The Economist's Digest 33

Jobless agonistes

Originally from The Economist July 8th, 2011

Summary:

After the 2008 financial crisis, there had been improvement in economy and job markets. However, the employment rate has worsened recently and it became the same as the before-recovery one. There is also a trend of worsened payment and shorter working time. It seems that America doesn’t have recovery after the recession.

We also found that while private sectors provide job offers, government agencies lay off their staff to avoid overspending.

The rising unemployment may be caused by interrupted supply chain caused by Japanese tsunami and rising oil prices. After all these things are past, the employment data should be improved. Nevertheless, the deleveraging process, especially the deleveraging of government debt, will worsen US economy. America just starts to limit their government debt, which is also the cause of the public sector lay off.

After two parties in US reached consensus for tax policy, the budget stress seems to be soothed a little. However, a tight fiscal policy will be implemented for sure. One the other hand, Federal Reserve still worries about the rising unemployment rate after the end of QE2.

Comments:

Monetary policy provides no help with structural unemployment, according to economic textbooks.

Fed implemented quantitative easing because they believed that the unemployment of America was caused by temporary economic depression, that is, cyclical unemployment. However, if the industrial structure of the world has changed after2008, the bottom rate of unemployment of US would be different form 5.8%, the before-crisis level.

In the article, it mentioned an important idea---deleveraging. In the last decade, from 1998 to 2008, the asset-backed security, especially the mortgage-backed ones, has thrived. Once the market starts to shrink due to deleveraging, two things will happen and they will change US basic employment level. First, the financing resources of housing market will shrink, and it will cause shrink in housing market, which contributes 12.7 % of US GDP. Second, the shrinkage of housing market will cause revenue of other related industries diminish. Finally, these things will reduce tax revenue of US government; then the government will be forced to contract fiscal spending, even reducing job offers of public sectors.

If US government can’t find a new way other than boosting housing and mortgage market to improve output, the new bottom rate of unemployment would be 9%.