[OPE] Employment outlook

>From the Statement by Ben S. Bernanke, Chairman Board of Governors of the
Federal Reserve System before the Committee on the Budget United States
Senate Washington, D.C. January 7, 2011:

"The projections submitted by Federal Open Market Committee (FOMC)
participants in November showed that, notwithstanding forecasts of increased
growth in 2011 and 2012, most participants expected the unemployment rate to
be close to 8 percent two years from now. At this rate of improvement, it
could take four to five more years for the job market to normalize fully."
http://budget.senate.gov/democratic/testimony/2011/Bernanke_010711_SenateBudget.pdf

I think it is more likely though that a higher unemployment rate will become
"normalized" in most of the OECD countries, i.e. an official standard rate
closer to 8 percent of the labour force (much the same would apply to the EU
and Japan).

In the words of PIMCO chief Mohamed El-Erian whom I cited before on OPE-L on
3 July 2009 ("American jobs data are worse than we think", FT July 2, 2009):
"The US faces a material probability of both a higher Nairu (in the 7 per
cent range) and, relative to recent history, a much slower convergence of
the actual unemployment rate to this new level."
http://www.ft.com/cms/s/0/1e06911c-6719-11de-925f-00144feabdc0.html

Unsurprisingly, the ILO notes that, in the wake of the GFC, globally the
increase in average gross wages has been halved. If you factor in price
inflation, average gross wage rates are actually decreasing (negative) in
many countries according to the ILO. These countries include France,
Germany, Korea, Japan, United Kingdom, Hong Kong, Singapore, Indonesia,
Thailand, Russian Federation, Ukraine, several East European countries,
Mexico, Bahrain, Palestine... You can find the anual increase/decrease in
inflation-adjusted gross wages by country on p. 111f of the Global Wage
Report 2010/11
http://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/@publ/documents/publication/wcms_145265.pdf

Countries with strong average wage growth include mainland China, Armenia,
Azerbaijan, Kyrgyzstan, Tajikistan, Turkmenistan, Bosnia and Herzegovina,
Bulgaria, Argentina, Ecuador, Panama, and Uruguay. But most of these have
had rather low average wage levels to start off with; if you leave out
China, the population of these countries represent only 1.5% of the world
population. The only quantitatively very significant player in the world
market on this score is China.

Assuming the total wage bill of China is about US$5 trillion, then a 12%
rise in the average wage per year equals about $600 billion extra income
(but a lot of it is not spent on final consumption). $600 billion is like
the GDP of Turkey or 1.5% of world gross product.

If the level of real wages is mostly rather stagnant globally, and upward
job mobility is reduced, final demand can really grow only by increasing the
number of wage and salary earners. Aside from population growth, and thus a
natural increase of the (employed) labor force, ILO labor participation
rates show no sign of increasing very significantly in most countries across
ten years or so (in mainland China, it's actually decreasing somewhat!).
http://kilm.ilo.org/KILMnetBeta/default2.asp

The global employment-to-population ratio is 60.3%
http://kilm.ilo.org/KILMnetBeta/pdf/kilm02EN-2009.pdf so if there is
currently a world population of 6,892.7 million, the employed labor force is
about 4,156 million. Assuming a natural growth of 1.14% of the world
population, the population increase is about 78.6 million a year, and there
are world wide ceteris paribus an extra 47.7 million employed people per
year (that's equal to the whole labour force of Mexico). Assuming a world
average wage of $7,000 a year, the natural increase of the population,
alone, would imply - disregarding tax - an increase in consumer final demand
of somewhere near $334 billion a year. So the natural increase in population
would contribute 5-6% to world GDP per year. Just a thought.

Jurriaan

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Received on Mon Jan 10 19:19:46 2011