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Sunday, December 4, 2016

Populism is no Cure for Cancer
Long Term Unemployment is Here to Stay

The focus of this article is on Long Term Unemployment and the demographic forces that have shaped and will continue shaping the domestic U.S. economy in the years to come. Population demographics presents us with facts that are almost as sound as the laws of physics. Demographic trends cannot be denied by politicians, unlike climate change theories.

During the last U.S. National elections and particularly after the 2016 Presidential elections, the issue of Globalization and domestic job creation took center stage. I decided to examine if besides (significant no less) issues like global cost of labor, overproduction, planned obsolescence and deflationary pressures on the world economy, there are other factors affecting employment. Due to lack of quantifiable information, I also chose to defer examination of the latest AI scare messages, coming from Stephen Hawking:
Instead, I tried to understand what is the underlying dominant factor, affecting the U.S. domestic job market.

The official unemployment statistics, tracked by the U.S. Government, are shown in the interactive chart below. As of November 2016 the tracked unemployment rate is measured at 4.6%. The unemployment statistics shown in the graph are used to evaluate the degree of the U.S. job market tightness and is utilized by the Federal Reserve Bank (among other factors) as an indicator for controlling interest rates and keeping inflation in check. It is however, clear that the measured values only represents short term unemployment which is limited to a running window of 26-week. The 26-week period is dictated by the terms of the U.S. national unemployment insurance program and the data tracked by this program only covers active unemployment claims. Currently there is no reliable way to track the unemployment term of workers who exhausted their 26-week benefits, because they are not required to report their status and the U.S. Government has no means to feel this information gap. 


In an article published in U.S. News, entitled "Long-Term Unemployment: The Economy's 'Secret Cancer'", Andrew Soergel wrote about the reality of today's job market and the distorted statistics that hides a severely endemic problem namely, long term unemployment. In his article, Soergel quotes the results of the recent Harris Poll of 1,500 people unemployed Americans, with the poll results shedding new light on factors that are typically not reflected in officially published job market statistics. For example, the majority of those surveyed in Harris Poll have had no job interviews since 2014. To the question, “When was the last time you went on an interview?” 
  • 51 percent said 2014 or before
  • 6 percent said Jan, Feb, March 2015
  • 5 percent said April, May, June 2015
  • 9 percent said July, August, Sep 2015
  • 8 percent said Oct, Nov, Dec 2015
  • 18 percent said Jan, Feb, March 2016
  • 3 percent said April, May 2016
Even though the reality reflected from the surveyed answers should not come as a big surprise to most of us, I still highly recommend reading the Harris report summary, retrievable through the links provided at the bottom of this article.

Regardless of populist rhetoric, of which we hear an earful after the 2016 November elections, I believe that none of the current political parties, or for that matter, no U.S. President, can offer a practical solution that will provide a lasting cure to long term unemployment. Not without enacting fundamental changes that would be unpalatable to most of the U.S. population. Not unless a major crisis like a major epidemic or WW-III situation develops.

The underlying facts leading to long-term unemployment as a permanent feature of the American (and the world) economy are derived from demographic growth limits. The golden age of the American economy came after WW-II, when the U.S. industry was fully mobilized, women entered the job market in significant numbers and the decimated economies of Europe and Japan depended on U.S. financing through the Marshall Plan. Economic growth came from the tremendous expansion of demand due to high birth rate of a young worker population and the consequent generation of commodities, goods, and services, consumed by the ever-rising tidal wave of the Baby Boomer generation.


Expansion of demand for a higher standard of living allowed domestic markets to continue growing and as long as younger population continued to surge behind the leading edge. However, this growth could not be sustained forever, since at some point in time, after several decades of dominating the labor market, the baby Boomers began retiring. The high birth rate of the Boomers era was not repeated in subsequent years and as a result, as a the chart below demonstrates, 25% of the labor force will be over 55 years old by 2020. This represents more than double the aging population growth rate, compared to 1990.


The interesting phenomenon in the U.S. doemestic job market is that over the years we are witnessing a constant decline of job-to-job transitions. An article entitled "Job-to-Job Transitions in an Evolving Labor Market", published in FRBSF ECONOMIC LETTER co-authors  CANYON BOSLER and NICOLAS PETROSKY-NADEAU claim that statistical evidence indicates that the U.S. domestic labor force becomes gradually less portable as the years go by. This is an interesting phenomenon, since the "pride and joy" of various factions in American politics, claiming the superiority of the American economic system, was the argument of ultimate job market freedom and portability.


Even more interesting is the indication that job portability actually declined over the years, even faster for young workers, compared with their older peers. As we can see from the chart below, job portability for 35 year old workers was currently reduced to under two percent of the total workforce. Is this an indication that the vast majority of the jobs that the domestic American economy can produce are already taken? Who is going to support the needs of the aging population while the job market is ruled by stagnation of income, due to lack of competition and job portability?


Luckily, as Americans our job market stagnation are not as bad as they are in the rest of the developed world. In addition, as the chart below indicates, most of our aging population will not live as long as will the population of many other developed countries, like Japan, Germany, Italy, France and many others.

We could possibly thank our "free market" healthcare system and our stressful work life for shortening our life expectancy. At least from a contemporary perspective, supporting an even greater number of octogenarians to their last day on earth seems to be more of a Japanese and European problem than an American problem...


The Stanford Report provides an extensive coverage of the aging U.S. domestic workforce with information that is easy to read and digest. I highly recommend fetching the PDF version of the report through the link provided at the bottom of this article.

As the chart below indicates, with about two million Americans living beyond their 90's by 2050 and over 50 million people between the age of 65 and 85, the American economy is not ready for the imminent future.


Note that you can enlarge the detail level of all images provided in this article, by clicking on them.

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All the best.

--Dr. Flywheel

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