Economic Reporting Review
November 15, 1999:
Unemployment drop; Clinton's trade claims; IMF criticism
By Dean Baker
EMPLOYMENT
"Jobless Rate Down to 4.1 Percent in October"
John M. Berry
Washington Post, November 6, 1999, page E1
"Jobless Rate Drops to 4.1 Percent as Wages Rise by 1 Cent an Hour"
Louis Uchitelle
New York Times, November 6, 1999, page B1
These articles report on the Labor Department's release of employment data for the month of
October. While both articles note the slight drop in the overall unemployment rate to 4.1
percent, and changes in the unemployment rate among various demographic groups, neither
notes the large rise in unemployment among African-American teenagers that has taken place
over the last several months.
In July, the unemployment rate for African-American teens was 22.9 percent. Since then it has
risen by 8.6 percentage points to 31.5 percent. This figure is extremely erratic, but since this is
the second consecutive month that the unemployment rate for African-Americans teens was
over 31.0 percent, it suggests that there really has been a striking deterioration in their job
prospects at a time when the labor market as a whole is quite strong.
The Post article notes the decline in manufacturing employment in recent months, which has
been coupled with growth in manufacturing output. The article comments that this is evidence
of rapid productivity growth in manufacturing. The Post article also notes rapid growth in
employment in businesses that provide services to other businesses, such as temporary help
agencies. This employment growth provides an alternative explanation for how employment
can decline in manufacturing while output increases. If manufacturing firms are increasingly
using contract labor or in other ways outsourcing jobs that used to be performed by employees
on their payroll, they can have higher output and lower levels of employment without any
increase in productivity.
The Times article comments that the low wage growth of recent years has been surprising
since "most economists expected, as unemployment fell below 5 percent, that the scramble to
find enough workers would force employers to bid up wages at an accelerating rate." Actually,
prior to 1994, most economists argued that wage growth would begin to accelerate if the
unemployment rate fell below 6 percent. (See, e.g., Congressional Budget Office, 1994, The
Economic and Budget Outlook: An Update; or R.J. Gordon, "Inflation and Unemployment:
Where Is the NAIRU?," paper presented at the Board of Governors of the Federal Reserve
System Meeting of Academic Consultants, 12/1/94, Washington, D.C.). The unemployment
rate has now been below this level for more than five full years.
"Help Wanted, Meaning Help Can Be Fussy"
Peter T. Kilborn
New York Times, November 6, 1999, page A1
This article discusses the impact that the tight labor market is having on workers' job
opportunities. The article correctly points out that low unemployment has had an especially
positive impact on the prospects for low-wage workers, but it does not put the situation in its
proper historical context. The real value of the minimum wage, while it is above the low point it
hit in the '80s, is still approximately 20 percent below its level of 30 years ago. As a result,
about 15 percent of all workers are receiving an hourly wage that would have been below the
legal floor of the late '60s.
The article also repeatedly asserts that firms cannot raise wages, because they can't pass on the
cost in higher prices. There is another option: Higher wages could erode profit margins rather
than leading to higher prices. The profit share of corporate income has risen by more than 3
percentage points since the last cyclical profit peak in 1988, pushing the profit rate to a
post-war high. It is reasonable to expect that such high rates of profit will not be sustained
indefinitely, and that the profit share will move back toward its historic average.
"Last Stand in Defense of a Hollow's History"
Francis X. Clines
New York Times, November 7, 1999, Section 1, page 16
"With 500 Miners as a Chorus, Byrd Attacks Court Ruling"
Francis X. Clines
New York Times, November 10, 1999, page A18
These articles report on the enforcement of an environmental regulation that will restrict strip
mining in West Virginia. Both articles report on concerns and protests over the prospect of lost
coal mining jobs. Actually, it is not clear that this regulation will, on net, lead to a loss of coal
mining jobs in West Virginia. Strip mining employs very few people. It has been rapidly
replacing underground mining, throwing thousands of miners out of work. West Virginia has
lost close to half its coal mining jobs in the last five years. The industry now employs slightly
more than 15,000 workers in the state. It is entirely possible that by restricting the practice of
strip mining, this environmental regulation may in the long run actually save jobs for miners in
the state.
