On Monday January 10, 2011, 11:27 am EST
The U.S. economy is steadily improving. So where are all the jobs? That question has become headline news on a nearly daily basis. Unfortunately the answers are not simple.
Jobs are actually being created – over one million in fact in 2010, but compared to the more than eight million jobs that were lost during the recession, the recovery in jobs lags the growth in profits and the recovery in the stock market.
So what is going on? Why are companies unwilling or unable to hire? Where will the new jobs come from?
There are multiple forces at work muzzling the demand for new jobs.
Two sectors of the economy are unlikely to contribute to much employment growth for several years – they are finance and real estate. In the financial industry, the lay-offs in 2008 and 2009 in the face of the industry’s collapse were huge. Last year, as the industry started recovering, it added employees, particularly in the northeast. However, many of the products it developed during the boom years of the last decade are no longer in demand, and the industry will likely employ fewer people over the next several years than it did in its heyday. In the real estate industry, the supply of housing in many parts of this country still far outstrips the demand and it will take years for that excess inventory to be worked off.
Another factor which I think is deterring employment growth is more complex.
With all the credit in the world to Fed Chairman Ben Bernanke, who has been unfairly criticized (I believe) for his action to reliquify the banking system, there is a corollary to the low interest rate environment which is impeding the demand for workers. With interest rates at historic lows, the cost of capital (money) is cheap, making it advantageous for companies to borrow and invest in labor-saving technology and capital equipment rather than hire new workers.
At the same time, despite the currently elevated unemployment rate, the cost of labor (which includes both wages and ancillary benefits) remains high, particularly when compared to the low cost of money. The result is that companies are more likely to continue to replace labor with capital, at least on the margin. This will change as interest rates rise, reducing the productivity of capital.
Despite that economic reality, I believe we will see a pickup in demand for jobs from the private sector in this country as the year unfolds, but it will be slower than in the past. The good news is that the consumer appears to be more willing and more able to spend, and while not all consumers have straightened out their finances, the numbers show that consumers’ balance sheets are improving.
But there is one more hindrance to employment in this country. The Federal Government as well as many State and local governments are facing severe budget deficits which they will be forced to remedy through cutbacks in spending. Of necessity, this will involve lay-offs just as the private sector is starting to gain some momentum. It appears that even the U.S. military will not be spared the need to make personnel cuts.
While in the short run, public sector lay-offs will hinder both economic growth and improvement in the unemployment statistics, in the long run it is more economically advantageous for growth to come from the private sector of the economy. This is not meant to disparage the benefits of government and its services; rather it is admitting the economic reality that income and profits from the private sector are largely what generate the taxes necessary to fund the public sector.
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