China Has An Unemployment Problem

China has an unemployment problem.  There are lots of articles and commentary about the Chinese economy, especially recently with attention focused on China’s declining rate of growth.  But have you noticed that there is rarely any mention of China’s unemployment rate?

Chinese growth is falling

China’s fourth-quarter 2018 GDP growth fell to 6.4 percent year-on-year, the slowest rate of growth since the global financial crisis. It brought full-year growth down to 6.6 percent, the slowest yearly rate of growth since 1990.  And predictions are for a significantly slower rate of growth in 2019, perhaps down to 6.3 percent.

The government has certainly pursued a number of policies over the last decade in an attempt to keep growth robust.  This includes the massive post-crisis, investment-heavy stimulus program; the more recent Belt and Road Initiative, and on-going highly expansionary monetary policy. But, the growth-generating effects of these and other government policies has steadily diminished.  As Victor Shih points out in a recent New Left Review interview:

In 2016, China needed three times as much credit to call forth the same amount of growth as in 2008. The scale of debt creation required to keep the economy moving forward has increased massively, and People’s Bank of China loans to domestic financial institutions rocketed from 4 trillion ren­minbi at the end of 2010 to 14 trillion renminbi by November 2017, a three-and-a-half-fold increase in the space of seven years. Total debt has grown from 163 per cent of GDP around 2009 to 328 per cent of GDP today, and this figure will likely continue to grow for the foreseeable future.

Strikingly few discussions of China’s declining growth trajectory include mention of the country’s unemployment rate.  One possible reason is that China’s official unemployment rate has been remarkably stable at roughly 4 percent for decades, seemingly unaffected by the economy’s ups and downs.  Unfortunately, this official rate is worthless as an indicator of the China’s labor market conditions.  In reality, China likely has a serious and growing unemployment problem.

China’s faulty measure of unemployment

As we can see from the chart below, taken from a National Bureau of Economic Research (NBER) report on trends in unemployment in China, the country’s unemployment rate has been low and quite stable.  It rose gradually from the early 1990s to the early 2000, as the government pursued a program of privatization and marketization, and then remained largely unchanged, hovering around 4 percent, from the early 2000s to 2013.

In fact, the official rate has remained much the same over the following years. In April 2018, the government introduced a new measure of unemployment, one that it said would be more accurate. According to the new measure, the country’s unemployment rate fell to 3.82 per cent at the end of September, from 3.83 per cent at the end of June.

This stability is rather startling, considering that over the period 2002 to 2018 China’s growth rate has fluctuated considerably.  It is why Christopher Balding, in a Bloomberg article, captured the opinion of most analysts when he said:

China has long been criticized both for its obsession with GDP statistics and their quality: Pressuring cadres to meet growth targets has encouraged a risky buildup of debt and, at times, the outright fabrication of numbers. If anything, though, the quality of China’s official employment data is even worse — and the inaccuracies could have equally dangerous repercussions.

There are many problems with the government’s past and current measure of unemployment.  Perhaps the most important is that it is a really an “urban registered jobless rate.”  The urban designation is significant because of China’s household registration system (Hukou), which identifies a person by their place of birth.  Migrant workers who come to an urban area in search of work do not have an urban registration and are thus denied the benefits enjoyed by the urban Hukou population, including subsidized housing, health insurance, unemployment insurance, and minimum living standard subsidies.  China’s unemployment rate only measures the rate of unemployment of those with an urban registration.

Another problem with the official measure is that until the April 2018 revision, an unemployed urban worker had to register with their local employment service agency to be counted as unemployed.  Unemployed workers often skipped registering because the process is time consuming and the benefits small and time limited to a maximum of two years.  The revised measure is said to be based on government surveys rather than registration, but the reliability of the surveys is in doubt.

In addition, as the authors of the NBER report point out:

the total labor force, which is the denominator in the calculation of unemployment rate, is also subject to error for many reasons. One recent article that reviewed the quality of Chinese labor statistics claimed that the official unemployment rate is “almost useless.” Another important and related labor market indicator – the labor force participation rate – is not even reported in official statistics.

