‘Phony’ jobs numbers and disguised unemployment

DSC00234Donald Trump has claimed that the jobs figures for the US under Barack Obama were ‘phony’. Now with the first set of monthly jobs figures published under his presidency, he has claimed credit for the picture they give of a healthy labour market. In fact, they are the 77th consecutive month of job gains in the US. Now of course, changes in employment are not all down to the White House, but government policy does have an influence.

Unemployment in the US is now down to less than 5%, an apparently good performance. But the employment rate is only at about 60% of the population and has been falling since 2000 when it was about 65%. Growth in average wages has also been weak in recent years. Compare these figures with those for the UK, where unemployment lies at a similar rate, but the employment rate is up at 75%. Wages have been similarly stagnant, while the number of self-employed workers has risen strongly since the recession. Productivity growth in the two economies has also been very weak for a number of years.

What can economics say about these trends, and the potential for policy to improve upon them?

Back in 1937, Cambridge economist Joan Robinson, a colleague and disciple of John Maynard Keynes, published Essays in the Theory of Employment in the wake of Keynes’ General Theory. One of these essays discussed the phenomenon of ‘disguised unemployment’:

“How can we account for the fact that, over the whole range of human history, unemployment in the modern sense is, comparatively speaking, a rare and local phenomenon?

The answer is to be found in the existence of disguised unemployment. In a society in which there is no regular system of unemployment benefit…a man who is thrown out of work must scratch up a living somehow or other by means of his own efforts…except under peculiar conditions, a decline in effective demand which reduces the amount of employment offered in the general run of industries will not lead to “unemployment” in the sense of complete idleness, but will rather drive workers in to a number of occupations – selling match-boxes in the Strand, cutting brushwood in the jungles, digging potatoes on allotments – which are still open to them. A decline in one sort of employment leads to an increase in another sort, and at first sight it may appear that…a decline in effective demand does not lead to unemployment at all. But…in all those occupations which the dismissed workers take up, their productivity is less than in the occupations that they have left. For if it were not so they would have engaged in them already…a decline in demand for the product of the general run of industries leads to a diversion of labour from occupations in which productivity is higher to others where it is lower. The cause of this diversion, a decline in effective demand, is exactly the same as the cause of unemployment in the ordinary sense, and it is natural to describe the adoption of inferior occupations by dismissed workers as disguised unemployment.” (my emphasis)

Joan Robinson (1937), Essays in the Theory of Employment, p.83-4

If Robinson’s theory can be applied to today’s labour markets, weak economic growth since the Great Recession may have held back growth in labour market participation in the case of the US, and both productivity and wage growth in the US and the UK. In the UK particularly, the much-vaunted growth in self-employment is to some degree involuntary, rather than representing a boom in entrepreneurship. Some individuals may like the apparent freedom and flexibility it entails, but figures show that average earnings among the self-employed are typically significantly lower than average wages among the employed.

Keynesian economists tend to emphasise weakness in effective demand as a cause of unemployment. Their more radical post-Keynesian cousins see this as a potential problem both in the short and the long term, one which is amenable to policy interventions to expand effective demand such as lower interest rates (monetary policy) and higher budget deficits (fiscal policy).

In a country with time-limited and low levels of unemployment benefit, a weak economy is more likely to give rise to disguised unemployment, since the unemployed will eventually have no choice but to drop out of the labour force, and find alternative means to make some sort of a living, which may often be less productive than in the more formal segment of the labour market.

The theory of disguised unemployment assumes that when demand picks up, structural unemployment, such as a mismatch between workers’ skills and technology, which is a supply-side constraint, will not be a problem. Over the longer term, beyond the effects of the business cycle, and in which the structure of the economy and within it the labour market change, some kinds of jobs will be eliminated, and new kinds will be created. Such changes are driven by growth in both aggregate demand and aggregate supply. But if we accept the Keynesian observation that unemployment can persist for longer than simply an economic downturn, disguised unemployment will be more likely to occur.

Expansionary macroeconomic policies may be able to reduce disguised unemployment, as a stronger economy leads to the reallocation of workers from lower to higher productivity jobs. If the theory is correct, overcoming weak growth in demand is the key to solving the problem.

Having said all this, Classical and Marxian economists emphasise the economy-wide rate of profit as providing both the source of funds and the incentive for investment, which drives growth. Thus in the absence of sufficiently high expected profits in the private sector, expansionary monetary and fiscal policies may not be sufficient to drive rapid growth. In the case of low profitability, private sector restructuring may need to take place. This could result in rising unemployment, the scrapping of less profitable capacity, the reduction of debt through bankruptcy or paying off creditors, and the restoration of profits to a higher rate at which a new round of more rapid growth through investment in new capacity and hiring workers can take place.

If the Classical explanation is more accurate than the Keynesian one, higher unemployment, alongside additional disguised unemployment, may be inevitable, and Keynesian policies could even be counter-productive if they prevent private sector restructuring. In this case, expansionary policies, if they are not to hinder a revival in profitability, should be accompanied by well-designed welfare and labour market policies which aid worker retraining and relocation while supporting the unemployed; industrial policies which support and encourage private sector restructuring may also be helpful.

Thus the idea of disguised unemployment highlights the downside to so-called flexible labour markets, in which weak worker protection and a diminished welfare state can combine to produce hidden surplus labour at the bottom of the income scale in the event of weak economic growth. A variety of policies should be enacted to counter or at least manage this. If we admit the importance of private sector profitability in driving investment and growth, then Keynesianism on its own will not be enough. Active labour market, welfare and industrial policies will also be needed.

All is not so well in the US and UK labour markets, and elsewhere in the developed world. While not exactly ‘phony’, the aggregate jobs figures conceal some negative developments. Even in countries with apparently decent jobs growth, weak wage and productivity growth remain a problem. Joan Robinson’s notion of disguised unemployment offers one explanation of the causes of these phenomena.

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