Very good video from Ray Dalio in which he believes that the three main forces that drive most economic activity are:
1) trend line productivity growth,
2) the long-term debt cycle and
3) the short-term debt cycle.
What follows is an explanation of all three of these forces and how, by overlaying the archetypical short-term debt cycle on top of the archetypical long-term debt cycle and overlaying them both on top of the productivity trend line, one can derive a good template for tracking most economic/market movements. While these three forces apply to all countries’ economies, in this study we will look at the U.S. economy over the last 100 years or so as an example to convey the Template.
Another video by Paul Solman in which he discusses how the NYSE record high doesn’t reflect the fundamentals of the US economy. With interest rates at virtually 0% the US Federal Reserve is trying to lower unemployment by stimulating the economy. But, by doing so there has been a tendency for it to overstimulating the stock market in the process. And also lending to stock investors, whose margin debt to buy shares on credit has been hitting record highs. Last week the Dow ended above 16000, another record for the headline index of 30 major companies.
The last record was set in 2007, a few months before the Dow’s previous high watermark.But for all the talk of the Fed’s role there’s an alternative way to understand a record Dow and higher profits: a shift of power from workers to owners. The stock market would actually be much higher if the unemployment was much lower. I think the economy is still really fundamentally weak, and that slack that’s in the economy right now, with all the unemployed people, all the unemployed businesses, would actually bring up the stock market even further.
In early August this year fast-food workers across the US staged a walkout in protest about their levels of pay – they were demanding an increase from $7.25 (Federal Minimum Wage) to $15 an hour. Under the current minimum wage a worker’s income is $15,000 per annum which is below poverty level pay. Although the minimum wage has increased it is still below its peak in 1968 when it was worth approximately $10.70 an hour in today’s dollars. As well as the low pay, workers in the fast food industry get few benefits and also prospects for full-time work are limited. Add to that a weak job market and ultimately bargaining position, the prospects for these workers look bleak. Although this low pay has been prevalent for many years why is it that is has become such a political issue?
Why are older workers in fast-food and retail jobs?
Historically these part-time jobs have been filled by students or parents looking for work to supplement the family income. However with the downturn in the US economy and increasing unemployment, many in the labour force have had no choice but to try and pick-up any available work. This includes major income earners for families and today low-wage workers provide up to 46% of their family’s income. This is in contrast to forty years ago where there was no expectation that fast-food or retail jobs would provide the living wage as they were not the jobs that the main breadwinner in the household was employed in. In the 1980s profitable companies like Ford, General Motors and other manufacturing industries were big employers in the US economy. Workers were well paid and also had the benefit of pension plans and medical cover. However globalisation and the drive for lower costs have seen a number of US firms looking to locate overseas in countries such as Mexico and China.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.
I was directed to this article on the New York Times website by A2 student Annie Huang. In October this year, a truck dumped 8 million coins (see photo) in front of the Swiss Parliament along with 125,000 signatures in support of a minimum monthly wage. The coins represented the citizens of Switzerland, and the petition was enough to trigger a referendum, voting on whether Swiss citizens should receive a monthly minimum income of $2,800, no questions asked. Each Swiss person would recieve this money from the government no matter what age they are, if employed or unemployed.
Although this seems rather radical there are some interesting points made as to why it has been proposed. The proposal is the work of German Enno Schmidt who is a leader of the basic-income movement. Here are some of the reasons:
* Basic income would provide dignity and security to those underemployed and unemployed
* Empower the labour force to work they want to, rather than just getting by
* Basic income through the tax code would be fairer than band aid programmes such as benefits, housing allowances, child benefits etc.
* The one basic income would replace and reduce welfare bureaucracy that is apparent with numerous welfare schemes
* Reduce poverty and increases social mobility
Research has shown that where the basic income has been implemented not only did poverty disappear but secondary school completion rates increases, hospitalisation went down and the community values started to change.
