Jobs – a continuing crisis

Unemployment has been rising for so long that it’s easy to become complacent about it. But as a number of recent OECD reports have underlined, this is a crisis on a scale not seen for decades.

According to the latest OECD Employment Outlook, released last week, the impact of the recession on jobs “appears likely to end up being comparable to the deepest earlier recession in the post-war period, namely, that following the first oil price shock in 1973.” A quick reminder about the scale of the problem: From very low levels before the crisis, unemployment has risen by half to around 8.7% in OECD countries, adding up to an extra 17 million people out of work. But even that number may not represent the true picture.

Over the course of long slowdown, people may give up looking for work or may find themselves working part-time when they’d prefer to be fulltime. Take all those people into account, and the true level of unemployment may well be about double the official number.

Will things get better? Eventually, but it will take time. OECD countries are recovering only slowly from the recession and, in any case, unemployment is a “lagging indicator” of economic downturns – it starts rising only after economies have begun slowing and improves only once they have begun strengthening. As a result, even by the end of next year, unemployment is unlikely to be much below 8%, meaning OECD countries will face a jobs gap of 15 million – the number of jobs they would need to create to get back to pre-crisis levels of employment.

But as a number of commentators have noted, some countries could face special problems in reducing unemployment, in particular the United States. The Economist, for instance, is  warning that “the American jobs machine has stalled badly”.

Quite what’s happening is a subject of intense discussion among economists at the moment. The debate is a little technical, but it centres around what’s known as Okun’s law, which – to complicate things even further – is not a law but a rule of thumb. In very simple terms, it’s a description of the relationship between changes in employment and changes in economic growth. According to some observers, the law hasn’t held up well during the current crisis in the U.S. – unemployment, they argue, rose too high and is now falling too slowly. Others, such as Freakonomics, disagree. 

In the face of the tragedy that unemployment represents, such a debate might seem a little removed from reality. But it has important consequences for the real world. For  instance, as Dave Altig of the U.S. Federal Reserve suggests, anomalies in U.S. jobs data could reflect a “mismatch between skills required in the jobs that are available and skills possessed by the pool of workers available to take those jobs”. In other words, the jobs are there but the right kind of workers aren’t there to fill them.

It will take some time before we know if that’s really the case. If it is, it could suggest that the crisis has created – or, perhaps more likely, accelerated – a structural shift in the U.S. economy and, possibly, other OECD economies. Old-style jobs in manufacturing, for example, may be gone not just for the duration of the recession but forever. Workers in those sectors, many with relatively low levels of education, could face a difficult transition to lower-paid jobs or, worse still, long-term unemployment.

Useful links

OECD work on employment and policies to combat unemployment  

OECD Insights: From Crisis to Recovery

A converging world

Incomes in more and more developing countries are starting to close the gap with those in OECD countries in the past decade, as we pointed out in our previous posts on economic convergence. In fact, in 65 countries GDP per capita grew at least twice as fast as in the high-income OECD countries, sharply up from just 12 countries in the 1990s. That means more convergence in the global economy. Despite this shift, many countries are still poor or classed as “struggling”. Our map shows which countries have converged and which continue to lag behind.

Psychic octopus 7 Rational expectations 0

Well-done Paul the Psychic Octopus! The soothsaying cephalopod maintained his 100% record by tipping Spain to win the World Cup last night. England fans can take comfort from the fact that Paul was born in the Sea Life Centre in Weymouth before his record-breaking transfer to Sea Life Oberhausen in Germany.

There’s little comfort for other experts though. At the end of the day, you’re only as good as your last prediction, and it turned out to be a disappointing tournament for the highly-paid stars of UBS and the other big names of financial forecasting Brian Keeley reported on here.

None of them spotted the winner. None of them spotted the Great Recession either. In that, they were like most economists, apart from the ones who always forecast shocks and crises, knowing they’ll be right sooner or later (there were 195 stock-market crashes and 84 depressions between 1860 and 2006).

They did get it right about football ruining money though. When France were eliminated, shares in French broadcaster TF1 who’d bought the retransmission rights plunged on the Paris stock exchange.

Can a profession that seems more comfortable describing what has happened than in predicting what will happen be called a science? In fact, using the ability to predict the behaviour of large systems as the criterion would exclude disciplines such as weather forecasting, which is like economics in many ways.

Einstein summed up the difficulty of meteorology and other fluid dynamics studies when he remarked that before he died, he hoped somebody would explain quantum mechanics to him, and that after he died, he hoped God would explain turbulence. In one sense though, it doesn’t matter if you can’t forecast the evolution of turbulent flow.

Aircraft designers, for instance, don’t have to predict when a plane will meet extreme turbulence – but they do have to make sure it won’t disintegrate. A similar attitude could be applied to economics – try to understand the basic mechanisms and at least give useful strategies for avoiding disaster.

For economists, this means developing models to describe how systems work. To do this, in common with other social sciences, economics has borrowed many of its concepts and tools from the physical sciences (the notions of flow, masses and reactions, for example) although the “hard” sciences have usually moved on to a new paradigm long before the sociologists and economists.

Has economics come up with anything worthy of the insights of other fields? When challenged by mathematician Stanislaw Ulam to name one social science proposition that was both true and non-trivial, Paul Samuelson nominated comparative advantage, arguing “That this idea is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them”.

At least some of the scepticism about economics arises when a doctrine, tool or method is used to explain much more than its intellectual underpinnings can bear, as when it is assumed that economic agents act rationally.