Accepting the urban Hukou framework, the authors made their own calculation of urban unemployment using China’s Urban Household Survey (UHS) which covers all of urban China and has been administered by China’s National Bureau of Statistics since the 1980s.  Their calculations yield, as shown by the sold dark line in the following figure, an urban rate of unemployment that is far higher than the government’s official measure (dotted black line).

The authors summarize their results as follows:

The rate averaged 3.9 percent in 1988-1995, when the labor market was highly regulated and dominated by state-owned enterprises, but rose sharply during the period of mass layoff from 1995- 2002, reaching an average of 10.9 percent in the subperiod from 2002 to 2009.

What is striking is that the high rates of unemployment from 2002 to 2009 occurred in years when official GDP growth was over 9 percent a year.

Of course, any meaningful measure of unemployment has to include all urban workers, not just the ones with an urban registration classification.  China’s migrant workforce tops 280 million according to official estimates.  The country’s four megacities, each with a population of over 10 million – Shanghai, Beijing, Guangzhou and Shenzhen — have huge migrant populations. For example, migrants make up more than 40 percent of Shanghai’s population, 37 percent of Beijing’s population, 38 percent of Guangzhou’s population, and 67 percent of Shenzhen’s population.

While not all migrant workers are in the labor force, most are since their migration was, more often than not, motivated by a search for employment.  And as the Chinese economy transitioned away from one anchored by state production for domestic use into one rooted in private production, increasingly for export, migrant workers became central to its operation.  For example, migrant workers dominate the manufacturing workforce at most foreign-owned export firms. They also comprise the majority of urban construction workers.

While it is true that the period of privatization was harder on state workers than migrant workers, the more recent years, marked by the country’s post-crisis slowdown in growth and exports, have definitely taken their toll on the migrant workforce.  In light of the high NBER unemployment estimates for urban Hukou workers highlighted above, it is not unreasonable to imagine an overall urban unemployment rate close to 15 percent if we include migrant workers.

It’s getting worse

As noted above, Chinese growth is slowing.  Adding to policymakers’ worries is the fact that export growth has also been trending down; exports in December 2018 fell 4.4 percent from a year earlier, with demand in most major markets weakening.  And these trends are definitely reflected in changes in company payrolls and hiring plans.

According to a report in The South China Morning Post,

Demand for labor at China’s importers, exporters, and related manufacturers fell by 40 per cent in the last quarter of 2018 from a year earlier, showing the trade war with the US has taken its toll, a survey released on Friday revealed.

The China Institute for Employment Research (CIER) at the Renmin University of China in Beijing found jobs in export-oriented regions, including Dongguan in the Pearl River Delta and Suzhou in the Yangtze River Delta, were hit hard.

A CNBC story highlights survey results showing planned layoffs in manufacturing but goes on to add:

The job losses don’t appear to be relegated to just the manufacturing sector.

“We haven’t seen this degree of jobs weakness since the (stock) market panic of Q1 2016,” Leland Miller, chief executive officer of China Beige Book, said in an email. The firm publishes a quarterly review of the Chinese economy based on a survey of more than 3,300 Chinese firms.

“In Q4 employment growth weakened across every major sector, with the ‘new economy’ — retail and services — seeing the most substantial deterioration,” Miller said. “To call it broad-based is an understatement: job growth slowed in every region we track except the Northeast.”

Regardless of official unemployment figures showing stable and even declining rates of unemployment, all signs point to the fact that unemployment is high and trending upwards.  And, that, certainly from a worker perspective, means that China has a serious unemployment problem.  Whether Chinese leaders have the commitment or capacity to offer a meaningful response, given the interests they represent and the constraints within which they operate, remains to be seen.

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Foxconn: Playing Fast and Loose in Wisconsin

When state and local governments bid for corporate investment, working people lose.  It is as simple as that.  And Foxconn’s on-again, off-again, and on-again shrinking investment in Wisconsin is a case in point.

In July 2017 Foxconn announced, at the White House, its agreement to spend $10 billion to build a factory in Wisconsin to produce flat-panel display screens for televisions and other consumer electronics, creating 13,000 manufacturing jobs within six years.  In return, the state of Wisconsin offered the company $3 billion in subsidies.  The agreement was celebrated by then Wisconsin governor Scott Walker and, of course, lauded by President Trump.

