Jobs: Tale from Two Continents
TCW Asset Management
By Komal Sri-Kumar
May 7, 2012
The latest employment figures in Europe and the United States did little to boost the standings of incumbent administrations or investor sentiment. Unemployment in the Eurozone rose to 10.9% in March, the highest level since the euro was created in 1999. The regional average masked a more dire picture in individual countries. In Spain, for example, almost one out of four members of the labor force is without work, and more than 50% of the Spanish youth remains jobless. On the other side of the Atlantic, U.S. job creation was a disappointing 115,000 in April, well below the consensus forecast of 160,000. The unemployment rate dropped from 8.2% in March to 8.1% only because the labor force shrank as disappointed job-seekers left the work force. In the past, the work force and the share of the population in the work force have both typically risen during recoveries to take advantage of growing job opportunities.
Europe: Soul-searching about Growth vs. Austerity
European unemployment has risen despite several individual country bailouts and crisis summit meetings over the past three years which were intended to resuscitate economic growth. The new realities have led European leaders to rethink their strategy of pushing austerity on their long- suffering residents. European Central Bank President Mario Draghi admitted last week that the economic outlook had become “more uncertain.” And on Saturday, Olli Rehn, European Union Commissioner for Economic and Monetary Affairs, indicated that the EU would show greater flexibility in enforcing fiscal deficit rules. The Stability and Growth Pact “is not stupid,” Mr. Rehn said, and growth in addition to deficit reduction is an objective.
The switch in emphasis toward growth by Mr. Draghi and Mr. Rehn was not by accident. In addition to the labor markets, European leaders were anticipating the victory of François Hollande in yesterday’s French presidential elections, and the growing attractiveness of fringe parties in the elections in Greece. Concerns about the economy were on top of the French electors’ minds, and Nicolas Sarkozy becomes the first French President since Valéry Giscard d’Estaing, another center-right politician, to lose office after his first term. As with Mr. Sarkozy yesterday, Mr. Giscard d’Estaing lost to a Socialist, François Mitterand, in 1981. Then, as now, France was in recession with rising unemployment which the incumbent was seen as having done little to correct.
In his victory speech last night, President-elect Hollande rejected further austerity and called for a “growth pact” for Europe – a challenging objective since German taxpayers may not agree to transfer additional funds that would be necessary to finance French economic growth.
And in parliamentary elections yesterday, Greek voters punished the centrist parties that had worked with EU authorities on an austerity program in exchange for a €174 billion bailout earlier this year. Fringe parties from both the left and right, opposed to further belt-tightening, won an impressive share of the vote. Syriza, a Coalition of the Radical Left, became the second largest party in Parliament, surpassing the more traditional, center-left party, Pasok. Yesterday’s developments increase the likelihood that the Eurozone will be forced to split up before year-end, with the ejection or departure of Greece being an essential element in the development.
Germany: Explaining the Low Unemployment Rate As new governments take office during coming weeks in France and Greece, it is important to note that high unemployment is not a universal phenomenon in Europe. Unemployment in Germany, the region’s largest economy, dropped from 7.2% in March to 7.0% in April, with the total unemployment falling below the psychologically important 3 million mark for the first time since 1992. Clearly, German exporters took advantage of a weakening euro, continued rapid growth in China, and the quick recovery of the U.S. economy from the global financial crisis, to boost the sale of German products and provide the necessary stimulus to the domestic economy.
Why did the French and Greek economies not benefit in a similar fashion? After all, they too had a depreciating euro to provide a tailwind during the past decade. And it does not help either to criticize them for a fiscal deficit exceeding the EU limit of 3%. They were not alone in this. On occasion, the German shortfall has also been over the 3% mark. Rather than monetary or fiscal easing, the fall in the German unemployment rate is traceable to more flexible labor markets resulting from structural reforms implemented by the Schroeder and Merkel governments over the past ten years. The reforms made German workers more productive than their European counterparts, enabling a rise in their salaries even when wages were under pressure elsewhere in the region. A second factor is the importance in German education of vocational schools where students spend a part of the week working for potential employers, earning a salary, and learning a trade. Such programs are typically funded jointly by employers and the government, a win-win situation for them and for the workers whose education is now more in tune with the demand for specific skills. A German youth unemployment rate of less than 10% in recent months compares with the 21.6% EU average in March, and over 50% in Spain and Greece.
Both factors have also made the German unemployment rate trend well below the corresponding U.S. figure in recent years. I now turn to the recent U.S. labor figures.
Fall in U.S. Participation Rate And Labor Force are Key Developments
There was little joy in Washington or on Wall Street at the release of statistics Friday showing a decline in the U.S. unemployment rate to 8.1% – the “good” statistic resulted from a negative development, viz., a large shrinkage in the labor force. In April alone, 342,000 left the work force, discouraged that they would ever find a job. The economy added only 115,000 jobs, well below even some pessimistic forecasts for the month.
Other statistics added to the gloom on the jobs front. Whatever job creation occurred in April was mostly for part- timers, with full-time employment actually declining by 812,000. And the decline in the unemployment rate was also helped by another drop in the participation rate, to 63.6%, the lowest since December 1981. Although some of the decline in the participation rate in recent years may be traced to the graying of the U.S. population and a rising share of retirees, the rise in the participation rate that typically occurs in economic recoveries has been largely absent this time around. The Bureau of Labor Statistics also indicated that the average duration of unemployment was an unacceptably high 39.1 weeks. When without jobs for such a long time, the unemployed workers loss their skills and joblessness increasingly becomes structural, impervious to a further easing of monetary policy.
As in the case of Europe, the U.S. unemployment situation is likely to get worse in coming months because few moves toward meaningful structural changes in the labor market (e.g., training for the unemployed to improve skills), or fiscal shifts to aid hiring (e.g., targeted employment tax-credits) are likely to be implemented before the November presidential elections. We may have to wait for a reelected President Obama, or President Romney, to move in this direction in 2013.
(c) TCW Asset Management