The Slow and Painful Path to Jobs Recovery
Commentary by Daniel Lacalle
July 6, 2020
The United States recovered 4.8 million jobs in June, adding to May’s 2.5 million jobs rebound. The U.S. employment recovery is faster and stronger than the eurozone one, which has over 40 million workers on subsidized furlough schemes added to a 7.4 percent unemployment that is expected to rise to 11 percent by September.
However, the positive headlines show important weaknesses that will have to be addressed in the following months. Labor Department data (pdf) showed that in the week ending 27 June, initial claims for unemployment insurance fell only slightly, to 1.43 million, compared to the previous week. Additionally, continuing claims remained stubbornly high at 19.29 million, and the share of those reporting permanent job losses increased by 588,000.
Considering these factors, the trend shows that the U.S. unemployment rate would fall to 8.5 percent with a labor force participation rate of 63 percent at the end of 2020, according to my estimates. Goldman Sachs has improved its unemployment rate outlook to 9 percent for 2020 from 9.5 percent a month ago. However, at this rate the United States would only recover the 2019 record-low unemployment at the end of 2021. Still, much faster than the eurozone.
Subsidized furlough schemes, as the eurozone economies are implementing, are costly and generate extraordinarily little impact on consumption. Government spending is rising at the fastest pace in decades to include the increase in health-care costs, the unemployment insurance expenses, and the subsidized furlough programs. However, workers under these schemes know that their positions are at risk and are deciding, wisely, to save as much as they can. Almost 10 percent of the labor force in the major European economies is under one of these schemes, designed to help businesses navigate the crisis without letting go of employees.
The International Labor Organization estimates (pdf) that 400 million full-time jobs have been lost in this crisis. Recovering and strengthening the labor market is crucial for developed economies to achieve the estimates of gross domestic product growth expected in 2021 and 2022. Without a strong job market, consumption and growth are likely to stall in 2021, and it will be exceedingly difficult to see investment growth.
How can economies recover the lost employment and continue to create jobs? Unfortunately, many governments would have to do the opposite of what most developed economies are doing. They should stop bailing out zombie firms, as those already had overcapacity in the past five years and are not going to hire more workers soon. Governments should also reduce unnecessary spending to prevent deficits from rising to unmanageable levels and then increase taxes that would reduce investment and job creation. Bloated public budgets are not going to bring employment back. It did not work in the eurozone in the 2009–2012 period and it will not work elsewhere.
The U.S. government has taken a more effective approach by combining some demand-side measures with more efficient supply-side policies that have supported the job recovery, even if it is still weak. There’s a long and painful road ahead, and the rising number of COVID-19 cases may harm the economic recovery as lockdown risks return.
Some commentators in Europe have argued that the job recovery in the United States is stronger due to a larger fiscal and monetary stimulus. It could not be further from the truth. The European Central Bank balance sheet is now 52.8 percent of GDP, 6.2 trillion euros. It started the year at 39.4 percent, or 4.6 trillion euros. The Federal Reserve balance sheet is 32.6 percent of GDP.
Fiscal stimulus is also much smaller than in eurozone economies. The U.S. fiscal impulse is equivalent to 5.2 percent of GDP, compared to 38 percent in Germany, 30 percent in Italy, 23 percent in France, and 10 percent in Spain.
The reason why the U.S. economy is improving faster than the eurozone is because of a more dynamic and flexible labor market with more resilient businesses. That doesn’t take away the important challenges of the United States. It lost 7.9 million jobs in hospitality and leisure, according to the Bureau of Labor Statistics, and the service sector, which saw the biggest employment reductions, is coming back slowly.
If the United States wants to surprise the world with a much quicker return to record employment, it needs to address the permanent job loss figure with tax incentives to hire faster and the continuing jobless claims with a robust and effective set of policies that strengthen business creation and allow existing ones to grow, particularly in digitalization and added-value online services for global customers.
At the current pace, the eurozone will not return to the 2019 employment levels until 2023, and in the case of the United States, at the end of 2021 or first quarter of 2022. It is not enough. The global economy may fall back into a recession if the conditions for strengthening the labor market and business creation are not introduced rapidly.
Governments will have to liberalize the labor market, cut red tape, eliminate harmful overregulation, and provide a stable and helpful framework for businesses to start and grow, or they will find themselves in a deeper crisis than feared.
Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”