However, in January 2019, the special assistant to the president of Foxconn announced that “In Wisconsin we’re not building a factory. You can’t use a factory to view our Wisconsin investment.” The reason, according to the special assistant, was that Foxconn decided that it couldn’t compete in the US TV market using US labor to build LCD panels.

As for jobs, the company has already fallen short on its employment promises.  It pledged to create 260 jobs in 2018 but added only 178.  It also promised to employ 5,200 workers by the end of 2020, but now estimates that the total will likely be closer to 1,000. And most of the future hires will be engaged in research and development, not manufacturing.

And the cost to Wisconsin’s communities?  The size of the subsidy quickly grew by over a billion dollars from its initial figure.  As the Verge reports:

By December 2017, the public cost had grown to include $764 million in new tax incentives from local governments in Racine County, which is just 40 minutes south of Milwaukee where the plant was to be located. Other additions included $164 million for road and highway connections built to service the plant, plus $140 million for a new electric transmission line to Foxconn that would be paid for by all 5 million ratepayers of the public utility We Energies. With other small costs added, the total Foxconn subsidy hit $4.1 billion — a stunning $1,774 per household in Wisconsin.

The original plan specified that the subsidy would be given out in increments as investments were made and jobs created.  It remains to be seen how the state will respond to Foxconn’s retrenchment.  But the additional $1.1 billion highlighted above will cost the public regardless of what Foxconn does, since local governments have already begun building the infrastructure that Foxconn wanted.  Those are real outlays that will come at the expense of other, far more critical social programs. And then there are the families who lost their homes when eminent domain was used to seize their properties to prepare the land for Foxconn’s proposed factory.

Not surprisingly, Foxconn’s announcement that it was walking back its commitment has generated a lot of anger in Wisconsin.  And bad press for President Trump.  And so, after a January 2019 phone exchange between President Trump and Foxconn chairman Terry Gou, the company announced that it will indeed build a factory in Wisconsin, just a smaller one than originally promised.

I think we all know how this will work out.

The Deal 

Foxconn’s proposed investment was seen as a significant win for both Governor Walker and President Trump. The Guardian quoted a senior administration official “who said the announcement was ‘meaningful,’ because ‘it [represents] a milestone in bringing back advanced manufacturing, specifically in the electronics sector, to the United States.’”  President Trump followed with “If I didn’t get elected, [Foxconn] definitely would not be spending $10bn.”

But Foxconn was always an unreliable investor. As the Cap Times pointed out, Foxconn had a track record of broken promises:

  • Foxconn promised a $30 million factory employing 500 workers in Harrisburg, Pennsylvania, in 2013. The plant was never built, not a single job was created.
  • That same year, the company signed a letter of intent to invest up to $1 billion in Indonesia. Nothing came of it.
  • Foxconn announced it would invest $5 billion and create 50,000 jobs over five years in India as part of an ambitious expansion in 2014. The investment amounted to a small fraction of that, according to The Washington Post’s Todd Frankel.
  • Foxconn committed to a $5 billion investment in Vietnam in 2007, and $10 billion in Brazil in 2011. The company made its first major foray in Vietnam only last year. In Brazil, Foxconn has an iPhone factory, but its investment has fallen far short of promises.
  • Foxconn recently laid off 60,000 workers, more than 50 percent of its workforce at its IPhone 6 factory in Kushan, China, replacing them with robots that Foxconn produces.

Even more importantly, the deal was a stinker for working people in Wisconsin.  Wisconsin’s Legislative Fiscal Bureau, after examining the initial agreement, concluded that that the state wouldn’t break even on its investment until 2043 — and that was an absolute best-case scenario.

Playing fast and loose

The agreement was announced in July 2017.  Less than one year later, in June 2018, Foxconn announced a change to its plan.  Instead of a Generation 10.5 plant producing 10-foot by 11-foot panels for 75-inch TV screens, Foxconn said it would build a Generation 6 plant that only produced 5-foot by 6-foot panels.  The smaller plant would require only about one-third the initially promised investment.

Then, in late August, Foxconn announced yet another change, when its spokesperson, Louis Woo, told the Journal Times that even the Gen 6 panels might not be manufactured in Racine for long.  “We are not really interested in television,” Woo told the newspaper.

