Thursday, February 05, 2004

Behind the numbers

The following brief analysis from the ForexNews ("foreign exchange") website puts into perspective the jobs/income/recovery picture as it relates to the common worker. Not a pretty picture.

"Are Payrolls or GDP the Anomaly?" by Jes Black
A general rule of thumb in economics, known as Okun's Law, states that a 1% increase in GDP leads to a 0.4% increase in employment. But the primary flaw is that changes in productivity undermine this relationship because output depends on both the amount of inputs used and the level of technology.

Moreover, when economists like Okun peered into the economy in the 1980s and 1990s a not so subtle shift was already taking place towards a global economy driven by finance and technology. Inflation has since grown quiescent while growth can be manufactured through lower borrowing costs. Yet the real economy seems to suffer since the shift from selling tangible goods to a service economy has resulted in exploding deficits and jobs outsourcing recently estimated at 500,000. Real growth has in fact been substituted for financial growth and the effects they have on employment are now noticeable.

Slow Recovery in Payrolls

Tomorrow's labor report is expected to show a sharp 165k-175k gain in payrolls, which is hardly surprising following the anemic December report and the strong advance in Q3 and Q4 GDP. This would complement the increase in the household survey while rising payrolls and record-setting gains in GDP will likely be heralded as the missing link in the recovery story. But since many of the jobs created so far have been in lower wage service sector, ambiguous self-employment and government jobs the actual benefit to the economy may be less significant.

The unemployment rate is expected to remain steady at 5.7% in January. But the real unemployment rate would be higher if it were adjusted for decreases in both hours per worker and labor force participation. Since each of these factors contributes to falling output, because of rising productivity last year's second half surge in US growth is the anomaly, not the jobs picture.

In fact, much of the second half recovery was financed through record homeowner refinancings, tax cuts and deficit spending. But for a US-centric global economy saturated with overcapacity, a slow, steady rise in employment and balanced GDP growth is the most logical path as the world struggles to find a more sustainable means of consuming domestic production.

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