Welcome to the Jobless Recovery

GDP growth without jobs is no recovery at all

By Gordon Campbell

The global economic recession is an old media story, so very 2009. Hallelujah, retail spending on Boxing Day was reportedly up five per cent on last year – better times must surely be on the way ! However, the basis for optimism is slim and uneven, at best. On the overall evidence, the current ‘recovery’ has been born from a combo of wishful thinking, political spin, the media’s short attention span and the fickle state of business confidence. Little about it is likely to benefit middle and lower income people and their families during 2010.

The perverse nature of the alleged ‘recovery’ was underlined just before Christmas. For the first time in 21 years, the current account deficit went into surplus during the September quarter. Why ? Because the flow of investment profit overseas had been depressed by the recession, and by the moneys set aside to pay the tax bill that the Aussie banks owe to Inland Revenue. Not to worry, says Westpac economist Michael Gordon, this ‘setback’ will only be temporary. “Lower profit for overseas-owned firms is a lagged response to the downturn. Once the recovery becomes entrenched, that will reverse.”

Fabulous. Yes, once the good times really start rolling again, New Zealand will be hostage once more to a large net outflow of profits, inflationary spending on imports, a deteriorating current account deficit, and a higher bill for servicing our national debt. Hard to see much in that sort of ‘recovery’ that stands to benefit ordinary New Zealanders. Especially given that unemployment hit a nine-year high of 6.5 per cent in the September quarter and is expected to rise further during 2010.

For now, we can perhaps take comfort in the fact that no-one really seems to know what is going on:

“What’s really surprising is how divergent forecasters’ views are across the board,” said NZIER economist Shamubeel Eaqub.
“This is across everything including growth, current account balances, inflation and especially the level of the Kiwi dollar.”

One thing though, does appear certain. Here and overseas, if GDP does happen to grow during 2010, such a ‘recovery’ will still be a jobless one. In the Treasury half yearly update released on 15 December, the unemployment forecast figures (see p 129) are for an unemployment rate at or above 6% for the next four years. NZ Council of Trade Unions economist Bill Rosenberg has been reading much the same signs. “According to the forecasts, Treasury has been saying 7%. The Reserve Bank is saying a bit lower 6.9 % , and the consensus forecasts from NZIER which are basically the bank forecasts, are a bit higher.”

As a consequence, surely this will mean that the Reserve Bank will be cranking up interest rates again in 2010 to curb inflation – even though the employment situation will actually be getting worse, and not better ? Yes, Rosenberg says, and the pressure on the Reserve Bank to do so is increasing. “All the bank economists were saying that the Reserve Bank can’t hold off until late this year [2010] and now they’re saying it can’t hold off until the middle of this year. So the banks are really trying to talk up an earlier increase.”

Any such hike in interest rates will obviously benefit the banks. Unfortunately for the rest of us, this will raise the cost of borrowing and investing – which will in turn make job expansion more difficult, and will prolong the current tendency for firms to squeeze greater productivity out of their existing workforce.

The job sectors that were hit the hardest by the recession have been manufacturing and construction, Rosenberg says. “Although its interesting that retail has been quite hard hit too. I hadn’t expected that.” Currently, according to Statistics New Zealand, mining and business services are showing the most positive signs of demand, on the production side of the economy.

So in sum – is a recovery in 2010 likely to entail wage increases or better job prospects for middle and lower income New Zealand ? “Better job prospects, no. “ Rosenberg replies. ‘because the level of unemployment is not dipping at all. Wages though, depending on what measure you look at – have actually kept on increasing. The wage/cost index – which is the best measure of wages once you’ve discounted the changes in industry composition – has gone up by 2% [in 2009] which is above the rate of inflation. That’s pretty good for a recession. And there are a lot of increases still coming through at 3-4 % The average wage went up by over 4 % in the year to September. “

Part of that apparent rise in the average wage is misleading, Rosenberg continues, because some of it is due to the changed composition of the work force. “ As low income earners have lost jobs, the average wage looks like it is higher, even though people aren’t being paid that much more. Even so, quite a number of wage settlements are significantly above 2%. “ Skill shortages are also once again starting to appear, which can only help to boost the wage bargaining clout of the sectors concerned.