And then in January 2019, Foxconn announced it might not ever build a factory in Wisconsin or have need for manufacturing workers.  As Reuters explained, the company:

is reconsidering plans to make advanced liquid crystal display panels at a $10 billion Wisconsin campus, and said it intends to hire mostly engineers and researchers rather than the manufacturing workforce the project originally promised.

Rather than a focus on LCD manufacturing, Foxconn wants to create a “technology hub” in Wisconsin that would largely consist of research facilities along with packaging and assembly operations, Woo said. It would also produce specialized tech products for industrial, healthcare, and professional applications, he added.

“In Wisconsin we’re not building a factory. You can’t use a factory to view our Wisconsin investment,” Woo said.”

Finally, as noted above, after a phone conversation between President Trump and Chairman Gou, some kind of factory is back in Foxconn’s plans.  But for how long?

Foxconn failed to earn its 2018 tax credits because it fell short of its employment target.  As Reuters reports: “The company may be prepared to walk away from future incentives if it is unable to meet Wisconsin’s job creation and capital investment requirements, according to the source familiar with the matter.”

Lessons

Governor Walker went all in to get Foxconn, giving the company far more than he needed to do. As the Verge explains:

In retrospect, it’s clear that Walker had a strong hand to play in negotiations with Foxconn. The company had to locate in a Great Lakes state because of the huge amount of water needed to clean the glass used in manufacturing LCD screens. And no other Great Lakes state came close to offering the $4.1 billion Foxconn is getting. Michigan came the closest, offering $2.3 billion, but it was partly a tax subsidy rather than cash.

The Walker administration also gave Foxconn an exemption for the state’s environmental rules, “allowing it to discharge materials into wetlands and reroute streams during construction and operation.” And it “also agreed to allow Foxconn to draw massive amounts of water from Lake Michigan” in violation of “the provisions of the Great Lake Compact signed by the Great Lakes states and Canadian provinces to protect the lakes.”

And of course, the production of LCD screens requires the use of a number of hazardous materials, such as benzene, chromium, cadmium, mercury, zinc, and copper. Foxconn’s track record in handling such materials is far from good, even if it promised to build a Zero Liquid Discharge system, “which will go beyond any local, state and federal requirements relating to industrial water discharge.”

When the Legislative Fiscal Bureau did its evaluation of the deal, it concluded, as noted above, that it would take until 2043 for taxpayers to recoup the subsidy. But that was based on a $3 billion subsidy. At $4.1 billion, the current amount, the date gets pushed back to 2050.  And again, that assumes that all goes according to the initial plan.

In short, there is no good outcome here for the people of Wisconsin. Given the enormous social and environmental costs associated with this project, Wisconsin is probably better off if it can cancel the deal the previous governor made with Foxconn. Most importantly, one hopes that the Foxconn fiasco will solidify popular understandings that it never pays to compete for corporate investment with tax cuts and public subsidies.

Millennials: Hit Hard And Fighting Back

A lot has been written and said critical of millennials. The business press has been tough on their spending habits.  As a recent Federal Reserve Board study of millennial economic well-being explained:

In the fields of business and economics, the unique tastes and preferences of millennials have been cited as reasons why new-car sales were lackluster during the early years of the recovery from the 2007–09 recession, why many brick-and-mortar retail chains have run into financial trouble (through lower brand loyalty and goods spending), why the recoveries in home sales and construction have remained slow, and why the indebtedness of the working-age population has increased.

Politicians, even some Democratic Party leaders, have tended to write them off as complainers. For example, while on a book tour, former Vice President Joe Biden told a Los Angeles Times interviewer that “The younger generation now tells me how tough things are. Give me a break. I have no empathy for it. Give me a break.” Biden went on to say that things were much tougher for young people in the 1960s and 1970s.

In fact, quite the opposite is true.  For better or worse, the authors of the Federal Reserve Board study found that there is “little evidence that millennial households have tastes and preference for consumption that are lower than those of earlier generations, once the effects of age, income, and a wide range of demographic characteristics are taken into account.”  More importantly, millennials are far poorer than past generations were at a similar age, and are becoming a significant force in revitalizing the labor movement.

Economic hard times for millennials

The Federal Reserve Board study leaves no doubt that millennials are less well off than members of earlier generations when they were equally young. They have lower earnings, fewer assets, and less wealth.  All despite being better educated.