"Senate Passes Minimum Wage Hike"
Helen Dewar
Washington Post, November 10, 1999, page A4
This article reports on the Senate's passage of a bill that would raise the minimum wage to
$6.15 over 28 months. The article includes a chart which shows the changes in the value of the
minimum wage through time. One line in the chart shows the value of the minimum wage in
1999 dollars. This line shows a large decline over the last 20 years. The other line is labeled "in
real dollars." This line shows an increase in the minimum wage through time. This label is
presumably a typographical error. The line showing the minimum wage in the 1999 dollars is
presenting the value of the minimum wage "in real dollars." The other line is showing the value
of the minimum wage measured in nominal dollars.
See more about labor.
[Top]
TRADE
"Clinton Hits the Road to Boost Trade"
Charles Babington
Washington Post, November 11, 1999, page A4
This article discusses President Clinton's trade agenda. At several points it suggests that the
president is a supporter of free trade or of opening trade. This is not accurate, since President
Clinton has done little or nothing to free trade in many areas such as doctors' or lawyers'
services. He has also attempted to restrict free trade in many products by imposing copyright
or patent protection on items sold in developing nations. President Clinton has only consistently
supported freer trade on the production of manufactured goods.
At one point, the article comments that the president "repeated his trade mantra: The United
States has 4 percent of the world's population, and 22 percent of its income, so 'we've got to
sell something to the other 96 percent. . . . But we will never be able to do it unless working
people believe that trade benefits ordinary American families.'"
This statement is literally incoherent. It would make no more (or less) sense if the United States
had 22 percent of the world's population and 4 percent of its income. There is absolutely no
logical link between these numbers and what the United States needs to do in terms of trade
policy. It is noteworthy that such a statement would now be the president's mantra for
advancing his trade policy.
See more about trade.
[Top]
SOCIAL SECURITY
"House Passes Compromise Bill for $13.5 Billion in Foreign Aid"
Eric Schmitt
New York Times, November 6, 1999, page A6
This articles reports on the passage of a foreign aid bill by the House of Representatives. At
one point it discusses the possibility that current spending levels could "raid" Social Security if
they required spending a portion of the Social Security surplus.
In reality, the Social Security system will not be affected at all by the outcome of this budget
debate, as has been pointed out in previous articles (see e.g. "Hands-Off Social Security Vow
Ignores Reality, Experts Say," by George Hager, Washington Post, 10/10/99, page A5; or
"Noble Talk of Saving Social Security Is Muted by Political Gamesmanship," by Richard W.
Stevenson, New York Times, 9/29/99, page A20; and ERR, 11/1/99).
See more about Social Security.
[Top]
GERMANY
"Siblings' Lives Trace a U.S.-German Divide"
Roger Cohen
New York Times, November 7, 1999, Section 1, page 1
This page 1 article contrasts the lives of a German brother and sister who were separated as
teenagers, just before the building of the Berlin war. The sister came to the United States and
lives in rural Missouri. The brother remained in what was then East Germany. The article
discusses the two as "national symbols" of the United States and Germany, respectively,
characterizing the sister as an "assertive American" and the brother as a "compliant German."
The article includes numerous assertions about both countries that are not supported by
evidence.
For example, the article asserts at various points that Germany's welfare state is
"no-longer-affordable," "beyond its means," "carrying more weight than it can bear," and that its
"time has run out." At present, German's annual budget deficit is approximately 2.5 percent of
GDP. It's national debt is slightly above 60 percent of GDP. At Germany's current growth rate,
this is a situation that could be sustained indefinitely.
It is also worth noting that, according to data from the Bureau of Labor Statistics and the
Conference Board, Germany has consistently maintained productivity growth rates of
approximately 2.0 percent annually. This is considerably higher than the productivity growth
rates experienced in the United States over most of the last 20 years, and will allow for more
rapid growth in wages and living standards in Germany. It also means that Germany in 1999 is
far richer than it was in 1979 or 1989. If the nation was able to afford its welfare state in prior
decades, it is difficult to understand how it can no longer afford benefits that have actually
become somewhat less generous through time.
The article also asserts that the ratio of retirees to workers is projected to more than double
over the next 30 years. According to projections from the World Bank, the percentage of the
population over age 60 is projected to increase by slightly less than 50 percent over this period
(the normal retirement age in Germany is age 65). However, since there are many people
under age 60 who can't currently find work, the ratio of retirees to active workers is likely to
increase by less than would be implied by the population shifts alone, since the percentage of
unemployed among the working age population should decline through time.