However there are some strong arguments against:
* The cost is too great
* It creates a disincentive to work
* The basic income might be enough to live on but at a very low standard
With the record earnings in the corporate sector but still no increase in the living standards of many, guaranteed incomes have resurfaced. Millions of workers have had no real increase in earnings since the late 1980’s. Below is an extract from the article:
The advocacy group Low Pay Is Not OK posted a phone call, recorded by a 10-year McDonald’s veteran, Nancy Salgado, when she contacted the company’s “McResource” help line. The operator told Salgado that she could qualify for food stamps and home heating assistance, while also suggesting some area food banks — impressively, she knew to recommend these services without even asking about Salgado’s wage ($8.25 an hour), though she was aware Salgado worked full time. The company earned $5.5 billion in net profits last year, and appears to take for granted that many of its employees will be on the dole. New York Times – 12th November 2013
‘The True Cost’ is a documentary film exploring the impact of the global clothing industry on people and the planet. While the price of clothing has been decreasing for decades, human rights and environmental costs have grown dramatically. It is the goal of this film to make those costs vividly clear as we explore how we got here, the damage being done, and the hope filled prospect of choosing a different future.
We have taken a first step in creating the teaser and building a growing team of experts around the world. We are now raising this money to begin full production on the final film. Funds will go to principal photography and the post-production process.
The film will feature interviews with top industry leaders from the international clothing industry, illuminating this complex dilemma. In addition to these professionals, the audience will get to see the human side of the issue as we take cameras around the world to capture the lives of the people affected by these issues every day. More than just underscoring the problem, this is an effort to highlight real solutions that we can all take part in. The road we are on is not sustainable, but there is an opportunity here; a defining moment in history for us to set a new precedent for the future we will create.
Here is a graphic from the National Australia Bank which shows a good correlation between the demand for full-time and part-time workers and business confidence. In Australia for five of the last six months, full time employment has fallen. This is a sign that employers lack of confidence in the outlook makes them reticent to hire on a full time basis. Instead they are preferring to hire people on a part time or casual basis which gives them a lot more flexibility in uncertain times.
Thanks to colleague David Parr for this graphic from the Washington Post. Unemployment measures those that are actively seeking work. There are 4 ways you can be taken off the unemployment register:
1. Get a job
2. Reached retirement age,
3. Become unmotivated or discouraged
4. Work illegally (cash jobs – hidden economy)
The yellow line on the left shows the official unemployment rate since 2008. It’s fallen from over 10 percent to under 8 percent. But the red line on the right shows the actual employment rate which has not really changed at all.
Notice from the figures that the reduction in unemployment hasn’t seen an increase in employment. That means a lot of the people who’ve left the labour force haven’t acquired a new job. They’ve just left the labour force altogether.
Some of that’s natural. The population is aging, and the labour force was expected to shrink. But it wasn’t expected to shrink this much. The economy is a lot worse than a glance at the unemployment rate suggests.
In the CIE AS courses labour participation is examined in Unit 5. Here is a graph from the book entitled: The New Zealand Economy – Lattimore & Eaqub 2011. How is it worked out? Below is a flow chart explaining it.
The participation rate of people of working age in the labour force is also quite variable over time – see graph below.
Recession – participation rates tend to fall as people who have lost their job will sometimes move into full-time training to develop new skills or leave the labour force as they become despondent about finding a paid job. In New Zealand rates fell after the recessions of 1985, 1997, and 2008.
Boom – participation rates tend to rise as people see that there is greater opportunity for acquiring gainful employment. In New Zealand rates increased with upswings in the business cycle – 1993 and 2001.
Government policy can also influence labour force participation. If wages increase for younger people or older people, or if tertiary education fees rise, the participation rate will typically rise. If welfare benefits for single parents rise, the participation rate can be expected to fall.
The OECDs annual employment report makes for sombre reading especially for those European countries. The Economist reports that policymakers in Europe, where projections remain especially poor, need to focus on creating demand. There is good discussion on structural and cyclical unemployment and especially the problem of youth unemployment. Basically the OECD have stated that there needs to be more focus on demand but with austerity measures in place where is it going to come from? Good introduction to unemployment.
Fed Chair Ben Bernanke recently testified before the House of Representatives Committee on Financial Services and acknowledged the troubling employment conditions. Unemployment rate at 7.6% remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high. Bernanke indicated that he would continue quantitative easing because of the unemployment figures but this method doesn’t seem to be working when you consider the lack of job growth – see graph. The U.S. Federal Reserve is currently purchasing US$85 billion of agency mortgage-backed securities and Treasury securities each month as part of its quantitative easing programme. This programme places downward pressure on long-term interest rates, and is intended to promote economic activity. However the S&P* earnings per share (eps) has grown above 70% since the bottom of the last cycle but job growth has been under 5%.
*The S&P 500® is widely regarded as the best single gauge of large cap U.S. equities. There is over USD 5.58 trillion benchmarked to the index, with index assets comprising approximately USD 1.3 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalisation.
