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JOBS SLOWLY RECOVERING FROM CRISIS FAVORING HIGHER SKILLS.

Byline: Marina

Today's job market demands more specialized skills but migration and technology are helping"not hurting " chances of high-quality employment according to the March 2015 issue of Finance and Development (FandD) magazine.

30 million jobs mostly in advanced economies were lost during the Great Recession writes the IMF's Prakash Loungani in the latest issue of FandD. The world has since recovered slowly and unevenly with global unemployment finally falling back to its pre-recession rate of 5 1/2 percent.

But the situation remains grim in much of Europe especially for youth says the IMF's Angana Banerji.

Most of the increase in youth unemployment stems from feeble economic growth Banerji's research finds so the policy priority should be to boost demand. Indeed the European Central bank is easing monetary policy and countries are investing in public infrastructure projects.

The story is different in sub-Saharan Africa where economic growth has been strong and unemployment is relatively low.

FandD's Bruce Edwards writes that there the problem is transforming the job market from one that has kept people working in small informal jobs and on farms"often for little or no pay"to one that offers more opportunities in the manufacturing and service sectors."

With sub-Saharan Africa's working- age population set to double by 2050 it's urgent that businesses"whether formal or informal"provide many more jobs and soon.

Larger companies would have the advantage of providing tax revenue and social programs such as pensions and health care but for now any new jobs would be embraced wherever they come from.

MOVING OUT

Over 200 million people are unemployed worldwide. No surprise then that some fear immigrants and robots will take the jobs they so desperately need.

But obstacles to immigration" geographic linguistic and bureaucratic"mean the share of migrants has remained stable since 1960 at about 3 percent of the global population.

The limited globalization of the labor force means large wage gaps persist between countries that send migrants and those that receive them; migration has little impact on wages.

Migrants often get blamed for flooding the job market but the World Bank's Caglar Ozden writes that they rarely take jobs from natives. If anything they tend to nudge local workers into higher-skilled and better- paying jobs"as managers for example.

Low-skilled migrant workers offer household help that allows educated women to work while their children are young.

Immigration does create jobs with migrants performing the jobs natives are either unwilling or unqualified to perform.

But there are also losers in the process and those are the stories we hear more about. Those who are too old to learn new skills or at the bottom rung of the ladder will lose out to foreign workers.

The largest economic benefit of migration for a host country is lower prices for consumers.

Given the pluses of immigration recipient countries are wise to encourage it while enforcing the taxation of immigrants' income and charging administrative fees to employers for visas Ozden recommends.

Then these revenues can pay for skills development of some natives and unemployment insurance for others who cannot be retrained.

NO ROBOT TAKEOVER

Nor can joblessness be blamed on technology says James Bessen of Boston University. Sometimes new technologies eliminate jobs altogether but his research finds that technology today creates demand for different capabilities displacing workers to different jobs that require new skills.

Only in advanced economies' manufacturing sectors are jobs being eliminated"and these losses are offset by new jobs in other sectors.

For example the introduction of automatic teller machines in the United States led to more branches being opened resulting in no fewer teller jobs but more branch manager jobs. People skills and those that complement the new technology are more in demand than ever.

But new technology does lead to stagnant wages for ordinary workers and skills shortages for employers heightening inequality.

LABOR MARKET TRENDS

The ILO's Ekkehard Ernst agrees. As workers move around the world and technology automates many activities the benefits of globalization accrue disproportionately to the top and bottom of the income scale.

And as middle-income jobs stagnate or are cut especially in manufacturing inequality worsens. Ernst predicts there will be better working conditions and higher salaries but probably only for those who possess the right skills."

Another influence exacerbating inequality has been the decline in unionization in recent decades. Research by the IMF's Florence Jaumotte and Carolina Osorio Buitron finds that this phenomenon combined with reductions in minimum wages has fed the rise in the share of income going to the top 10 percent.

UNEMPLOYMENT: THE CURSE OF JOBLESSNESS

At the peak of the worldwide recession that began in 2008 the International Labor Office announced that global unemployment reached the highest level on record. More than 200 million people 7 percent of the global workforce were looking for jobs in 2009.

It is not a coincidence that the global economy experienced the most severe case of unemployment during the worst economic crisis since the Great Depression. Unemployment is highly dependent on economic activity; in fact growth and unemployment can be thought of as two sides of the same coin: when economic activity is high more production happens overall and more people are needed to produce the higher amount of goods and services. And when economic activity is low firms reduce their workforce and unemployment rises.

In that sense unemployment is countercyclical meaning it rises when economic growth is low and vice versa.

But unemployment does not fall in lockstep with an increase in growth. It is more common for businesses to first try to recover from a downturn by having the same number of employees do more work or turn out more products"that is to increase their productivity. Only as the recovery takes hold are businesses likely to add workers.

As a consequence unemployment may start to come down only well after an economic recovery begins. The phenomenon works in reverse at the start of a downturn when firms would rather reduce work hours or impose some pay cuts before they let workers go.

Unemployment starts rising only when the downturn is prolonged. Because unemployment follows growth with a delay it is considered a lagging indicator of economic activity.

