Zakaria Gets the Story Half Right on Workers and Jobs

Readers don't expect much from the Washington Post when it comes to economic issues, so it is notable when an opinion column gets issues at least half right. In that vein, Fareed Zakaria's piece today noting the ways in which Germany seems to be outperforming the U.S. is worthy of attention.

First, let's note a couple of the things he gets wrong. Zakaria touts the growth in exports under President Obama, claiming that they have been growing at a 16 percent annual rate. He tells readers that this "means that U.S. exports should double earlier than 2014, the goal President Obama set in 2009."

Apparently, Zakaria is looking at the nominal value of exports. The real value of exports has increased by a total of just 12.9 percent since the fourth quarter of 2008. At this pace, we won't see exports double until around 2023. Perhaps Obama meant that he would reach his goal primarily through higher prices, but usually presidents don't want to boast about higher inflation on their watch.

The second point is that no serious person (okay, this is the Washington Post opinion page) would value exports in isolation. Net exports, exports minus imports, create jobs, not exports alone. If we export car parts to be assembled into a car in Mexico, it certainly does not create more jobs in the United States than when the car was assembled in the United States.

Because imports have exceeded exports by a huge amount over the last 15 years (i.e. we have large trade deficits) the United States has lost millions of jobs. The trade deficit has only declined by about half a percentage point of GDP during the Obama years. So in this sense, trade has contributed little to growth and jobs.

Zakaria also errs in his portrayal of the investment record on Clinton, Bush, and Obama. He tells readers:

"From 2001 to 2007, investment in equipment and software — the kinds of investments that boost productivity and create good jobs — declined 15 percent as a share of gross domestic product. ... In contrast, the current recovery, while anemic in terms of number of jobs created, is more broad-based and more durable. Business investment is rising, having boomed 18 percent since the end of 2009."

Actually, much of the investment in equipment in software at the end of the Clinton years was driven by the bubble in tech stocks. It was wasted establishing operations like Pets.com and other companies that quickly ended up in the dustbin of startup history. While this spending created jobs in the same way that paying people to dig holes and fill them up again will create jobs, it did not boost productivity.

Productivity growth over the Bush years averaged 2.2 percent annually. In the pre-recession period it averaged 2.7 percent. This compares to a 2.0 percent annual rate for the Clinton years taken as a whole and a 2.7 percent rate for the period following the beginning of the productivity speedup in 1995. In other words, there is little basis for saying that the falloff in investment in the Bush years harmed productivity growth.

On the other hand, the boom in investment during the Obama years touted by Zakaria is simply making up for the collapse of investment during the downturn. This is a normal pattern following a recession. Even with the Zakaria boom, equipment and software investment have still not risen back to its pre-recession share of GDP.

Now for the part that Zakaria gets right; Germany has done well because of its different attitude towards its workers. It is German government policy to try to persuade employers to keep workers on their payroll even during a downturn through policies like work sharing. This ensures that the workers continue to stay in the workforce and upgrade their skills. By contrast, many workers in the United States face long-term unemployment and some may never work again.

Germany has been so successful with this policy that its unemployment rate is now 1.6 percentage points lower than it was before the recession began. That is in spite of the fact that its GDP growth has been no better than GDP growth in the United States. The difference has been its labor force policy.

Zakaria notes the importance of the German experience and, citing a paper from the Brookings Institution, holds it up as a model for the United States. At CEPR we are always glad to see Brookings follow our lead so that the Post can write about a topic of importance.

Work Sharing in Germany
written by Paul, January 19, 2012 9:06 AM

Does NOTHING to increase aggregate demand, so from a Keynesian perspective, i.e., the correct perspective, it is a worthless policy.

Germany would be better off stimulating domestic consumption to increase demand for its own industries and the rest of Euroland. But that will never happen with the physicist in charge of the government.

-4

employment has no worth?
written by ngal, January 19, 2012 9:33 AM

Paul, you seem to think that your fellow Americans' being employed has no worth. I disagree whole-heartedly. As is stated above: "This ensures that the workers continue to stay in the workforce and upgrade their skills." Also: "By contrast, many workers in the United States face long-term unemployment and some may never work again."