So, Rosenberg concludes, the wage prospects for people who still have jobs in the private sector is not looking as dismal as might be expected. “The people who will really be at risk will be the people in government employment, who are – effectively – having their wages frozen at the moment. People tend to think such people are wealthy policy analysts on $90,000 a year. But a lot of them are cleaners, caretakers, support staff in schools who are very close to the minimum wage.”

The politics of the ‘recovery’

So far, the government’s has managed the politics of the recession by sending out two contradictory messages at once. First, it wanted to re-assure the public that it had dealt effectively with the threat – while also using the ongoing threat to justify cutbacks to government jobs and services. It has used a good cop/bad cop routine to do so, whereby Prime Minister John Key has talked up the signs of recovery and the virtues of the government’s handling of the crisis, while Finance Minister Bill English has insisted on the need for continued, eternal austerity. At times, the media have interpreted this as being a policy struggle – but wasn’t it always merely two dimensions of the same policy ?

“In a sense it is, “ Rosnberg agrees. “John Key obviously likes to be the good news boy, Bill English, on the other hand is still concerned [about the recession.] But the underlying agenda of both is to cut government expenditure as a percentage of GDP. And this recession is the perfect storm, really, for them doing so.“

Much of the mythology about the Clark government is that it oversaw a vast explosion of government spending – and thus created the necessity for the cost cutting measures by English. The evidence says otherwise. By OECD measures, state spending in New Zealand has recently blown out to around 46 % of GDP – up from 41% when the recession began in New Zealand, two years ago.

Those figures, however, need to be taken with several grains of salt. In virtually every country on the globe, the recession has seen large increases in state spending, as governments have struggled to salvage a semblance of national wellbeing from the failures of the private sector. Secondly, GDP in New Zealand contracted by 2.2 per cent in the year to September, which means that the same level of government spending looms larger in proportion. Thirdly, the OECD ratio to GDP measure includes both central and local government spending, and therefore cannot be invoked to condemn the spending habits of central government.

Speaking of which…the figures for core spending by central government cannot justify English’s campaign of austerity, either. If one looks at page 128 of the Treasury Half Yearly update, the table for government core spending as a proportion of GDP was 32.4 % when National left office in 1999 – and the ratio then fell when Labour took office, and stayed below previous National government levels for the next eight years, The ratio only surged in the year to June 2009 – to 35.5 per cent – at a point nearly sixteen months into a very deep recession. English can hardly use that track record as a rationale for cutbacks. Any campaign to do so is primarily an ideological crusade, and not one based on economic principle.

The international dimension.

If exports are going to recover – and English has said that our traders cannot expect to see much in the way of export growth until the year ended March 2012 – it will depend on people overseas being willing and able to buy our products. Unfortunately, the recovery in the global economy seen during the last months of 2009 has largely been the result of stimulus packages that are now running out, or being deliberately brought to a close.

Globally throughout 2009, state spending prevented the global recession from blowing out into a full scale Depression. Some massive amounts were involved. Twelve months ago the US Congress passed a $787 billion package of stimulus measures, while the Bank of England enacted a ‘quantitative easing’ programme estimated to be worth a further $US330 billion. The side effects now need to be addressed. As the Economist magazine recently reported :

Worries [ have been] aired about the sustainability of large Budget deficits. America’s has hit more than $1.4 trillion. The IMF, European Central Bank and others [have] urged countries to take steps to unwind their stimulus schemes. 

In proportion to GDP, the US trade deficit is now comparable to that of Greece, widely seen to be something of a basket case. Moreover, it is becoming increasingly clear that any current upturn in the US economy has been stimulus dependent:

Economist Martin Neil Baily at the Brookings Institute says the latest indicators suggest the economy is on pace to beat third quarter results. “Most forecasters are looking at more than that in the fourth quarter, maybe four percent [GDP growth] or a little more than that. So given that the economy is turning around, it sort of looks good,” he said. The downside is that much of the growth in the third quarter was fueled by government stimulus spending….As government programs unwind, so could the recovery.

“Some of those forecasters see strong growth in 2010 and 2011. But I think that’s far from a sure thing. I think it’s quite possible that what we’re seeing now is a kind of bounceback with inventories and so on and that you may not get a continuation of strong growth in 2010 and 2011,” Baily said.

