Saturday, 27 July 2013

Work Hours, Job Turnover and Aggregate Demand in the US

It has been said that our perception of the world economy has changed. We are no longer constrained by limited goods like we did in the early- and mid-20th century; in fact, we have more goods than we have ever had in the past. Our economic understanding has shifted from supply problems to demand issues (not all economists adhere to this, but the flat earth society still exists doesn't it?) and our view of crises has been exactly that: a sharp drop in demand causes an abundance of goods and services remaining unsold, resulting in losses for corporations which, given their worsening economic situation have to let go many employees, if not all. This vicious cycle can be easily seen in any economy where austerity has been defining policy in the past couple of years with politicians unfortunately still adhering to flat-earth remedies (an excellent review of this shifting of ideas can be found in Tom Streithorst's Post-Scarcity Economics).

What has come to be an increasing worry is whether the US can really break out of the current secular trend of falling demand and continue on a path where demand is higher and more stable. In the case of the US, many appear to be pessimistic on whether this could be implemented. While others argue that the time of a permanent decrease in demand has come, others (like yours truly) believe that demand could actually be increased. Despite the camp the reader chooses to abide with the truth is that data are not so terrible as many present them. Job turnover has averaged about 3% per month, much lower than the early 2000's 4%, yet still quite high.
Job Turnover Rate. Source
In addition, real wages which had been falling ever since the 1970's, according to the Federal Reserve, show a clearly increasing trend since the mid-1990's, despite some ups and downs during the years.
Source: CPI and Wages
The unemployment rate has been decreasing since 2008 (although quite slowly) yet the most alarming issue is that the number of hours worked by the average American in the past years has been steadily increasing. While on average people were working 54.3 hours per week in 1979, in 2012 this has increased to 60.0. The trend seen in the next chart is more than obvious:
(Weekly compensation divided by Hourly compensation. Data can be found in the BLS website under codes LEU0208183700 and LEU0258178300 respectively.)
A most straightforward question which comes to mind is why do people feel like they need to increase their working hours if their real wages are increasing every year since 1996? The turning point in the graph was 2007. The reader will notice that between 1992 and 2007 working hours had fluctuated in the 56-57.4 interval without ever going past it. Yet, when the late-2007 crisis occurred, a jump in the graphs could be observed: between 2007 and 2009 people were working 1.5 hours more per week. In addition, labour productivity was also increasing in the 2007-2012 period which means that it wasn't that Americans were producing less than other periods in their history so they had to work longer to make up for it. Then, was this trend due to high turnover or high unemployment? Was it due to increased worry about what the future would bring or a willingness to save for debt repayment? My opinion is all of the above. It's not that easy to see everything around you shutter and not be willing to work some more in order to secure your job.
This, however, comes at a cost. The more people are afraid, the more they are willing to postpone spending for the future, thus making the situation even worse. It is a sort of citizen-imposed austerity, with the same results as the state-imposed one. People work more, spend less, and watching unemployment rise and others around the world (e.g. Europe) facing difficulties makes them willing to live on a shoestring. As people get more and more afraid they fell victims to their employers' whims and requests as they are "willingly forced" to work longer hours out of uncertainty about their job stability and their future employment prospects; this uncertainty manifests as fear and spreads like wildfire through the economy.

Although the increasing trend in the number of hours worked is worrying there are remedies which can assist in making things better. Many still believe that even if people are finally persuaded to spend more, demand will never reach the heights of the pre-2008 era. I would respectfully disagree with them: data are not supportive of their claims and opportunities are still plenty. Unfortunately, they are still plenty because not all is good in the US.

Real personal consumption is increasing ever since the 1940's, despite the sharp drop during the recession. Yet, as commentators indicate, the crisis has taken its toll on the people: real household income had decreased by 4% in 2011 (data for 2012 are not yet available) and the poverty rate reached 15% or 46.5 million people in the same year, up from 14.3 in 2009 and 13.2% in 2008. Thus, there is plenty which can be done to boost demand, with most of it includes some sort of government intervention; either direct or indirect. Underprivileged members of the society could be given better education (in a country where some universities have endowments of over $1 billion, only 27% of the population has a bachelor degree) and more importantly a better chance to work somewhere that offers them the opportunity for personal and professional growth.

Many a policy (e.g. tax breaks for corporations hiring them, subsidies, scholarships, etc) could be implemented in order for the underprivileged to overcome their financial difficulties, yet these are beyond the scope of this article. What matters is that if income is increased by just $1000 a year on average then an additional $46.5 billion would be available for spending. This might not seem like much compared to the $9.5 trillion of total spending per year, yet the effect of these would be further increased over time with the increase in bank credit and accumulated jobs which would further stimulate the economy. In contrast to austerity's vicious cycle we would experience a virtuous cycle which would reduce the poverty level, increase real wages, decrease the total hours of work and in addition create more jobs and boost consumption, thus making the economy grow.

Those who fear that aggregate demand will fall in the future may be proven right if nothing is done to prevent such a turning of the events and the US will be one of the first countries to witness a permanent abundance of supply over demand, resulting in worsening economic circumstances. Regardless of whether we call it Keynesianism or Monetarism (which are in essence the same) the truth is that markest appreciate assistance in times of crises. I am not arguing that they would never get out of the crisis on their own, yet why should we force ourselves through the torment of a long-lasting depression when we know the doctrine which would help us overcoming the problems?


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