Obviously Employment has Worth
written by Paul, January 19, 2012 11:46 AM

Work sharing is worthless from exactly that perspective. By artificially reducing the unemployment rate while adding NOTHING to aggregate demand, work sharing perpetuates economic stagnation and reduces economic growth.

As Prof. Krugman has repeatedly said, you must have a viable model to understand economics and prescribe economic policy. One off "solutions" like work sharing or tax cuts that don't conform to the Keynesian aggregate demand model actually do more harm than good.

What is needed in Germany and the U.S. is fiscal stimulus to increase aggregate demand so that the economy grows vigorously and employment increases along with it.

Work sharing may actually be counterproductive compared to no worksharing/unemployment benefits because in the latter case the unemployment benefits inject more demand into the economy from the government.

-1

What Makes Work Sharing Artificial?
written by Dean, January 19, 2012 12:50 PM

Paul,

Are you opposed to unemployment insurance? If not, then why would you oppose work sharing? How can it make sense to effectively have the government subsidize unemployment but not subsidize shorter work hours?

...
written by skeptonomist, January 19, 2012 12:56 PM

Germany gained a trade advantage over the peripheral countries largely because its real wages have been flat for the last 10 years. Now its conservative leaders want the other countries to cut wages to be competitive (or say they do). This is not so worker friendly.

Work sharing can increase spending. If only part of the population is employed, but afraid of losing their jobs, they will tend to save. If everyone is employed but at lower total income they many have no choice but to spend all their income. But Paul's point about unemployment compensation is a good one - everyone talks about the size of the 2009 discretionary stimulus, but actually the automatic Keynesian effect of unemployment benefits and medicaid was comparable or larger. Given the obvious political difficulties with discretionary Keynesian measures it would be a good idea to make responses as automatic as possible.

The Balance of Trade
written by Luke Lea, January 19, 2012 1:47 PM

A tariff on low-wage manufactured goods from China would not only boost employment here and help restore our manufacturing sector, it would raise American wage rates across the board (Stolper-Samuelson). A threefer.

The Balance of Trade
written by Luke Lea, January 19, 2012 1:51 PM

A tariff on low-wage manufactured goods from China would not only boost U.S. employment and restore our manufacturing sector, it would raise wage rates across the country (Stolper-Samuelson). A threefer.

[Please excuse it this posted twice]

Germany Fully Subsidizes Work Sharing?
written by Paul, January 19, 2012 1:57 PM

If the German government fully subsidizes work sharing so that otherwise unemployed workers are on the job at government expense in lieu of unemployment benefits, then clearly that adds to aggregate demand and promotes economic growth. That is highly appropriate.

But if the government simply mandates that instead of laying off workers, companies must reduce the hours and pay of workers in order to share the overall compensation, then there is no addition to aggregate demand.

I am certainly not against unemployment benefits. I think they should be vastly extended and expanded to fully compensate for lost wages in order to maintain aggregate demand in the economy.

It is all about demand.

...
written by liberal, January 19, 2012 2:52 PM

[/quaul wrote,

But if the government simply mandates that instead of laying off workers, companies must reduce the hours and pay of workers in order to share the overall compensation, then there is no addition to aggregate demand.

IMHO that's not clear. If many people's hours are reduced, in exchange for which fewer people are unemployed, then because of different marginal propensities to consume based on income effects, overall demand might be higher. Which I thought was one of the points.

Propensity to Consume
written by Paul, January 19, 2012 4:54 PM

While the propensity to consume would necessarily be higher for workers who have had their hours/pay reduced, total consumption demand would not necessarily increase due to the overall reduction in compensation.

In fact, mandatory work sharing is effectively just a wage reduction for all workers, i.e., same number of workers on the job but overall compensation is reduced. Clearly, that does not increase demand.

Contrast that with non-work sharing combined with unemployment benefits for those laid off: compensation of workers is the same, but laid off employees now get unemployment benefits which means a net gain to demand compared to the work-sharing scheme.

Bottom line: work sharing likely reduces demand while disguising unemployment. So although Germany has a lower unemployment rate than the U.S., its consumer demand is comparitively lower than ours and its economy is growing more slowly as a result. I think the facts bear this out.