On the other hand, applying strict economic analysis to a subject not usually treated in this way can be highly entertaining. Adam Smith’s “invisible hand” inspires Peter Leeson’s wonderful title The Invisible Hook: The Hidden Economics of Pirates. Leeson explains, among other things, why working conditions on 18th century pirate ships were immensely superior to those on merchant and naval vessels. And why we should see that Long John Silver’s peg leg was a negative externality with obvious implications for his labour market utility. Arr.

BBC debates the skills gap

Click on the image to go to the BBC World Debate home page

By the end of next year, around 15 million new jobs will be needed to get OECD countries back to pre-crisis levels of unemployment. That’s the “jobs gap” .

Paradoxically, there’s also a “skills gap” – a shortage of qualified people to fill job vacancies. According to David Arkless of  Manpower Inc., companies in Europe have around three million unfilled vacancies. Why? Despite high unemployment, they still can’t find the right people.

Arkless was speaking on the BBC’s World Debate, which was recorded on Wednesday at the OECD in Paris to coincide with the release of the Organisation’s annual report on jobs and unemployment.

The debate offered a fascinating insight into the skills shortage at a moment when the issue is being eclipsed by unemployment. But as OECD Secretary-General Angel Gurría pointed out, “thinking about skills now is an act of foresight”. If we wait to act until economies recover, it will be too late.

Education and training as an investment in the future will be key. But, as Sharan Burrow, head of the international labour body ITUC, warned, this could be at risk as governments seek to cut back on spending. “If we don’t invest in education, we’ll be having this same debate in 10 years,” she said.

Just days before the release of the OECD’s annual survey of international migration, the panel also discussed whether countries should ease migration for skilled workers. Manpower’s Arkless pointed out that, in many cases, “the people who can fill jobs are in the wrong place with the wrong skills”. So, does it make sense to let them move more freely to the right place? In theory, yes. But in practice, as presenter Nik Gowing pointed out, that can face real political obstacles: “How do you persuade politicians to argue for skilled immigration in a time of unemployment?” he asked his panellists.

To hear what they had to say, tune in this weekend to The World Debate on BBC World at these times.

Useful links

OECD work on employment, on education  and migration

OECD Insights: From Crisis to Recovery

OECD Insights: International Migration

Seed money: How much do farmers get from government?

In 2008, farmer Jeremy T. James of Blackburn got 32 pence (around $0.45) from the EU’s Common Agriculture Policy (CAP). That’s not much, but it’s still over 30 times more than his Blackburn neighbours A&KM Barnes, who only got a penny. Queen Elizabeth II on the other hand got nearly £500 000 (around $700 000), and she wasn’t the only royal to benefit. Prince Albert II of Monaco got over half a million euros, as did the Duke of Westminster.

The industrial aristocracy didn’t do too badly either, with food giants Nestlé and Tate&Lyle getting around a million pounds each. The biggest UK  payout, over £6.7 million, went to Czarnikow Group Limited of London, a “professional services company in the sugar market” according to their website. In France, the biggest sum from the CAP was the 62.8 million euros going to Groupe Doux, a multinational present in 130 countries, that presents itself as “Europe’s number one producer of poultry and poultry-based processed products”.

Other OECD countries could show a similar pattern for farm subsidies – the rich getting more than their less well-off colleagues.

More what, though? There are problems with vocabulary in such a sensitive area. For some people, we’re talking about handouts or the less pejorative “aid” or “assistance”. Others prefer the dynamism of “incentives”, or the neutral-sounding “transfers”. The OECD term “support” describes the various ways in which governments intervene in the business of agriculture, including subsidies, grants, tax breaks and other policies that boost revenues.

Whatever the terms used, agricultural support costs a lot of money – $252 billion in 2009 for OECD countries according to the newly-published Agricultural Policies in OECD Countries.

Support as % of gross farm receipts, 2007-09 average

That sum represents 22% of total farm receipts in OECD countries, the same as in 2007, but up a percentage point from 2008, when support was less after agricultural commodity prices hit record highs. As the graph shows, the level of support varies enormously, from 1% in New Zealand to 61% in Norway.  

Support to agriculture is often criticised for going to the wrong people (a catering company supplying cruise ships got 148,000 euros in subsidies in 2008 for the sugar and milk powder it “exported” in passengers’ stomachs) or for encouraging harmful practices.

The report argues that with public budgets under pressure in the wake of the economic crisis, governments need to reassess and adapt their farm support policies to meet specific economic, social and environmental objectives, rather than simply encouraging famers to produce as much as they can.

This kind of conditional support in pursuit of broader objectives, such as preservation of the environment, conservation of natural resources or animal welfare, represented only 4% of the OECD aggregate support in 1986-88, but now represents a third. The EU, US and Switzerland provided the highest shares (around 50%) of their total support with some constraints.

Useful links

OECD work on agriculture

OECD agricultural support database includes information by country provides data on who receives EU subsidies

Is Africa catching up?

The 2000s were for much of the developing world a first decade of strong growth since the 1970s. They were marked by a global shift in wealth and the emergence of a new geography of the world economy. But the shift is not just about major emerging markets such as China, but shows up in African growth figures as well. This should not be surprising: a 2008 article in the OECD Observer reported that Africa had survived the early crisis quite well, and since 2000 the magazine has been highlighting the growing interest in Africa among private investors, not to mention its brighter image as a place for young people from OECD countries to go and find work. (more…)