The study compares the financial standing of three different cohorts: millennials (those born between 1981 and 1997), Generation Xers (those born between 1965 and 1980), and baby boomers (those born between 1946 and 1964).  Table 1, below, shows inflation adjusted income in three different time periods for all households with a full-time worker and for all households headed by a worker younger than 33 years.

The median figures, which best represent the earnings of the typical member of the group, are shown in brackets.  Comparing the median annual earnings of young male heads of households and of young female heads of household across the three time periods shows the millennial earnings disadvantage.  For example, while the median boomer male head of household earned $53,400, the median millennial male head of household earned only $40,600.  Millennial female heads of household suffered a similar decline, although not nearly as steep.

Table 4 compares the asset and wealth holdings of the three generations, and again highlights the deteriorating economic position of millennials.  As we can see, the median total assets held by millennials in 2016 is significantly lower than that held by baby boomers and only half as large as that held by Generation Xers.  Moreover, millennials suffered a decrease in asset holdings across most asset categories.

Finally, we also see that millennials have substantially lower real net worth than earlier cohorts. In 2016, the average real net worth of millennial households was $91,700, some 20 percent less than baby boomer households and almost 40 percent less than Generation X households.

Fighting back

Millennials have good reason to be concerned about their economic situation.  What is encouraging is that there are signs that growing numbers see structural failings in the operation of capitalism as the cause of their problems and collective action as the best response.  A recent Gallup poll offers one sign.  It found a sharp fall in support for capitalism among those 18 to 29 years, from 68 percent positive in 2010 down to 45 percent positive in 2018.  Support for socialism remained unchanged at 51 percent.

A recent Pew Research poll offers another, as shown below. Young people registered the strongest support for unions and the weakest support for corporations.

Of course, what millennials do rather than say is what counts. And millennials are now boosting the ranks of unions.  Union membership grew in 2017 for the first time in years, by 262,000.  And three in four of those new members was under 35.  Figures for 2018 are not yet available, but given the strong and successful organizing work among education, health care, hotel, and restaurant workers, the positive trend is likely to continue.

Millennials are now the largest generation in the United States, having surpassed the baby boomers in 2015.  Hopefully, self-interest will encourage them to play a leading role in building the movement necessary to transform the US political-economy, improving working and living conditions for everyone.

The US Economy: Monopolized Product Markets And Precarious Work

Most economists and politicians sing the praises of competition.  It is supposed to keep firms on their toes for the benefit of consumers and workers.  Well, competition is certainly alive and well in the US, but the results are far from positive for working people.

Monopolized product markets

The Open Markets Institute recently issued a report that looks at recent changes in industry concentration in 32 different product markets.  It framed its work as follows:

while it may appear as though there are endless brands to choose from online and on the shelf, most are owned by a few large parent companies, the array of labels a mere façade creating the illusion of abundant options.

Locating data on how few companies control individual markets, though, has long been difficult, and not by accident. Although Americans used anti-monopoly policies throughout much of the 20th century to preserve competition, a shift in ideology in the late 1970s allowed increased monopolization across the economy. To shield this pro-corporate turn from the public, the Federal Trade Commission halted the collection and publication of industry concentration data in 1981.

To remedy this gap in public knowledge, Open Markets purchased extensive, up-to-date industry intelligence from IBISWorld, a team of analysts who collect economic and market data, with the intention of releasing the information regarding industry concentration to the public.

David Leonhardt, in his New York Times commentary on the report, includes the following summary chart:

And as Leonhardt notes, “If anything, the chart here understates consolidation, because it doesn’t yet cover energy, telecommunications and some other areas.”

These trends paint a picture of an economy in which a growing number of industries are dominated by a few powerful corporations, one that belies the conventional view that since our economy is subject to ever stronger competitive pressures, fears of monopoly domination are unjustified. This is not a new insight. For example, John Bellamy Foster, Robert W. McChesney, and R. Jamil Jonna made the same point in a 2011 Monthly Review article:

A striking paradox animates political economy in our times. On the one hand, mainstream economics and much of left economics discuss our era as one of intense and increased competition among businesses, now on a global scale. It is a matter so self-evident as no longer to require empirical verification or scholarly examination. On the other hand, wherever one looks, it seems that nearly every industry is concentrated into fewer and fewer hands.