-2

not buying it
written by Peter K., January 19, 2012 5:04 PM

Paul, I'm not buying your argument at all.

Maybe you need to get laid off.

"I think the facts bear this out." I doubt it.

...
written by liberal, January 19, 2012 7:52 PM

Peter K. wrote,

Maybe you need to get laid off.

Agreed. Paul is ignoring the human cost of unemployment. I.e., the impact is usually much more than just the nominal reduction in income.

Not Ignoring Anything
written by Paul, January 19, 2012 8:25 PM

Obviously, the human cost of unemployment is devastating, but how is working for half pay a solution? Unless the government is going to subsidize the jobs of all the workers who would otherwise be laid off, then all workers are bearing the entire brunt of the recession by having their pay cut.

I want to see expanded and extended unemployment benefits to those who are laid off which will increase demand in the economy and therefore reduce unemployment. Under work sharing, there is no increase of demand and therefore no new jobs created.

Also, if the unemployed are able to be re-trained or get more education during their layoff, then they will be better equipped to get a job when the economy does create employment opportunities.

If they are working at half pay, they have no ability to get ahead. Perhaps this is why Keynes never advocated work sharing as a solution to unemployment.

...
written by reason, January 20, 2012 2:40 AM

"Germany has been so successful with this policy that its unemployment rate is now 1.6 percentage points lower than it was before the recession began. That is in spite of the fact that its GDP growth has been no better than GDP growth in the United States. The difference has been its labor force policy. "

Well a big decline in the number of school leavers helps as well.

...
written by reason, January 20, 2012 2:45 AM

Paul,
1. Net pay is not cut in half - subsidies and lower tax rates mean that the fall is much less than that.
2. The world is not perfectly symmetrical. Some costs are unavoidable. Maintaining a larger percentage of the workforce in work, means many fewer insolvencies.
3. In Germany, larger firms are required (subject to tax surcharges) to spend a certain amount on training workers.

If Net Pay is Cut 10% for All Workers under Work-Sharing
written by Paul, January 20, 2012 8:09 AM

In lieu of a 10% reduction in force, then demand is cut 10% as well.

OTOH, if the work force is cut 10%, but UI makes up 5% of their lost wages, then demand is cut only 5%.

Since demand drives economic growth and job creation according to the Keynesian model, which is the only valid model, we can conclude that work sharing is not appropriate.

If UI made up all lost wages of the laid off workers, demand would not be reduced at all. That is the solution.

An Administrative Solution
written by The OutSourced One, January 20, 2012 10:17 AM

The practice of work sharing may save some jobs, and will certainly maintain some skills during a downturn, but I have an even better idea to lower the unemployment rate. Require that guest workers brought to the US on a work visa to work in the IT, business or engineering fields have at least a Masters Degree in their supposed field of expertise.

The Washington Post has an article today stating that the unemployment rate for new graduates in the "Computers and Mathematics" field is 8.2%. This is comparable to that in the "Law and Public Policy" (8.1%) and "Recreation" (8.3%) fields.

Meanwhile the unemployment rate for new graduates in the "Education" and "Health" categories (which are not [yet] subject to as high a percentage of imported guest workers) both have an unemployment rate for new graduates of 5.4%.

Many firms now set up a shell "multinational" corporation offshore an then establish a US operation owned by that offshore firm that they claim they need to ship overseas employees to under one of the "L" visas. These workers then work for the US division transferring knowledge or "installing" one of the firm's products that had been sold to a US corporation.

Another example of international trade that lifts all boats, right? Well not exactly...

What is actually happening is that the product being sold is on-site marketing, engineering and software development services. This allows firms operating in the US to hire fairly new grads from overseas (who pay about $12,000 total for a 4-year engineering degree - including room and board) and skip over the recent US graduates who are often in debt for tens of thousands of dollars. You only need to work for the overseas firm for one year before you can be sent to the US this way.

This is the state of job market in the US for corporate IT and engineering jobs. In all the firms I have worked for since 2002 the policy has been to NOT hire recent US graduates.

The push now is to continue to increase this practice for marketing (product development) jobs.

This is why the STEM worker shortage is a myth. We don't need more tech visas, we actually need less.

Zakaria Gets the Story Half Right on Workers and Jobs

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