Andrew Leigh

My AFR op-ed today is on the US economy, and why the labour market numbers are so much worse than the growth figures.

Down and Out in the USA, Australian Financial Review, 1 February 2011

Ten years ago, I wrote an opinion piece with Justin Wolfers. Titled ‘A jobs miracle that has baffled the experts’, our goal was to try to understand the ‘miracle’ US labour market, and what lessons could be learned by Australian policymakers as they strove to get our unemployment rate (then 6%) down to US levels (then 4%).

Today, the dole cheque is in the other hand. Australia’s unemployment rate is 5% (ranging up to 6% in Queensland), while US unemployment is 9% (ranging up to 15% in Nevada). But those figures understate the magnitude of America’s unemployment problem. Many US adults have now given up looking for work, and so do not show up in the unemployment statistics. In addition, 1% of US adults are in jail, and are not counted in the jobless numbers.

For the most part, the picture Australians get of the US is an economy steadily recovering from recession. The National Bureau of Economic Research formally dates the end of the US recession as June 2009. Yet growth statistics show only part of the story. Far more disturbing are the labour force figures.

The magnitude of the US jobless problem was brought home to me when I attended the annual meetings of the American Economic Association in Denver in early-January. In a session titled ‘Lessons for Economics from the Great Recession’, Princeton’s Alan Krueger pointed out that the magnitude of the job loss was about one-third larger than would be expected given the fall in GDP. Compared with past recessions, US firms were quicker to fire employees in the latest downturn.

Looking to the future, Northwestern University’s Robert Gordon showed that merely to keep pace with steady increases in the working-age population, substantial job growth is needed. He painted one scenario: what if the US economy was to regain the employment rate it had before the crisis, and it was to reach that goal by 2016? To achieve this, Gordon calculated, it would be necessary to create nearly 300,000 jobs per month. Yet the current rate of job creation is just 100,000 per month.

Even if Gordon’s over-optimistic scenario was to be realised, the impact on the US workforce would be severe. Using the fact that every one-point fall in the employment/population ratio equates to 2.4 million people, he estimates the number of ‘job-years’ sacrificed as a result of the recession. In total, Gordon estimates that the US recession has led to 54 million lost job-years.

And if that picture wasn’t bleak enough, MIT’s David Autor presented historical data showing increased polarisation of the US labour market over the past three decades. Adjusted for inflation, US males without a university degree have gone backwards. Indeed, these men now have lower hourly wages today than their counterparts at the end of the 1970s. Yet for university graduates, earnings are one-third higher than they were a generation ago. The gap between rich and poor in America is higher than at any time since the 1930s.

The worrying labour market outcomes for less educated US men can be seen in declining marriage rates (particularly for black men), with potential adverse implications for future generations. One-tenth of African-American children have a parent in jail, while two-thirds are living with one parent.

The underperforming US labour market is likely to have three impacts on Australia. First, many migrants who might otherwise have looked to the US or Europe will now be likely to apply to enter Australia. This means that it’s a buyers’ market for skilled migrants.

Second, US politics is likely to be even more inward-looking than usual. With the rise of Tea Party Republicans (the modern-day version of the nineteenth-century ‘Know Nothing’ movement), US politicians who speak honestly about global challenges risk being attacked for being ‘out of touch’ with the concerns of Kansas City and Cincinnati. This will make it tougher than ever to strike international deals on issues such as trade and climate change.

Third, it ought to give pause to those who have argued that Australia’s industrial relations system requires a burst of US-style deregulation. The ability of US employers to fire workers with few legal impediments probably helped fuel the mass layoffs of 2008 and 2009. And while policymakers should always do everything we can to reduce the Australian unemployment rate, it remains a fact that our labour market is one of the best-performing in the developed world.

Andrew Leigh is the federal member for Fraser.