Tue, Jul 21, 2009 - Page 9 News List

Numbers don’t show the real economic picture

Monetary and fiscal boosts have done little to slow the rate of job losses in most countries, even as many employers ask workers to accept cuts in hours and wages

By Nouriel Roubini

Recent data suggest that job market conditions are not improving in the US and other advanced economies. In the US, the unemployment rate, currently at 9.5 percent, is poised to rise above 10 percent by the fall. It should peak at 11 percent some time next year and remain well above 10 percent for a long time. The unemployment rate will peak above 10 percent in most other advanced economies, too.

These raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the US labor force, for example, the unemployment rate is already 16.5 percent. Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses. As a result, total labor income — the product of jobs times hours worked times average hourly wages — has fallen dramatically.

Moreover, many employers, seeking to share the pain of recession and slow down layoffs, are now asking workers to accept cuts in both hours and hourly wages. British Airways, for example, has asked workers to work for an entire month without pay. Thus, the total effect of the recession on labor income of jobs, hours and wage reductions is much larger.

A sharp contraction in jobs and labor income has many negative consequences on both the economy and financial markets.

First, falling labor income implies falling consumption for households, which have already been hard hit by a massive loss of wealth (as the value of equities and homes has fallen) and a sharp rise in their debt ratios. With consumption accounting for 70 percent of GDP in the US, and a similarly high percent in other advanced economies, this implies that the recession will last longer, and that economic recovery next year will be anemic (less than 1 percent growth in the US and even lower growth rates in Europe and Japan).

Second, job losses will lead to a more protracted and severe housing recession, as joblessness and falling income are key factors in determining delinquencies on mortgages and foreclosure. By the end of this year about 8.4 million US individuals with mortgages will be unemployed and unable to service their mortgages.

Third, if you plug an unemployment rate of 10 percent to 11 percent into any model of loan defaults, you get ugly figures not just for residential mortgages (both prime and subprime), but also for commercial real estate, credit cards, student loans, auto loans, etc. Thus, banks losses on their toxic assets and their capital needs will be much larger than recently estimated, which will worsen the credit crunch.

Fourth, rising job losses lead to greater demands for protectionist measures, as governments are pressured to save domestic jobs. This threatens to aggravate the damaging contraction of global trade.

Fifth, the higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilizers reduce revenue and increase spending (for example, on unemployment benefits). Thus, an already unsustainable US fiscal path, with budget deficits above 10 percent of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse.

This leads to a policy dilemma: Rising unemployment rates are forcing politicians in the US and other countries to consider additional fiscal stimulus programs to boost sagging demand and falling employment. But, despite persistent deflationary pressure through next year, rising budget deficits, high financial-sector bailout costs, continued monetization of deficits and eventually unsustainable levels of public debt will ultimately lead to higher expected inflation — and thus to higher interest rates, which would stifle the recovery of private demand.

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