The following chart, taken from the article, illustrates their point about growing industry concentration.

Foster, McChesney, and Jonna explain this “striking paradox” by showing how the competition that captures our attention is increasingly driven by, and largely takes place between, powerful, globally-organized corporations.  And, they also discuss the ways in which mainstream economic theory has worked to minimize public awareness of the resulting monopolization of economic processes and its negative consequences for the stability and vibrancy of the economy.

Precarious work

One negative consequence of these competitive battles is worth highlighting here: the transformation of labor relations which is making work, by design, more precarious.  As Lauren Weber, in a Wall Street Journal article titled “The End of Employees,” explains:

Never before have big employers tried so hard to hand over chunks of their business to contractors. From Google to Wal-Mart, the strategy prunes costs for firms and job security for millions of workers. . . .

The outsourcing wave that moved apparel-making jobs to China and call-center operations to India is now just as likely to happen inside companies across the U.S. and in almost every industry. . . .

The shift is radically altering what it means to be a company and a worker. More flexibility for companies to shrink the size of their employee base, pay and benefits means less job security for workers. Rising from the mailroom to a corner office is harder now that outsourced jobs are no longer part of the workforce from which star performers are promoted. . . .

Companies, which disclose few details about their outside workers, are rapidly increasing the numbers and types of jobs seen as ripe for contracting. At large firms, 20% to 50% of the total workforce often is outsourced, according to staffing executives. Bank of America Corp., Verizon Communications Inc., Procter & Gamble Co. and FedEx Corp. have thousands of contractors each.

Is it any wonder that income inequality has exploded in the US and even a record-breaking economic expansion in terms of longevity brings few benefits to working people?  Clearly, we need some new words, if not an entirely new song, if we are going to keep singing about competition.

Forgotten Workers And The US Expansion

There is a lot of celebrating going on in mainstream policy circles.  The economy is said to be running at full steam with the unemployment rate now below 4 percent.  As Clive Crook puts it in Bloomberg Businessweek, “The U.S. expansion has put millions of people back to work and economists agree that the economy is now at or close to full employment.”

Forgotten in all this celebration is the fact that wages remain stagnant.  Also forgotten are the millions of workers who are no longer counted as part of the labor force and thus not counted as unemployed.

Forgotten workers

One of the best indicators of the weakness of the current recovery is the labor market status of what is called the core workforce, those ages 25-54.  Their core status stems from the fact that, as Jill Mislinski explains, “This cohort leaves out the employment volatility of the high-school and college years, the lower employment of the retirement years and also the age 55-64 decade when many in the workforce begin transitioning to retirement … for example, two-income households that downsize into one-income households.”

The unemployment rate of those 25-54 reached a peak of 9 percent in 2009 before falling steadily to a low of 3.2 percent as of July 2018.  However, the unemployment rate alone can be a very misleading indicator of labor market conditions.  That is certainly true when it comes to the labor market status of today’s core workforce.

A more revealing measure is the Labor Force Participation Rate, which is defined as the Civilian Labor Force (i.e. the sum of those employed and unemployed) divided by the Civilian Noninstitutional Population (i.e. those of working age who are not in the military or institutionalized). Because there can be significant monthly swings in both the numerator and denominator of this measure, the Labor Force Participation Rate shown in the chart below is calculated using a 12-month moving average.

As we can see, the Labor Force Participation Rate for the 25-54 core cohort has sharply declined, from a mid-2000 high of 84.2 percent, down to a low of 81.9 percent in July 2018. Mislinski calculates that:

Based on the moving average, today’s age 25-54 cohort would require 1.6 million additional people in the labor force to match its interim peak participation rate in 2008 and 2.9 million to match the peak rate around the turn of the century.

A related measure of labor market conditions is the Employment-to-Population Ratio, which is defined as the Civilian Employed divided by the Civilian Noninstitutional Population.  As we can see in the next chart, the Employment-to-Population Ratio of our core cohort has also declined from its mid-2000 peak.