While the article repeatedly calls attention to Germany's high unemployment rate, it never notes
the most obvious explanation for the continuation of high unemployment-- the contractionary
monetary policy pursued first by the Bundesbank and now by the European Central Bank. The
European Central Bank just raised the real short-term interest in Europe to 2.0 percent. By
contrast, the U.S. Federal Reserve Board allowed the real short-term interest rate to remain
near zero for two years when the United States was recovering from its last recession between
1992 and 1994. The predicted result of the contractionary monetary policy pursued by
European Central Banks is precisely the high unemployment that Germany and other European
countries are experiencing. This point was recently argued in a statement signed by many of the
world's most prominent economists. (See "An Economists' Manifesto on Unemployment in the
European Union," BNL Quarterly Review, 9/98.)
The article also asserts that Germany "desperately needs more risk-taking," pointing out that
Americans are nearly four times as likely to start a business as Germans. While it is certainly
possible that Germany would benefit if more people would take the risk of starting a business,
it is also possible that the United States is hurt by too many people taking this risk. Most new
businesses fail. When they do, it often results in considerable resources being wasted.
For example, Amazon.com has absorbed billions of dollars that could have been used for other
productive investments. It has never made a profit, and its top executives still cannot predict
when they expect it to be profitable. If it turns out that Amazon.com can never make a profit
and the business eventually collapses, most of the resources that have gone into the firm to date
will have been completely wasted. If an economy produces a large number of such
unsuccessful firms, it would be an enormous drain on its productivity. In the absence of other
evidence, there is no reason to believe that the rate of business creation in the United States is
closer to the optimal rate than the rate in Germany.
Finally, it is worth noting that the woman who lives in Missouri is a farmer. At one point, she is
quoted as saying that, in contrast to her brother who is unemployed and waiting for his
government pension when he turns 60, "I never could bring myself to sit in some county office
and ask for some handout like food stamps." The U.S. government has paid out farm subsidies
that have averaged more than $15 billion annually over the last fifteen years. This averages
more than $10,000 per farmer each year. This government subsidy is far larger than the food
stamp allotment available to poor families in the United States, and is approximately the same
size as the pension that her brother is waiting to receive.
See more about Europe.
[Top]
INTERNATIONAL MONETARY FUND
"Camdessus to Quit as Head of IMF"
John Burgess
Washington Post, November 10, 1999, page E1
"Longtime IMF Director Resigns in Midterm"
David E. Sanger
New York Times, November 10, 1999, page C1
Both of these articles discuss the decision of Michel Camdessus, the director of the IMF, to
resign his position in the middle of his term. Both articles downplay the severity of the criticism
that was directed against the policies pursued by the IMF under Camdessus.
For example, Joseph Stiglitz, the chief economist at the World Bank, was harshly critical of the
IMF for insisting on economic policies that led to the collapse of the Russian economy and
forced tens of millions of Russians into poverty (see "Wither Reform: Ten Years of the
Transition," by Joseph E. Stiglitz, www.worldbank.org/research/abcde/stiglitz.html). To take
another example, the IMF forced Brazil to waste billions of dollars in the last year, supporting
its currency at an above market rate.
The Post article notes the views of Camdessus' critics on the left. It claims that they viewed
him as "a heartless bureaucrat" who demanded large sacrifices from the poor in countries that
sought IMF assistance. It is unlikely that many on the left would claim insight into the nature of
Mr. Camdessus' heart. Most on the left would probably criticize him for insisting on policies
that have consistently produced poor economic results in developing nations, and left most of
their populations significantly worse off.
[Top]
OUTSTANDING STORIES OF THE WEEK
"Medical Journal Cites Misleading Drug Research"
Denise Grady
New York Times, November 10, 1999, page A18
This article reports the findings of a new study in the Journal of the American Medical
Association, that scientific studies have a bias towards exaggerating the effectiveness of new
drugs. According to the article, the study cites a variety of reasons for this bias, including the
fact that the pharmaceutical industry is responsible for funding a growing portion of research on
drug safety and efficacy.
[Top]
Dean Baker is a senior research fellow at the Preamble Center and at the Century Foundation.
ERR is edited by Jim Naureckas.