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Unemployment Insurance? Or Guaranteed Wages?

The Cost of Wrong Choices

By Shlomo Maital

US politicians, led by POTUS (President of the United States) are congratulating themselves for the $2.2 trillion bailout (Care Act), bringing relief to Americans out of work.

But let’s look at this more closely. US unemployment has leaped from a 40 year low, to what the St. Louis Federal Reserve believes could be as high as 32% (higher than the 24% unemployment rate in the Great Depression of the 1930’s). So the right approach is: Extend unemployment benefits. Right?

Wrong!

A New York Times article by leading economists  Emmanuel Saez and Gabriel Zucman makes this case:

“Instead of safeguarding employment, America is relying on beefed-up unemployment benefits to shield laid-off workers from economic hardship. To give just one example, in both the United States and Britain, the government is asking restaurant workers to stay home. But in Britain, workers are receiving 80 percent of their pay (up to £2,500 a month, or $3,125) and are guaranteed to get their job back once the shutdown is over. In America, the workers are laid off; they must then file for unemployment insurance and wait for the economy to start up again before they can apply for a new job, and if all goes well, sign a new contract and resume working.”

So clearly – the ‘extend unemployment insurance’ approach is NOT a solution. In the US, the right policy is to protect jobs. The wrong policy, the one adopted, is to pay pittances to those thrown out of work, in large part owing to government ‘shelter at home’ policy. The NYT continues:

“This dramatic spike in jobless claims [in the US] is an American peculiarity. In almost no other country are jobs being destroyed so fast. Why? Because throughout the world, governments are protecting employment. Workers keep their jobs, even in industries that are shut down. The government covers most of their wage through direct payments to employers. Wages are, in effect, socialized for the duration of the crisis.”

Socialized? SOCIALIZED!!!!???? Oh my, there’s that word, socialism. Yikes.

The US has a huge problem with semantics. Let’s be clear. Socialism is an economic and social and political system, in which the means of production, distribution, and exchange are owned by the government. By paying wages to employers, governments are NOT implementing socialism, but preserving capitalism, by keeping employers and their companies alive, for a few months. That’s it!

America, open your windows (how often have I said that!). Check out Europe, “Old Europe”, as US Presidents like to say.

“Some countries — like Germany, with its Kurzarbeit system, a policy aimed at job retention in times of crisis — already had the government infrastructure in place to send workers home while the state replaced most of their lost earnings. [Kurzarbeit, ‘short work’, shortens the work week for all to distribute the hours among more people]. But several nations with no experience in that area — like Britain, Ireland and Denmark — were able to introduce brand-new employment guarantee programs on the fly during the epidemic.”

There is a fundamental problem with using unemployment insurance as the main bailout tool:

“Even if unemployment is generously compensated — as it is in the $2.2 trillion bill Congress passed — there is nothing efficient in letting the unemployment rate rise to double digits. Losing one’s job is anxiety inducing. Applying for unemployment benefits is burdensome. The unemployment system risks being swamped soon by tens of millions of claims. Although some businesses may rehire their workers once the shutdown is over, others will have disappeared. When social distancing ends, millions of employer-employee relationships will have been destroyed, slowing down the recovery. In Europe, people will be able to return to work, as if they had been on a long, government-paid leave.”

There is a basic hidden assumption in the US Care (bailout) Bill. It is based on liquidation – let businesses go broke, they screwed up anyway, we’ll re-establish them when all this blows over. Wrong!!!

  “A liquidationist ideology seems to have infected minds on both the left and the right. On the right, opposition to government grants to businesses is grounded in the view that markets should be left to sort out the consequences of the pandemic. Let airlines go bankrupt; shareholders and bondholders will lose but the airlines will restructure and re-emerge. The best way government can help is by slashing taxes, according to this view. The relief package includes more than $200 billion in tax cuts for business profits. This view is misguided. There is nothing efficient in the destruction of businesses that were viable before the virus outbreak. The crisis cannot be blamed on poorly managed corporations. Government support, in the case of a pandemic, does not create perverse incentives. Bankruptcies redistribute income, but in a chaotic and opaque way. And while bankruptcy might be a way to deal with the economic fallout of the pandemic for large corporations, it is not well adapted to small businesses. Without strong enough government support, many small businesses will have to liquidate.”

   Wrong-headed American policy impacts us all. In the good old days of the global economy, from the 1950’s onward, whenever the world economy slowed, America’s economy was the locomotive. Burgeoning spending by eager US consumers created demand that pull other economies out of the mud, worldwide. That was a crucial role America played.

  Today? We’re going to need America and China both, as locomotives, to pull us out of the Depression COVID-19 is causing. China seems to be coming out of it. Well done. But the US?   Not under current policies. Sooner or later, policymakers will recognize their error. But the US President NEVER admits error and doubles down on wrongheaded statements and policies. So don’t count on the US correcting its fundamental MASSIVE mistake.

      World, we’re on our own. America will sink, under a mountain of unemployment applications.

The Desperate Search for Good Jobs

By Shlomo Maital

jobs    

    Writing in the recent issue of Scientific American, the Swedish-British economist Karl Benedict Lund raises an issue at the core of our economic woes, and not sufficiently discussed:  Where in the world will we find well-paying jobs for young people, jobs that can sustain and help the middle class to endure?  

    The problem is, in the past,  new industries that were born out of innovation created jobs to replace the industries that were obsolete and dying.  Sunrise industries’ new employment offset the lost jobs of sunset industries.