The level of unemployment in Spain has reached worringly high levels with over 25% of the labour force out of work. More of a concern is the 57% of the labour force under 25 without a job. However with these levels, especially amongst the youth, one would think that social unrest, crime rates etc would be widespread in the country. There is a belief that the hidden economy (working in cash jobs and also claiming benefit) hides the real figure and, like in Ireland, the labour force is contracting as those without job prospects stay on in education or emigrate.
However in Spain the education system doesn’t do any favours for those students that fail exams when they are 16 – if you fail you are out the school system. This is all very well if there are jobs/trades available for those without qualifications. In 1984 the late Margaret Thatcher said “Young people ought not to be idle. It is very bad for them”. Those that start their careers on the dole are more likely to have lower wages and more spells of joblessness later in life, because they lose out on the chance to acquire skills and self confidence later in their formative years. It is estimated that there are over 310m young people (16-25) that are looking for work. One of the main issues to be addressed is the mismatch between education and the labour market or commonly referred to as structural unemployment.
To reduce the level of unemployment in Spain the economy’s net job growth needs GDP of 1% or more but the Spanish government doesn’t forsee that until 2016.
This year saw an all German final in the European Champions League with Bayern Munich defeating Borussia Dortmund 2-1 at Wembly Stadium in London. In order to get to the final both teams beat Spanish counterparts – Real Madrid and Barcelona. What is fitting is that in economic terms German is the powerhouse of the European economy whilst in contrast Spain has suffered greatly from the euro crisis and austerity measures that have been imposed on it. If you look at post-war Germany you can see some correlation between the success of the national side and state of the economy.
The Economist looked at this and made the point that German has opened up its borders to not just traditional labour but also football players. Of the two squads on show at the Champions League Final at Wembley last month, 17 were from outside Germany.
Most visibly, Germany opened up. Just as immigrants flock to German jobs (more than 1m net arrivals in 2012), so players join German clubs. Between them Bayern and Dortmund have four Brazilians, three Poles, a Peruvian-Italian, a Serb, a Croat, a Swiss of Kosovar extraction, an Austrian of Filipino/Nigerian stock, a Ukrainian and two Australians—and so on. Of the German players, several have dual citizenship or a “migration background”. If the choice is between a German Europe or a European Germany, as the novelist Thomas Mann once put it, football points to the second.
From the Wall Street Journal Graphics page. Unemployment in the EU hits record highs – joblessness in the 17-nation currency area rose to 12.2 percent in April. Reuters stated that the greatest menace to the unity of the euro zone is now social breakdown from the crisis, rather than market-driven factors. What is of significant concern is that 5.6m young are without employment although it is getting desperate for Spain and Greece.
I found this graph in New Zealand Association of Economists publication entitled “Asymmetric Information”. It shows the effects of immigration policy and considers the broader effects of immigration – not just the simple fact that immigration increases the size of the labour force and therefore puts downward pressure on wages. It suggests that immigration shifts the aggregate demand curve to the right and this can increase inflationary pressure which ultimately raises wages. There is also the chance that this could lead to an outward migration of domestic workers as their jobs are taken by those coming into the country. Below is an extract from the article:
The model shows the flow of immigrants in the centre of the diagram, and the well-recognised downward impact on domestic wages through increased supply. The extent to which increased supply of immigrants can impact domestic wages depends on the occupational attainment of immigrants, and the extent to which immigrants are substitutes for domestic labour.
The left-hand side of the diagram shows the added effect of immigration, with an upward effect on domestic wages through increased demand for goods and services and new job creation. This effect can explain why wage decreases may not result after an influx of immigrants. In addition, a feedback loop is shown on the right-hand side, which shows that if downward pressure on wages is created, outward migration of immigrant or domestic workforce would have an increasing feedback effect on wages. The out-migration part of the diagram is pertinent to New Zealand due to its geographic and institutional proximity to Australia.
Since the 1950′s the free movement of people has been one of the major goals of European integration. Broadly defined, this freedom enables citizens of one Member State to travel to another, to reside and to work there (permanently or temporarily). The idea behind EU legislation in this field is that citizens from other member states should be treated equally with domestic ones – they should not be discriminated against. With the current austerity measures in a lot of European countries and high unemployment there has been a movement to more bouyant countries in particular Germany. See graph below from WSJ Graphics.
