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Unemployment: Part of the Economic Cycle or Secular Shift?

Bob Huebscher just published an outstanding article on the sustained high level of unemployment in the United States.  The question that he seeks to address is whether we are in the recovery phase of a major recession or we are actually in the midst of a long-term shift in the economy.  The article calls these two possible explanations ‘cyclical’ and ‘structural.’  It is worth understanding the key factors that have resulted in the current persistent unemployment levels in order to put the recent modest reduction in unemployment into context.  Are we seeing signs of the long-awaited recovery that will bring us back to full employment or is the recent growth in employment simply variability around a long-term shift in the U.S. economy in which unemployment will remain well-above historical levels?

Whenever the economy experiences a major disruption, there is debate about whether the changes are part of the normal business cycle or whether something has fundamentally changed.  I am partial to the term ‘secular transformation’ or ‘secular shift’ for ‘structural’ changes, as proposed in Mohamed El Erian’s outstanding 2008 book, When Markets Collide: Investment Strategies for the Era of Global Economic Change.    I mention this book because El Erian spends a considerable amount of the book discussing factors that are changing the global economic power structure over the long-term.  I see distinct parallels between the ‘structural changes’ that Huebscher discusses and the ‘secular transformations’ that El Erian describes.

In his article, Huebscher discusses two recent analyses of the state of the labor market.  The first suggests that the current high unemployment is simply part of the economic cycle but the authors acknowledge that the recovery has been very slow.  The second study, part of a long-term initiative by Harvard Business School (HBS), suggests that the problems are largely structural and that we may be facing a future with persistent high levels of unemployment and downward pressure on household income and, ultimately, a decline in the standard of living in the U.S.  I suggest that you read Huebscher’s article for a deep explanation of the key arguments.

My own perspective, considerably influenced by El Erian when I first read his book, is that it is undeniable that there is a shift in global economic power underway, a major secular transformation in the labor market that translates directly into a permanent decline in the economic prospects for many U.S. workers.  We have a U.S. Federal minimum wage of $7.25 ($1160 per month, assuming 40 hours worked per week) and skilled workers assembling electronic devices (such as iPhones) in China are getting paid $283 per month.  The HBS study finds that the vast majority of jobs created in the U.S. over the last ten years have been in local industries—healthcare, for example—that cannot be outsourced.  In industries in which the U.S. competes with other countries, the U.S. has lost out.  How long can we have an economy in which our least-paid workers are getting paid four times what presumably skilled electronics workers are making in other countries?  The United States has enjoyed a long period during which we were paid at one rate for our own basic labor but we purchased goods made by people with another, far lower, rate of pay.

To make matters worse, we have paid for our foreign-made goods with a lot of borrowed money.  American consumers, employed or not, are burdened by a massive overhang of consumer debt.  The U.S. economy is largely driven by consumer spending and the growth in consumer spending over the past 30 years has been largely paid for with debt.  This cannot continue forever.

Huebscher’s article reinforces a range of other analyses that I have read.  There is considerable evidence that suggests that the United States is in the midst of a major secular shift in which we will see median wages continue to decline.  An article in the Wall Street Journal in mid-2011 noted that U.S. economic output had risen by 19% over the most recent ten year period, but that the number of private sector jobs in the U.S. had declined by 2 million.  It is hard to envisage any scenario in which the U.S. labor outlook improves dramatically.  I am heartened by the recent news that unemployment has finally dropped below 8%, but the broader trends suggest that our expectations for a full recovery in the employment numbers may need to be tempered.


The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services.

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