Last week, I described the historical disconnect that exists between job vacancies and unemployment.
That is, job vacancy creation is increasing yet unemployment isn’t decreasing as expected.
This suggests the supply of labor is inadequate to meet the demand for labor. In this case, it isn’t the quantity of labor that is at issue, it’s the quality. The supply of labor lacks the skill sets required by business to operate productively.
The Beveridge Curve describes the relationship between job openings and unemployment over the past 70 years.
Between July 2009 through December 2010, unemployment is remaining relatively constant (near 10 percent) while the job vacancy rate of increase has been rising (from 1.5 percent to 2.5 percent).
As I thoroughly described in my previous post, the critical reason for this discrepancy is the underperformance of our education system. In recent decades, our education system placed inadequate emphasis on independent learning, intellectual curiosity, knowledge acquisition, and insightful wisdom.
These economic times accentuate the discrepancies.
By introducing severe cost uncertainties, the recent healthcare legislation has increased demand for high quality labor to offset these potential expenditures. These qualities are short in supply, which further explains why job vacancies haven’t been filled at the historical rate.
These dynamics are also reflected in long-term employment potential. Employment uncertainties are manifesting in the rental market as well.
“For the first time since at least 1981, the median monthly rent in the U.S. is now higher than the median monthly mortgage payment,” Capital Economics points out.
This suggests the demand for short term housing is strong relative to the demand for long-term housing: a reflection of uncertain future debt-service capability.
Ironically, an increase in labor productivity has increased demand for productive workers. U.S. labor productivity increased roughly 6 percent in 2 years (from 2009 to 2010).
The Bureau of Labor Statistics indicates labor productivity increased 6 percent while real wages increased only 0.3 percent. This suggests corporate revenue increased 6 percent while labor compensation increased 0.3 percent.
Therefore, corporations and their shareholders received 94 percent of the revenue increase and labor received 6 percent. The 63-year average for labor’s share is 58 percent. Corporate profit margins increased further due to the recent reductions in employment. The additional profit margin enables corporations to seek higher quality labor.
Concordant with my previously expressed view, the St. Louis Federal Reserve Bank concluded in a recent essay that the mismatch in demand and supply of labor may not be resolved through monetary and/or fiscal policy.
Eric S. Rosengren, president of the Federal Reserve Bank of Boston, recently stated: “[T]he Fed had reached the limits of responsible policy. We’ve done things that are quite unusual. We’re using tools that we have less experience with. Most of the criticism has been that we’re being too accommodative. That is a concern that we have to put some weight on.”
Christina Romer, Chairperson of President Obama’s Council of Economic Advisors until fall 2010, recently stated, “[N]o part of the government was addressing unemployment with sufficient urgency or hope. Urgency, because unemployment is a tragedy that should not be tolerated a minute longer. And hope, because prudent and possible policies could make a crucial difference.”
You may recall, Dr. Romer was one of the principle architects of President Barack Obama’s American Recovery and Reinvestment Act of 2009 (stimulus program). At that time, she anticipated the program would keep unemployment below 8 percent. It subsequently reached 10 percent and has hovered in this range for the past two years. The rate approaches 20 percent if the Bureau of Labor Statistics includes the underemployed and all those seeking work (e.g., first time job seekers and those unemployed more than one year).
The answer to the economic recovery is: velocity.
Velocity refers to the quantity of monetary transactions (not the quantity of money). The same quantity of money can generate more income via more monetary transactions.
Transaction velocity will increase when we embark on innovative and creative ideas that provide long-term positive returns on investment.
This return on investment will enable economic entities to borrow funds at interest rates that provide a positive return to lenders (a mutually beneficial relationship).
Extremely low interest rates for extended periods of time provide disincentives to embark on sustainable product development. When money and credit are obtained too easily, less focus is placed on providing clear, thorough, long-term growth plans.
Therefore, the funds aren’t utilized optimally. The investment doesn’t supply product that will be in demand over the long term. Hence, weak transaction velocity ensues over time. Within several years, these funds are essentially depleted.
When this occurs, the current thinking is to provide more money and credit (accommodative, quantitative easing) to stimulate economic activity and growth.
This thinking is antithetical to addressing the underlying issue and its associated dynamics.
A given percentage increase in the monetary base is essentially offset by a decrease of equal magnitude in monetary velocity. Since GDP (income) equals M (monetary base) times V (monetary velocity), there is very little GDP growth.
Moreover, 0 percent growth in the monetary base implies a 6 percent increase in the velocity. This translates to a 6 percent GDP growth rate (GDP equals M times V).
Japan has essentially been anaesthetized to increases in monetary aggregates. That is, a 0 percent increase in monetary base generates 0 percent GDP growth. Moreover, like the US, any increase in the monetary base is offset by an equal decrease in velocity, generating 0 percent GDP growth.
Ironically, velocity increases when the monetary base decreases: this generates GDP growth. Economic activity and growth is predicated on a healthy transaction velocity.
“Faster” money (not more money), will generate a positive environment for employment.
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