To be fair, the bounceback in the US economy in the September quarter still seems significant, even when inventory growth is stripped out. Baily is right, though : the jury remains out on whether the US signs of recovery are sustainable. Meanwhile in Britain, the post-Christmas news has been that the UK upturn seems to have been dependent on a temporary cut in VAT tax, shortly to be reversed:

“The downside… is that reversing [the VAT cut] in January has the potential of stalling an emerging recovery,” [economist Jorg] Radeke said in a report [for the Centre for Economics and Business Research] The re-instatement “is likely to wipe out most of the benefits it was meant to create in the first place….

Clearly, there will be risks to our export markets as these stimulus packages peter out, and/or are unwound. Within New Zealand though our own domestic stimulus package was never much more than a token effort. As Rosenberg points out, New Zealand’s stimulus spending was below the average for the OECD, and was not geared to provide immediate relief. “ It was very much about tax cuts rather than about additional spending, or about increases in infrastructure. Nor did it, as Kevin Rudd did in Australia, include any direct handouts to low income people. Which in Australia, has meant the stimulus money got spent much more quickly, and lots of projects got started that created employment straight away.”

So what, if anything, did the Key government launch during 2009 in terms of major employment generating projects ? “ That is their answer,” Rosenberg replies, passing a government press release across the table.

“Those measures, they say, have created 2,300 jobs. Which is about the same number of jobs that have been lost in the public service. When you see that there are 150,000 unemployed, that’s not huge.” It is in fact, a response that currently leaves 98.5% of the unemployment problem untouched.

Why has the Key government been so inept at responding to the employment challenges posed by the recession ? “Part of it was that the response wasn’t directed at projects that could start up quickly.” Rosenberg says, by way of explanation. “A lot of it – $1.5 billion – has been on the emphasis on broadband, and that is just taking forever to get underway. Same for the roading projects – and whatever you think about roading projects, they’re quite slow to get under way.“ In essence, the New Zealand response to the recession has been to announce projects – and hope that the recovery overseas will occur before it is necessary to actually start the items on the wishlist.

All this would suggest that the New Zealand government deserves a failing grade for the way it has handled the recession. Overseas, it is getting them. Under the headline “Concern over slow growth in New Zealand “ the Financial Times reported on Christmas Eve that this country “had recorded unexpectedly sluggish growth in the third quarter, underlining fears that the country’s emergence from its worst recession in decades will be slower than predicted.” The growth figures, the Financial Times added, for that September quarter were at half expected by the forecasters.

The structural effects

So far, a “ recovery’ in New Zealand has been taken by the media to mean any up-tick whatsoever in GDP growth. GDP growth though is a rough measure of economic health. GDP growth for instance, can occur without any improvement at all in employment – which is the very definition of a jobless recovery. GDP measures also tend to treat cutbacks in r & d, capital investment and skilled staff as being a benefit, and not as a future cost to the economy, and society.

The real problem with the New Zealand fixation on GDP growth is that post-recession, things may well not return to normal, and firms may not simply re-hire the people they let go during the bad patch. If and when the jobs come back at all, it could well be in a different part of the economy. Therefore, retraining for adult workers should be part of any meaningful stimulus package. It has been in the US – but it has not been the case in New Zealand.

In a jobless recovery, the employment impacts associated with the normal ups and downs of the business cycle do differ from the structural changes that the recession can wreak on an economy. In an article about the jobless recovery contained in this month’s edition of the conservative journal American Spectator, Joseph Lawler makes an interesting point about business cycle vs structural factors that are affecting the jobs market in the US. Apparently, between the end of WWII and the late 1980s, a close relationship did exist between GDP growth and employment. This current recession though is the third US downturn in a row where employment has worsened, even as GDP grew – and in the recessions of 1991 and 2001, the lag before jobs picked up again stretched out for three or four years after GDP had improved.

The usual neo-Keynesian reasons commonly given here for such lagged delays in job growth are familiar enough, and valid up to a point – yes, firms do try to hold onto their essential staff and squeeze more productivity from them, thus delaying any substantial bounceback in new job creation. Lawler, however, suggests that “structural” factors are also occurring every time now that the modern economy turns sour – with the entire pattern of hiring changing “not as a function of economic fluctuations, but because of shifts in the economy’s production that re-allocate workers among industries.”

