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American Jobs, Factories and Investment: The Picture is Grim

Economics / US Economy Mar 21, 2011 - 05:35 AM GMT

By: Gerard_Jackson

Economics

Best Financial Markets Analysis ArticleThe Washington Post recently published a story revealing that if the hidden jobless were included in the unemployment rate it would jump to 10.5 per cent. (Hidden workforce challenges domestic economic recovery) This is a damning indictment of Obama's economic policies and Bernanke's monetary mismanagement. Even more damning is the fact that Obama appears completely unfazed by the situation. Now he did not create this recession any more than Bush created the 2000 recession -- irrespective of what America's utterly corrupt media assert -- but his policies are responsible for making it worse. To say that America is in an even more frightful mess than would otherwise be the case because of this man's dogmatic leftism and mindless hostility to free markets would be a severe understatement. However, recriminations -- no matter how well deserved -- will not alleviate the situation.


The Post's article contained an interesting observation by Columbia University economist Till von Wachter who found that there was a 20 per cent difference in the wages of those laid off in 1982 recession with those who face the same situation today. In other words, today's unemployment and wage situation is much worse. In fact, it's far worse than this figure suggests.

The pattern of employment paints a dismal picture for males. Since 2000 there has been a net loss of more than 3 million jobs for men while during the same period net jobs for women rose by nearly a million. In addition, the average unemployment rate for men older than 25 rose to about 9 per cent from the 4.2 per cent that prevailed from 1960 to 2008, an increase of more than 100 per cent compared with 52 per cent for women.

It's easy to conclude from these figures that increased female participation in the workforce has driven down wages while raising the unemployment rate for men. Easy and very wrong. What we need to do is look at the previous pattern of employment. The average male worker got paid more than the female worker because he was employed in higher-productivity jobs. As a rule the physical nature of these jobs made it virtually impossible for any female to do them as effectively as men.

As you have probably gathered, most of these jobs were in manufacturing. For some years now manufacturing jobs have been shrinking with nearly 5 million being lost since 2000. Then there were the 1.5 million jobs or so that disappeared in the building trade. So where did all the jobs for females come from? About 3.5 million jobs were created in health and education with the remaining jobs appearing in retailing and other services.

A pattern now seems to be emerged where women are becoming dominant in the workforce. Now some free marketeers assure the public that there is nothing to worry about because the reduction in the manufacturing sector is only to be expected as the economy matures and the demand for services expand. In an effort to reassure a doubting public they sometimes refer to the experience of agriculture during the industrial revolution as evidence that there is nothing to fear.

Three points:

1. There is no economic law that says the absolute number of manufacturing jobs must fall as an economy grows over time. Economics is supposed to explain the situation, not rationalise it.

2. There is no such thing as a mature economy. This argument was used by some in the 1930s to try and explain the Great Depression. It was wrong then and it is wrong now.

3. These people do not know their economic history. They certainly do not really know anything about the Industrial Revolution.

When England was on the threshold of the industrial revolution about 75 per cent of the labour force was employed in agriculture. Two things should be self-evident here. So many are working in farming because agricultural productivity is very low. This means that 75 of the work force was also employed in largely growing food for itself. Agricultural employment didn't shrink because manufacturing expanded. It eventually shrank because productivity grew. What manufacturing did was to rapidly expand the capital stock which in turn gave the country a continual rise in real wages. So what we had was a progressing economy, in which the rate of accumulation grew at a faster rate than the population.

In 1982 approximately 3 per cent of the US workforce were directly engaged in agriculture, which seems to confirm the optimists' case. Yet a 1982 US Department of Agriculture report calculated that the food production structure employed a total of 28.4 million people. Just as the mass of manufacturing workers produce entirely for others -- instead of for 25 per cent of the population -- agricultural workers are doing likewise. But in order to achieve this miracle they require a highly complex manufacturing structure.

This throws an entirely different light on the optimists' belief that the growth of services will absorb factory workers and at the same wage rates if not higher. But for this to happen net investment must be growing faster than the population. This is not the case at the moment. The classical economists had a thorough understanding of this process and that is why they understood that the "increased demand for commodities [consumer goods] does not constitute demand for labor."(John Stuart Mill, Principles of Political Economy, University of Toronto Press, Routledge & Kegan Paul, 1965, p. 80).

In other words, economic activities that directly serve the public (the Austrian school of economics would call these activities the lowest stage of production because they are at the point of consumption) do nothing to raise productivity and hence real wage rates. This returns us to the millions of recently created jobs for women: nearly all of them are at the consumption end of the production structure. They do absolutely nothing to raise the value of the marginal product of labour. On the other hand, most of the men who lost their jobs worked in the higher states of production, those regions totally alien to politicians and bureaucrats that actually raise the general level of productivity and in doing so raise the wages of everyone.

So how does a situation like this come about? Several factors: monetary policy that skews investment to shorter production periods; a currency that has been overvalued for a lengthy period of time resulting in more and more manufacturing processes becoming unprofitable, perhaps even leaving the country; fiscal policies that encourage consumption at the expense of investment; levels of government borrowing, taxation and spending that reduces the supply of capital. These are the things that can put a brake on wages growth. If left unchecked, they would eventually force real wages down.

I don't know whether America is facing a period of capital consumption or not. What I do know is that the current rate of net capital accumulation is not sufficient to create a significant upward trend in real wages.

On a final note:

I have noticed the number of billionaires who donate heavily to the Democratic Party. (A misnomer if there was ever one.) Buffet and Bill Gross spring to mind. Both believe in more interventionism and higher taxes, with Gross even arguing that corporate taxes should be raised. As far as I know, all of these billionaires have one thing in common: they made their money in finance. None of them were ever directly engaged in manufacturing, unlike the Koch brothers. This suggest to me that they have no understanding of the difficulties that American manufacturers face. Readers could point to Steve Jobs as an exception. But last I heard he has Apple's products manufactured in China.

I learnt a long time ago that very smart people are capable of believing the most stupid things. If it were otherwise I would have to accuse these billionaires of being a bunch of malicious America-haters.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2011 Gerard Jackson

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