    But no longer.  Frey notes:   The video-streaming startup Twitch, bought by Amazon for almost $1 billion,  employs only 170 people.   In the past a $1 b. company would employ many times that.   Google has annual revenues of $66 b.,  and employs only 53,000.   IBM, with roughly similar revenues, employs 8 times that (431,000 in 2013).   Dell employs 108,000.   But Dell and IBM are shedding huge numbers of workers.   Once, Dell came along to absorb many of the 250,000 (!) workers that IBM shed in 1993-5.  No longer.

     And Facebook?    Facebook employed only about 9,500 employees in 2014, with $8 billion in revenues.   When Internet companies like Google, Twitter and Facebook can generate a million dollars in revenue per employee,  the founders and shareholders rejoice, but ordinary folks who seek employment do not.

     Frey’s research reveals this fact:   only 0.5 per cent of the U.S. labor force was employed, in 2010, in industries that did not exist 10 years ago.   And there are quite a few such industries.

     How will society deal with innovation that creates wealth, products, services,  and in general wellbeing,   without actually producing many new jobs?   Will we have to accept a bifurcated society, where a fortunate handful become millionaires and the rest of us scrounge for handouts?  What happens when the old pattern of new industries creating jobs to replace ones lost by dying industries fails, and new industries simply don’t create jobs? 

   One possible solution:  A great many more of us will need to become independent business persons, creating our own job by starting small businesses.  This will take a whole new approach to the way we educate our young people, and a new support system that, for instance, can supply micro-credit to such businesses.  

 

Unemployment – It’s How You Measure It!

By Shlomo  Maital

            unemployed  unemployed 2

       Writing in the Los Angeles Times, my friend Clyde Prestowitz, formerly senior trade policy advisor to President Reagan, explains the mystery of unemployment rates – if the U.S. job market is so bad, why is the unemployment rate so low? (6.7 per cent)? 

    Here is the answer, according to Clyde:

      “ Although the Federal Reserve Bank says we’re in the midst of a recovery, and the official unemployment rate has fallen below 7%, the economy is far from being out of the woods. That official rate – technically known as U-3 – doesn’t begin to tell the real story.  It is only one of six unemployment measures kept by the U.S. government and counts all those who say they are unemployed and looking for work.   

      But it does not include those discouraged unemployed workers who have given up looking for a job or those who would like to work full time but are only able to find part-time work. The rate that includes all those people – U-6 – is about 13%.    Granted, that is below the 17% of 2010, but it is still far above the 8% of 2007, as we navigate what is being called a recovery – albeit an abnormally slow one.”

         Americans who have a job, the fortunate ones, but fear they could lose it, and those who lack a job,  and are seeking one or who have given up [discouraged workers], should be defined as “unemployed or at risk of unemployment”.  THAT rate is over 50 per cent. And that is the relevant measure, and it is not included in U1 through U6. 

     U.S. President Barack Obama has just given his State of the Union address.  He mentioned the job problem, but gave no specifics.  This should become his top priority.  It’s a tough nut to crack.  Companies like Facebook, with a stock market cap of some $160 b., generate relatively little employment.  Companies like Apple create jobs in China.   Small businesses face impossible competition from shopping centers and chain stories like Wal-Mart.  So, President Obama, start with the SME’s, small and medium-size enterprises.  Help them a bit.  Nothing could help create jobs more.  And silence the big lobbyists, who drown out the weak voices of those SME’s.    

Will Your Well-Paying Job (And Your Kids’) Soon Be Obsolete?

By Shlomo   Maital 

          slide rule

Slide Rule:  Will Your Skill Soon Be As Obsolete?

  One test of a futuristic prediction is to spot in several independent sources.  After my previous blog on how we’re failing to teach our kids the right 10 skills – The Economist has a lead editorial on how technology will affect our future jobs.  (See the Jan. 18 edition).

According to the Economist:  “ Innovation,  the elixir of progress, has always cost people their jobs. In the Industrial Revolution artisan weavers were swept aside by the mechanical loom. Over the past 30 years the digital revolution has displaced many of the mid-skill jobs that underpinned 20th-century middle-class life. Typists, ticket agents, bank tellers and many production-line jobs have been dispensed with, just as the weavers were.”

       “Why be worried? It is partly just a matter of history repeating itself. In the early part of the Industrial Revolution the rewards of increasing productivity went disproportionately to capital; later on, labour reaped most of the benefits. The pattern today is similar. The prosperity unleashed by the digital revolution has gone overwhelmingly to the owners of capital and the highest-skilled workers. Over the past three decades, labour’s share of output has shrunk globally from 64% to 59%. Meanwhile, the share of income going to the top 1% in America has risen from around 9% in the 1970s to 22% today. Unemployment is at alarming levels in much of the rich world, and not just for cyclical reasons. In 2000, 65% of working-age Americans were in work; since then the proportion has fallen, during good years as well as bad, to the current level of 59%.”

 What should be done?  What can be done?  “Innovation has brought great benefits to humanity. Nobody in their right mind would want to return to the world of handloom weavers. But the benefits of technological progress are unevenly distributed, especially in the early stages of each new wave, and it is up to governments to spread them. In the 19th century it took the threat of revolution to bring about progressive reforms. Today’s governments would do well to start making the changes needed before their people get angry.”

      It will take a long time for people to get angry…and by the time that happens, society will be in deep trouble.

     But individuals can act.  Ask yourself,  what is your main skill?   Could it be made obsolete (like the skill of middle level managers who once processed data, now available on the screen of senior managers instantly) by technology?  If so, how?  When?   Can you develop a new skill?  Should you start now? 

    And get your kids to ask the same questions.   That nice fat paycheck of today could be a green slip tomorrow.   Prepare yourself and your loved ones.   Remember the slide rule. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital

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