July 2, 2012
US Job Market and the EU Crisis
This week the US Department of Labor will reveal the June employment report. As with the past several months, a number of economists are predicting job growth in the 150,000 range. That would be better news than the 77,000 and 69,000 new jobs created in April and May respectively, but, make no mistake, 150,000 new jobs ain’t good news.
The steady state of population growth means that in any given month about 350,000 young adults turn 18. They don’t immediately enter the labor force; they head off to college, trade school, the military, finish high school or the like. They then leave these institutions in about the same rate they enter, and so the rough math suggests that on average the young labor force grows steadily and inexorably at 350,000 per month.
During this same time, workers are leaving the labor force. We retire mostly at a rate equivalent to almost 200,000 per month. Of course this happens at different times in our life. Some of us leave because of a disability or death, some leave to go back to school and some to start families. So with some predictability the labor force should grow monthly by 350,000 – 200,000 = 150,000. One need not have done well in math to appreciate that the creation of 150,000 new jobs per month is insufficient to budge the unemployment rate. Moreover, it would take closer to half a million new jobs per month to get us moving towards the robust recovery that we had at the end of the last big recession in 1982 and 1983. More worrisome still is that June ought to be a blazing job creation month, so my advice is simple: Brace yourself for more bad news.
Exacerbating the economy is the necessary asymmetry that attends to the European financial problems. By this I mean that the downside and upside have wholly different outcomes for the world economy. The worst case scenario involves an unstructured exit from the Eurozone by Greece and other nations. In this event, there is a great likelihood that a number of financial institutions around the world will fail, making world financial markets resemble September 2008 once again, with similar world outcomes. I don’t think this especially likely, but InTrade is betting a 40 percent probability of a Greek exit. How smoothly this happens will be determined by the same political forces which have got them this far. This is hardly a comfort.
The asymmetry to this worst case scenario is apparent in the very slow and sullen upside. The very best economic outcome would be that no Euro dissolution occurs, and banks have already priced in the risk of default. Further, this outcome demands that governments with behemoth government debts quickly convince their citizens to accept reality. In this optimistic scenario it will be months before the EU economy hits bottom.
Altogether this means that 150,000 new jobs per month are about as good as it is going to get for a long time.
About the Author
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