Unemployment will stall global recovery: Kohler

This morning’s US jobs report is a green shoots herbicide: after four months of slowing job losses, payrolls have slumped by 467,000 and unemployment is up to 9.5%.

Teenage unemployment has jumped sharply, to 24%, and the average working week is down to a record low of 33 hours (Australia’s is 33.7, by the way – not much more).

All signs of life have been snuffed out of the American labour market. Bill Gross of Pimco said on CNBC this morning that unemployment could stay above 10% for a long time, which points to a long period of stagnation in the US economy.

Sung Won Sohn, from the Smith School of Business and Economics, told the Wall Street Journal: “The green shoots in the job market are hard to find. Businesses are determined to trim costs by cutting payrolls. Expecting sluggish recovery in demand in the foreseeable future, employers want to make sure that a sustained economic recovery is here before hiring. The job market will become the Achilles’ heel of the coming recovery.”

A year ago the financial markets crisis was getting into full swing and the focus of the world’s problems was a shortage of capital, especially bank debt. Now it’s unemployment – a persistent and ugly glut of labour.

The credit crisis has now eased, and to some extent the providers of equity capital have stepped into the breach.

It is an outrageous irony, incidentally, that this has resulted in a surge in investment banking incomes back almost to the boom conditions of 2007. They are the doctors who got rich almost killing the patients, and are now getting richer helping to cure them.

Meanwhile, more and more people around the world are being thrown out of work by the after-effects of the financial crisis.

The OECD has estimated that by the end of 2010, 57 million people will be unemployed in its member countries. Those who are still in work are already seeing sharp declines in their hours worked and, therefore, their incomes.

Employment is contracting everywhere. In the US it has fallen almost 7% and the unemployment rate is 9.5%; in Europe it is 9.5% across the board, but an appalling 18.7% in Spain and 12% in Ireland. In the UK and Japan, unemployment has now accelerated after remaining relatively stable for longer than the rest.

At first this is good for financial markets and companies. Inflation that might have otherwise have started getting out of control because of the growth in money supply from massive monetary and fiscal stimulus, is constrained. Wages growth is falling and companies are taking the opportunity to tidy up their cost structures.

But that’s very short term. Apart from the human misery, unemployment is now the key long-term problem for the global economy: the credit crisis has now morphed into an employment crisis.

• The threat of deflation is growing. What is unknown is how flexible wages will prove to be on the downside. Russell Jones of RBC Capital Markets says there is a risk that the relationship between labour market slack and pay proves to be ‘non-linear’ and that at exceptional levels of unemployment, wages begin to plummet.
• Soft labour markets and falling working hours and incomes create more pressure on government budget balances and public sector debt, because of lower taxes.
• And most of all, persistently high unemployment lowers growth potential because it further disrupts consumption, which has already been hammered by lower house prices in the US. Bill Gross thinks we’re in for a generation of reduced consumption because the asset inflation that fuelled the consumption boom has finished. Uncertainty about wages and jobs following a period of 10-plus% unemployment will extend that, so that consumption is suppressed for a generation, as it was after the 1930s.

This article first appeared on Business Spectator.