposing a very specific 20th century economic tool to “fix” it.

Posted by tmc | Report as abusive

Hear!! Hear!! Well said, carefully crafted.
Boldly put. Stinging yes, something that neede to be touted in my opinion. I am a regular reader of Reuter
‘s. This piece stirred emotions that were stagnated by the continual reports from the ” main media round table ” of today’s media pool. Cheers !!

Posted by bbb47615 | Report as abusive

Here’s the Wikipedia entry for tariffs

Interestly, a tariff is one of the easiest and most effective ways to collect a tax in large amounts. It requires very little bureaucracy.

We Americans have nobody to blame for our predicament but ourselves. We are profligate consumers, and the Chinese are hard workers and investors.

But if we keep going as is, without a tariff on imported goods, we are digging our own grave.

We need to reinstitute the American Tariff that Alexander Hamilton first created, and continued thoughout the entire trajectory of America to the leading manufacturing, commercial and scientific position in the world.

It was the American corporations who lobbied to eliminate the American Tariff, so that they could increase profits by taking advantage of cheap labor overseas. American corporations sold out the American worker. And they continue to do so. It’s the American international corporations that lobby most strenuously against any American Tariff.

Look at the years in the Wikipedia entry. It is in 1970, when America drastically reduced its protective tariff that America began to lose its manufacturing momentum.


Posted by AdamSmith | Report as abusive

We need a better fiscal environment to compete with cheap foreign labor.

- tax outsourcing
- reduce corporate tax for small business
- enact import tariffs for subsidized manufactured goods (most that comes from Asia) or start subsidizing our manufacturing like China does for theirs.

Posted by robb1 | Report as abusive