The obvious historical example of this process that he offers is the Industrial Revolution, that saw vast numbers of manual jobs destroyed within agriculture, and an eventual transition to technology-aided jobs in manufacturing. The more recent US example he cites is the 2001 recession, which saw thousands of dotcom jobs destroyed and new jobs ( eventually ) created in….housing.

The difference…is that we now have recessions with structural shifts. Two reasons for this come to mind. First, modern technologically advanced firms do a better job calculating their optimal amount of labor without resorting to temporary layoffs — if they downsize, they downsize permanently because their industry is shrinking. Second, the Federal Reserve is less likely to mismanage the money supply and create recessions entailing mass temporary layoffs owing to an artificial scarcity of money….

As a result, the reality is that it can take a very long time indeed for an economy to shake out where – if at all – its former workers can profitably be re-allocated. During this period of structural change, the government can choose to be compassionate. It can put money into adult re-retraining and into benefit support – or it can simply let the cards fall where they may, and leave families to bear the pain of transition, virtually unaided. That was the approach taken by the fourth Labour government during the 1980s, and New Zealand is still recovering from the social effects – in crime, and generational misery.

Certainly, some firms have helped the government to escape the worst-case Treasury scenarios of unemployment. Mainly, by reducing hours, rather than by cutting staff. “ They realized this after the last recession,” Rosenberg says, “ that if they laid off workers, they would never get them back.” Skilled workers went off to Australia before, and they may do so again – if the jobless recovery endures here for too long. Given the current climate of uncertainty, employers will probably begin by tentatively increasing the work hours for existing staff, rather than risk the creation of new jobs.

Plainly, many workplaces have not gone even that far. We are currently facing 7% unemployment levels, after all. “ But,” Rosenberg adds, “ it could explain why the numbers didn’t go even higher.” Some positive signs of life do exist. “Construction has certainly troughed, and is starting to go back up again.” Some commentators are also saying that given the migration patterns – we are currently at a five year migration high – we may have a housing shortage on the horizon.

The bad news is that the economy has to generate jobs for those sons and daughters coming home/ staying home to escape the global downturn, and for the young who will be entering the workforce for the first time. At present, as Fran O’Sullivan demonstrated in mid-November, the Key government is failing young people spectacularly, on the jobs front.

Essentially, the government has budgeted $152 million for its “youth opportunity’ funding that is meant to provide assistance for 16,900 young people – this, at a time when 62,700 New Zealanders aged between 15-24 were out of work, even before those numbers were swelled by the Christmas vacation break. Currently, a quarter of the job seekers aged between 15-19 cannot find work.

The social cost of this level of market failure.is immense. As O’Sullivan says, we saw this happen before, in the wake of the unemployment wave that was willfully created by the Rogernomics reforms. Trouble now is, everyone overseas is currently in much the same boat :

New Zealand has been down this track before in the early 1990s. It was not a pretty sight. Young men who couldn’t find work lost hope. There was an explosion of youth suicide. Many ultimately left for new opportunities offshore.
The problem New Zealand now faces is the international opportunities are not there. Other countries face just as many problems – if not more – than we do.

Keep that in mind the next time you hear John Key bragging that his government has saved New Zealand from the worst case Treasury scenarios of unemployment. The reality is that his government has also bedded in Treasury’s middle range forecasts for unemployment, for the foreseeable future. That, by any reasonable assessment, should count as a failure. The big problem the government has got is how do you come of this recession with a better balanced economy,” Rosenberg says. “Some in government and in business still think the best approach is… to set the regulations right and then everything else will follow..” Few other countries still believe in that discredited gospel.

Quite the contrary, in fact. In most OECD countries, the state is now seen as an active player and co-operative agent with the private sector. “ Since the Rogernomics era though,” Rosenberg concludes somberly, “ there’s never been much of an appetite here for that sort of thing.” Yet if New Zealand is ever going to create the jobs than it needs – rather than simply generate slivers of wealth for the fortunately placed few – any retraining scheme may need to begin with our politicians, and our current crop of business leaders.