Here is a very good video graphic from The Economist. It looks at youth unemployment rates in the main economies of Europe and discusses the reasons why some countries have had much higher rates. Notice German’s low rate which was falling during the GFC which was mainly due to labour reforms which allowed small businesses to fire employees more easily and liberalised work for part-time and temporary work.
If you look at the labour market in Spain you would think that it resembles the German economy 10 years ago when Gerhard Schroder was its leader. Schroder was responsible for labour reforms that ignited the German economy into one of the strongest in Europe.
Spain is relaxing labour laws and cutting public spending and there are some positive signs here in that labour unit costs are falling as result of greater productivity. However German’s vocational education sector was a significant factor in its improved performance as the education and training system is more job orientated. Furthermore, with austerity measures in place and more to follow – pressure from the EU to introduce yet another sales-tax rise – Spain will find it hard to generate any sort of growth. But if it does grow will it generate any reduction in unemployment? Because of labour reforms some economists now believe that only 1.5% growth is required to bring about net job creation rather than 2.5% as previous.
Recently the minimum wage in New Zealand increased from $13.50 to $13.75 per hour. What are the arguments for an increase in this and what affect does it have?
An argument for the minimum wage is the fact that sometimes in labour markets there isn’t enough competition between employers and a monopsony situation occurs – see graph below. Here the minimum wage would protect the employee. However, is raising the minimum wage based more on reducing inequality as people are still struggling with the purchasing power of their incomes. In the US President Obama spoke in his State of the Union address about increasing the minimum wage from US$7.25 to US$9 – seems to be well targeted with regard to its impact. But ultimately how many people are affected by the increase in the minimum wage?
With the increase in minimum wage there is the belief that employers will lay-off workers. Evidence suggests the following:
1. Employment doesn’t fall much as the increase in wages lowers labour turnover, which raises productivity and the demand for labour.
2. The increase in costs for the employer will be passed onto the consumer in higher prices for goods and services
There is also the argument that wage increases will boost aggregate demand and therefore growth and employment. But in the USA this is estimated to increase consumer purchases by approximately US$15bn and when you think that the US economy is worth US$15 trillion is quite small in the scheme of things.
Economist Christina Romer stated in The New York Times that a more generous earned-income tax credit would provide more support for the working poor and would be more pro business at the same time.
Monopsony Labour Market
A monopsony occurs in the labour market when there is a single or dominant buyer of labour. The buyer therefore is able to determine the price at which is paid for services. Unlike other examples we have looked at, in this situation we are now dealing with an imperfect rather than a perfectly competitive market. The monopsonist will hire workers where:
Marginal Cost of labour (MCL) = Marginal Revenue product of labour (MRPL)
In order to entice workers to supply this amount of labour, the firm need pay only the wage Wq. (Remember that ACL is the supply of labour). You can see, therefore, that a profit-maximising monopsonist will use less labour, and pay a lower wage, than a firm operating under perfect competition.
In this situation the power of the employer in the labour market is of overriding importance and the employer can set a low wage because of this buying power.
From reading the McKinsey report on the mismatch between the skills of the unemployed and the jobs available – Structural Unemployment – here is an interesting graph which I have put together from their data. The lack of skills is a common reason for entry-level vacancies in the nine economies below. It seems that employers and those in education don’t communicate much as to the future requirements of labour.
Just covering the labour market with my A2 class and New Zealand at present gives some good examples of labour market imperfections. You would think with the commencement of the major rebuild in Christchurch would have positive effects on the New Zealand labour market. Economists had forecast unemployment to drop below 6% at the end of 2012 however the December quarter had the rate at 6.9%. The Westpac Economic Overview came up with some reasons as to why employers have been reluctant to take on more labour.
1. Employers are increasing the hours that labour is working rather than taking more on. After the GFC a lot of employers kept labour but reduced their working hours so when the economy starts to grow there is a tendency for them to increase the working hours rather than employing new staff.
2. There has a lack of geographical mobility as workers have been reluctant to move away from areas of New Zealand that have weak growth to those that require more labour – eg. Canterbury. Since late 2010 job vacancies in Christchurch have increased dramatically and employers have found it increasingly difficult to find labour = wages have risen faster in Canterbury than most of New Zealand. The RBNZ reported that this two-speed labour market is suffering from the lowest matching efficiency – the speed with which job vacancies and additions to the labour force translate into jobs. This implies higher wages and higher unemployment than normal.
3. The high NZ$ make imported capital cheaper and there has been an increase in a firms’ intentions to invest in plant and equipment (form overseas) but a reluctance to spend money on new buildings or labour.