European Commission Addresses Economy

The European Commission’s 2012 report on employment and social development has impressed economists as an accurate summary of what has gone wrong with the Eurozone economy in the last year and what will become of it this year, although it’s still questionable whether the insights gleaned from the report will be used to help make the situation better. Economist Jonathon Portes’ interpretation of the report is that a lack of aggregate demand as the result of macroeconomic policy mismanagement as the source of current woes, and that the poorest countries are getting worse, even if other areas are recovering. For more on this continue reading the following article from Economist’s View. 

Jonathan Portes (he also provides discussion of each of these points):

European labor markets: six key lessons from the Commission report, by Jonathan Portes: I haven't always been complimentary about the European Commission - either its economic analysis or its policy advice. So it's nice to be able to be wholeheartedly positive about the excellent report "Employment and Social Developments in Europe 2012"...

The report is really worth reading. But it's close to 500 pages, and the main messages deserve as wide an audience as possible, so I thought I'd try to highlight them with some commentary. To my mind, the key ones are the following:

1. Economic weakness in Europe, and the consequent rise in unemployment, are mostly to do with a lack of aggregate demand, which in turn is the result of mistaken macroeconomic policies - especially aggressive fiscal consolidation...

2. Although financial markets may have stabilized - who knows for how long - things are getting worse, not better, in the real economy of the crisis countries...

3. Countries with more generous welfare states, but also more flexible labor markets, have fared best...

4. Following on from this, structural reforms in labor markets are required in many countries - but they need to be based on evidence! Segmented labor markets are a problem and raise youth unemployment...

..and even in recession, minimum wages at a sensible level do more good than harm. ...

5. Where they were allowed to operate, the "automatic stabilizers" worked...(in both macroeconomic and social terms)...

...while where they were overridden, in the pursuit of "self-defeating austerity", things have got worse...

6. Latvia, Ireland (and even Estonia) may look like "success stories" to some in the Commission, and perhaps to the financial markets (at present) but the reality in terms of jobs and incomes is rather different. ...

Too bad fiscal policymakers didn't do their homework and learn these lessons about austerity, social insurance, automatic stabilizers, and so on before putting harmful or ineffective policy in place (or failing to implement policy when action is called for, e.g. to reduce unemployment). Wish I thought they were doing their homework now.
 

This blog post was republished with permission from Economist's View.

Is The Private Job Market Getting Weaker?

The loss of 114,000 temporary Census workers in August and a small gain in private employment continues the sub-par performance of the labor market. The 67,000 private jobs gained is much smaller than the 241,000 jobs gained in April, which may signal that the private sector job market is weakening. See the following post from The Capital Spectator.

Nonfarm payrolls retreated by a net 54,000 last month (seasonally adjusted) and the unemployment rate ticked up to 9.6% from 9.5% in July, the Bureau of Labor Statistics reported this morning. The payroll loss for August isn’t as steep as the 100,000-plus decline that economists expected, but that’s cold comfort for a labor market that’s still struggling to grow. But there’s better news once we focus on the net change for private-sector payrolls, which posted a 67,000 rise—comfortably above the consensus forecast of a 44,000 gain. Better, but unimpressive.



Why emphasize non-government payrolls? We must ignore the headline figure because the government laid off 114,000 temporary Census workers in August. After dismissing that statistical glitch, here’s how the monthly net change in private sector nonfarm payrolls has unfolded:

Private-sector job creation has managed to climb above zero this year, as graphed above, but at a disturbingly low rate. The average gain so far in 2010 is under 100,000 per month. That’s a dismally low figure given the steep losses in jobs in recent years and, more importantly, what’s required to keep the economy humming in the months ahead. As troubling as that is, the trend of late suggests that job creation in the private sector may be weakening. Indeed, last month’s 67,000 net rise in private payrolls is down sharply from July’s 107,000 rise and an even smaller fraction of April’s 241,000 burst higher.

Consider, too, that the bulk of last month's net rise of 67,000 jobs in the private sector was due primarily to hiring in health services, according to the government's breakout of the data. There's nothing wrong with that, and it's certainly welcome. But the health industry is hardly a cyclically sensitive corner of the job market/economy. The implication: last month's private-sector hiring had little to do with upside momentum in the business cycle. In fact, manufacturing-related employment, which is cyclically sensitive, shed 27,000 jobs last month, reversing most of July's 34,000 gain in this corner of the economy.

Feeling inspired yet? I’m not. Certainly there’s scant evidence that the labor market is improving on a meaningful basis. You can, however, argue that it’s treading water, echoing the trendless trend in initial jobless claims this year.

Yes, fears of a double-dip were probably exaggerated. We’ve been arguing all along that the economy was likely to "muddle through" and avoid an outright contraction in the second half of this year (as noted here and here, for instance).

But the outlook for subpar growth and weak job creation—although superior to a new recession—is a real and present danger, and today's employment report doesn't offer much reason to dismiss the danger. If the economy continues to struggle, eventually the risk of a recession will become more than a low-probability prediction.

This post has been republished from James Picerno's blog, The Capital Spectator.