What if some of the manufacturing jobs had been retained? How would U.S. employment have been affected? Would we have anything like the high unemployment rates experienced over the past two years?
The following analysis shows that the U.S. simply didn't have the population needed to produce what we have been consuming. The trade deficit is actually a demographic problem as well as a global competition problem for the U.S.
First let’s look at the labor participation rate over the past 60 years.
click to enlarge images
Over the last 25-30 years the institution of two wage-earner households became entrenched and the labor participation rate rose above 65% as of 1985. In 2010 the participation rate fell back below 65% as a result of severe employment dislocations produced by The Great Recession.
The following graph focuses on the years starting with 1992. Two arbitrary areas are identified by the author, a “peak” participation rate and a “healthy” rate. These arbitrary definitions may be subject to debate.
In the previous article a graph was presented which showed the number of manufacturing jobs “exported” each year starting with 1992. What was not discussed in the previous article is that jobs have multiplier factors. If one person receives a wage much of that money is spent and that creates additional jobs. For each person working in a particular job, other people are employed in support industries. The total of all these additional jobs is what comprises the jobs multiplier. The mathematics can be reviewed here.
The multiplier varies for different types of jobs and is determined by collecting experimental data in the actual economy. Manufacturing jobs have high jobs multipliers. A table of jobs multipliers is shown in the following table:
|Economic Policy Institute|
A jobs multiplier of 3.0 means that each job represents a total of three jobs: the original job plus two others that exist only because that original job is there. One estimate for all employment is an average multiplier of 1.9. For manufacturing the multiplier is close to 3. For every manufacturing job gained or lost directly, two other jobs, on average, are gained or lost.
For the rest of this article we will use the multiplier of 2.9. Using that value, the number of jobs lost each year since 1992 because of the trade deficit for manufactured goods has been calculated and is shown in the following graph. The lowest line represents the number of direct manufacturing jobs exported. The second line is the number of dependent jobs lost and the top line is the total number of jobs, direct and indirect, that were exported.
If all the direct and indirect jobs that have been ‘exported” had been retained, what would the unemployment picture have been forth past 18 years? This is displayed in the following graph.
There are two shaded areas in the graph. The blue area encompasses all the commonly accepted values for NAIRU. The salmon area defines where labor shortages would occur, the lower the percentage the greater the shortage.
The red line shows the counterfactual case calculated for the “exported jobs” being retained and the labor participation rate staying at the peak (67%). The green line shows the counterfactual unemployment rate provided the participation rate actually experienced is used.
A reasonable conclusion from this graph is that, to retain the number of jobs estimated, labor would have to be imported or the labor participation rate would have to rise above the all-time peak. Without some combination of those two factors there would have been labor shortages 14 of the last 16 years (1994-2007)
Note: NAIRU refers to a Milton Freeman defined term: Non-Accelerating Inflation Rate of Unemployment
The next counterfactual situation examined is the case where half of the “exported jobs” were retained each year. The following graph shows the official unemployment rate average each year (blue), with two counterfactual unemployment rates.
The red line shows the counterfactual case calculated for ½ of the “exported jobs” being retained and the labor participation rate staying at the peak (67%). The green line shows the counterfactual unemployment rate provided the participation rate actually experienced is used.
The following graph shows official and counterfactual unemployment rates if 25% of the “exported jobs” had been retained.
Even if 75% of the “exported jobs” had occurred, the U.S. would still have had labor shortages almost in seven of the past 19 years. The unemployment rate would have been below 4% for1997-2000 and 2005-2007. If the labor particpation rate had remained at peak (67%) throughout this time period, there would have been labor shortages only in the last four years of the 2oth century.
There are many assumptions to be questioned in this analysis. A few are listed here:
I expect there are many more open issues here and I expect that readers will eagerly point them out to me.
The U.S. has been on a consumption binge. The examination discussed here indicates that the country has been living beyond its means to produce what it consumes. That doesn't even consider that we have to import more than half of the energy used. If the production of even part of the production of goods that have been imported over the lat 14 years had been retained domestically, there would not have been enough labor available to fill the jobs that would have been required.
So the U.S. has been living beyond its means in three ways:
Further work is in progress to examine:
There is one additional area being studied: How does the undocumented worker influx that has occurred over the past two decades interact with these labor requirement scenarios.
Note: The author was formerly a Registered Rep with a NASD broker-dealer and also an SEC registered and a New York State registered investment advisor. He has been a CFP Board Certified Financial Planner and a member of the Financial Planning Association and retains both relationships today.
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