How sensitive is the unemployment rate to economic growth That depends on several factors most notably on labor market conditions and regulations.

One estimate of the strength of this relationship for the U.S. economy comes from Okun's Law (named after the late U.S. economist Arthur Okun) which postulates that a decline in unemployment by 1 percentage point corresponds to a 3 percent rise in output. More recent estimates find that the consequent rise in output may be lower possibly between 2 and 3 percent.

JOBS AND GROWTH

How far does this inverse relationship between growth and unemployment go If economies kept expanding would one expect to see unemployment disappear altogether

Actually this is not the case (see chart); even in the 2000s when the global economy was prospering (at least until the crisis) global unemployment

declined but never reached zero. This observation raises the question why can unemployment never fall to zero

CLEARING THE MARKET

According to classical economic theory every market including the labor market should have a point at which it clears"where supply and demand are equal.

Yet the very existence of unemployment seems to imply that in labor markets around the world the demand for and supply of labor fail to reach the equilibrium. Do labor markets continually fail

Sometimes it is a matter of wages or the unit price of labor not adjusting to clear the market. Some workers particularly skilled ones may have reservation wages below which they are not willing to work but which are higher than what employers are willing to pay.

Alternatively the wage an employer is willing to pay may be lower than the legal minimum wage set by governments to try to ensure that wages can sustain a living. When such rigidities in the labor market lead to a shortage of jobs it creates structural unemployment and those who are structurally unemployed tend to have longer spells of joblessness on average.

But the inflexibility of wages does not fully explain the perennial nature of unemployment. Some level of unemployment will always exist for no other reason than that there always will be some people who are between jobs or just starting out their careers.

These people are unemployed not because there is a shortage of jobs in the market but because finding a job takes time. Such temporary spells of unemployment are referred to as frictional unemployment.

The combination of these factors brings about a long-term average around which the unemployment rate tends to fluctuate called the natural rate of unemployment (NRU).

The term natural" does not mean it is a given that cannot be changed; to the contrary it implies that labor market characteristics which are mostly driven by policies determine it.

For example the relatively high rate of unemployment in Europe compared with the United States is in part attributed to Europe's stronger unions and stricter labor regulations.

These labor market institutions may give European workers a better bargaining position but they can also render workers too expensive for employers. In the United States unionization is lower and labor markets are more flexible but workers have traditionally enjoyed higher employment rates than their European counterparts.

The natural rate of unemployment is sometimes called the nonaccelerating inflation rate of unemployment (NAIRU) because it is consistent with an economy that is growing at its long-term potential so there is no upward or downward pressure on inflation.

The flip side of this argument suggests that whenever unemployment temporarily deviates from the NAIRU inflation is affected. Consider a recession a period of low economic activity.

With lower demand for goods and services firms start laying off workers and at the same time refrain from raising prices.

So unemployment rises and inflation falls during recessions. This trade-off between unemployment and inflation"described by the Phillips curve (named after the late New Zealand economist William Phillips)" is only temporary though; once prices adjust to a new equilibrium that clears the goods and services market firms go back to producing at full capacity and unemployment once again falls" to the NAIRU.

Understanding what is behind the long-term equilibrium rate of unemployment helps policymakers understand how they can and cannot change it.

For example policies that try to lower unemployment by boosting consumer demand (thereby raising production) can do so only temporarily and at the cost of higher inflation later.

However policies that are geared toward easing frictional or structural unemployment can boost employment without necessarily affecting inflation.

But the NAIRU can also change over time without any explicit policy action: structural changes such as technological advances and demographic shifts can have long- lasting effects on unemployment trends.

For example many economists agree that the technology boom of the 1990s increased labor productivity making each worker more desirable" to employers and has therefore reduced the NAIRU"although there was an initial blip of unemployment as workers untrained in the technologies were displaced.

A rapidly aging population"as is occurring in many advanced economies today"also contributes to fewer people in the job market and lower unemployment.

MEASURING UNEMPLOYMENT

Not all people who don't work are unemployed. To be considered unemployed for government statistics a person must not only be out of work but also be actively looking for a job"for example by sending out resumes.

In the United States unemployment is measured by a monthly survey of households conducted for the Bureau of Labor Statistics and covers a representative sample of more than 100000 individuals.

The labor force includes both those with jobs and those looking for them. The unemployment rate is the percentage of the labor force that is looking for a job.

The labor force is only a portion of the total population. The ratio of the labor force to the working-age population is called the labor force participation rate.

The labor force excludes people who are of working age but are neither employed nor looking for a job"such as students nor homemakers. But the labor force also leaves out jobless people who were in the job market unsuccessfully for so long that they stopped looking for a job.

Such discouraged workers are one reason why unemployment statistics can underestimate the true demand for jobs in an economy.

Another form of hidden unemployment in statistics comes from counting as employed anyone who did any work for pay (or profit if self-employed) in the week before the government survey. This hides the demand for work by people who would prefer full-time employment but cannot find it.
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Publication:Cambodian Business Review
Date:Apr 30, 2015
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