There has been a quiet jobs revolution in the USA, which has become more acute since year 2000. Recessions are having a bigger and bigger impact on jobs and income inequality has risen to levels unseen since the 1920s. What is happening and what are the consequences? Knowing about this helps with financial strategies, career, and business strategies and decisions, as well as understanding social and economic implications and public policy challenges.
More time to recover
The US economy is like an aging person who can’t recover from excesses as easily as before. Recessions are having a lasting negative impact on employment – it is taking more and more months to come back to the level of employment just before recessions, as is clearly visible in this graph, which should give food for thought:
Isn’t it interesting: it took 28 months to recover the initial employment volume in the 1981 recession... 32 for the 1990 recession... 48 for the 2001 resession... and 76 for the most recent recession. It seems to be harder and harder for the US economy to generate jobs. This is seen in the employment rate of the 25-54 year old age group (and all other age groups)...
The participation rate also shows the same phenomenon:
Income inequality is also high for an industrialized country:
What is going on? There are several potential reasons to explain all this. Let’s very briefly look into them to get a better understanding of what is going on so that we make better strategic decisions in our personal, investment, and business decisons...
Technology and innovation
Technology has exploded since the 1990s, especially telecoms and Internet. This has opened up the doors to 2 related things: 1) many things become scalable; 2) coordination of large scale and decentralized production becomes easier.
Take Uber, for instance. This company is essentially doing the same thing as the local taxi service always did: person A wants to go somewhere, person B has a car, person C coordinates the 2 so that they meet... “person C” in this case is the taxi call center: Person A calls the call center and the call center “matches” the available car (based on actual availability and proximity found with geo-location enabled by telecoms) to the person wanting a ride... and VOILA! Barring technological complexity of the programming (which is impressive), the “call center” is global. They just do it globally and better than the taxi service. Facebook replaced local circles of friends... same thing, only on a global scale. Netflix replaced your local vdeo/dvd store... the “store” is now global. AirBnB has the same principle as Uber. The examples are plentyful.
Once the “matching technology” is in place, it is no harder to produce 100 units as it is to produce 100 million units... The type of production in modern economies is changing: there is proportionally more production done with “matching and coordination” technology, and less with “man hours.” This means that there are proportionally less wages paid per unit produced. Unit labor costs are falling to zero in some industries due to scale effects and technology.
This has 3 effects: less employment income in proportion to total income, proportionally more capital income, and proportionally more “high-skill” employment volume (engineers, managers, specialists, etc). In short: income inequality and no jobs.
The scalability not only decreases the value of ordinary labor. It increases the value of high-performance CEOs. With scale effects and global supply chains, good top-level executives can harness MORE production from a given set of global resources due to better telecoms and coordination. This means that corporate income naturally rises due to its rising marginal value (which has nothing to do with merit or hard word by the way).
So if CEO “A” makes a difference of 3% (increases profits by 3%) and CEO “B” increases profits by 4%, CEO B has a relative marginal value of 1% of profits. If annual profits are 10 billion, 1% of 10 billion is 100 million... CEO B is a bargain at 20 million! This is always true for high-level executives, but it is exacerbated by technology-enabled scale effects.
Loss of production and consumption home bias
Related to the last point is the fact that technology and telecoms make it easier to coordinate global supply chains and to outsource production to low-cost regions like Asia and Latin America. Technology also implies more capacity to automate routine tasks.
So what is happening? 1) Any task that has repetitive aspects is replaced my a machine/robot and 2) tasks that can be done by a low-wage worker are being sent to other regions of the world. Add to this the falling “made in USA” (or Canada or wahetever) consumer preference bias, and you get falling employment creation in rich countries... and plenty of job creation in poor countries with enough skills, organization, stability and production capacity. China, India, Mexico, etc. There is massive technology and production organization knowledge transfer from rich countries to a few lower-income countries. This creates growth and jobs in low-income countries, and contributes to the rise of income inequality (or employment stagnation) in rich countries.
Mass media and “stars”
It used to be the case that a pop singer or professional sports athlete would earn income due to presence in front of a live audience. Then it went to more people with television, which increased the market value of star performers... then the Internet made everything global. The same talent and the same performance are now available and demanded by... the world!
Imagine the marketing/brand value of being associated to such stars? Imagine the impact of winning the Super Bowl or any other big win? Scale effects. Top-level athletes and artists now have bigger impacts on their organizations due to mass media and technology-enabled scale effects. This increases their marginal market value, which again pumps up their incomes... and adds to income inequality.
The rise of income inequality brings with it an important consequence: lots of money looking for returns. If you give 1000$ to a 40k per year worker, he is likely to spend most of it, because he is cash strapped. If you give 1000$ to a millionnaire, it will all go straight to savings... and into financial markets.
The rise of high-income funds looking for returns combined to massive central bank liquidity have increased the income base of financial firms and experts. The base of income is not the flow of global income – it is the stock of massive accumulation of savings and central bank liquidity. So again, the same “scale effect” happens here, but for different reasons: the same return (e.g. 5%) gives much larger income to competent and strategic financial experts and financial institutions. The rise of low-interest central bank liquidity also allows for massive leverage, which again contributes to a ratched effect on financial service incomes. This also adds to high-incomes and exacerbates income inequality, without large-scale job creation.
On the backdrop of all this is a demographic undercurrent. The ratio of 25-55 to total population is falling everywhere (except in India and Africa). This has several important consequences: all else equal, proportionally less people work, which means less demand, less production and employment, less tax income for governments, and more pressure on pension funds, social safety nets and public health care services, which all contribute to fiscal pressure.
Employment stagnates and the lack of purchasing power of the masses combined to the “hollowing out” of the labor market (there is debate over this) all contribute to a strange mix: low unemployment, low employment, stagnating wages, rising inequality, lots of profits and lots of capital looking for returns, which in turn may feed financial bubbles and massive capital flows in and out of markets and countries, which impact forex, stock, and bond markets.
In the midsts of all this, governments are stuck between a rock and a hard place. Tax income stagnates due to employment stagnation and low inflation, and expenditure pressure rises due to social safety nets, health costs, infrastructure repairs, and the need to finance education in the knowledge economy.
To decrease fiscal pressure, taxing corporations is the worst idea ever... but taxing higher incomes may be an option. It depends on the response of taxable income and production to taxation and tax rates and the totelance to taxation of the electorate. This varies per country and capital market structure. On this particular subject, the complexity is much greater than it seems and the devil is in the details!
The next recession
To be sure, if a recession occurs any time soon, we will have very limited ammunitions to fight it unless we really think outside the box. Government debt has risen sharply since 2008 and monetary policies are already expansionary worldwide, with negative interest rates and occasional QE policies. If a recession does happen, perhaps it will be time to go all out with outside-the-box thinking (print money and send cheques to all 18+ and spend massively on infrastructure upgrades)... or not at all and see what happens.
I admit I err on the side of massive stimulation, as it seems that research on past events has shown that “when in doubt, overstimulate” ends up being LESS costly in the long run compared to being shy and restrained on macro policies. But obviously maybe this is wrong and we should let things “happen” by leaving all macro policies on the sidelines, as some Freshwaters suggest.
The structure of the labor market and of the economy is changing dramatically. Less “ordinary jobs”, more high-skill jobs, more scale effects, close-to-zero marginal costs of production in some industries, more automation, more production in emerging markets, all-markets-are-global, and massive capital flows.
The structure of income is also in a revolution: higher capital gains and less wages, more capital looking for returns, lots of central bank liquidity, easy leverage. This is the knowledge economy. It will not change. Just know it so that you may benefit from the obvious trends and dynamics that go with it.
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