Again, according to Mislinski,

First the good news: This metric began to rebound from its post-recession trough in late 2012. However, the more disturbing news is that the current age 25-54 cohort would require an increase of 1.2 million employed prime-age participants to match its ratio peak in 2007. To match its mid-2000 peak would require a 3.1 million participant increase.

The takeaway

Both the Labor Force Participation Rate and the Employment-to-Population Ratio are useful measures of the employment intensity of the economy.  And in a healthy economy we should expect to see high values for both measures for the 25-54 age cohort. That is especially true for a country like the United States, where the non-market public provision of education, health care, and housing is quite limited, and an adequate retirement depends upon private savings.  In other words, people need paid employment to live and these are prime work years.

The decline, over the business cycle, in both the Labor Force Participation Rate and the Employment-to-Population Ratio for our core cohort strongly suggests that our economy is undergoing a profound structural change, with business increasingly organizing its activities in ways that require fewer workers. More specifically, the lower values in these measures mean that millions of prime age workers are being sidelined, left outside the labor market.

It is hard to know what will become of these workers and by extension their families and communities.  Moreover, this is not a problem only of the moment.  This cohort is still relatively young, and the social costs of being sidelined from employment—and here we are not even considering the quality of that employment—will only grow with age.  We can only hope that workers of all ages will eventually recognize that our growing employment problems are the result, not of individual failings, but an increasingly problematic economic system, and begin pushing for its structural transformation.

Magical Bootstraps And The Struggles Of Working Americans

A recession is coming, sooner or later.  Once it hits, we can expect articles bemoaning the fact that working people didn’t build-up their savings during this record expansion to help them through the hard times.  If only they had pinched pennies here and there, skipped a new TV or smart phone, they could have generated some capital that could have been invested . . . Ah the missed opportunities.

Of course, the reality is quite different.  One reason is that the current so-called good times have not been very good for working people.  For example, as Jonathan Spicer points out, “the rise in median expenditures has outpaced before-tax income for the lower 40 percent of earners in the five years to mid-2017 while the upper half has increased its financial cushion, deepening income disparities.” In other words, a significant percentage of workers have had to run down their savings or borrow to survive; wealth accumulation has been out of the question.

The bootstrap theory of success

The notion that under capitalism each individual has the ability, without outside help, to “pull themselves up by their bootstraps,” has a powerful hold on popular consciousness.  And, its message of self-reliance and individual responsibility serves capitalist interests well by deflecting attention away from the systemic causes of current economic problems.

The irony is that the phrase itself originally referred to something that was physically impossible to achieve.  As Caroline Bologna explains:

The concept is simple: To pull yourself up by your bootstraps means to succeed or elevate yourself without any outside help.

But when you examine this expression and its current meaning, it doesn’t seem to make much sense.

To pull yourself up by your bootstraps is actually physically impossible. In fact, the original meaning of the phrase was more along the lines of “to try to do something completely absurd.”

Etymologist Barry Popik and linguist and lexicographer Ben Zimmer have cited an American newspaper snippet from Sept. 30, 1834 as the earliest published reference to lifting oneself up by one’s bootstraps. A month earlier, a man named Nimrod Murphree announced in the Nashville Banner that he had “discovered perpetual motion.” The Mobile Advertiser picked up this tidbit and published it with a snarky response ridiculing his claim: “Probably Mr. Murphree has succeeded in handing himself over the Cumberland river, or a barn yard fence, by the straps of his boots.”

“Bootstraps were a typical feature of boots that you could pull on in the act of putting your boots on, but of course bootstraps wouldn’t actually help you pull yourself over anything,” Zimmer told HuffPost. “If you pulled on them, it would be physically impossible to get yourself over a fence. The original imagery was something very ludicrous, as opposed to what we mean by it today of being a self-made man.” . . .

Beyond the Murphree example, versions of the phrase appeared in many published texts to describe something ridiculous. Popik has documented several of these examples on his blog.

Leaving aside questions about why the phrase “pulling oneself up by their bootstraps” is no longer used as a way to dismiss an impossibility or absurdity, its original meaning captures capitalist realities far better than does is its current meaning.  Quite simply, there are no magical bootstraps that enable working people to “pull themselves up” to economic security and well-being by dint of their own hard work.  The problem is that far too many Americans still believe in their existence and thus blame themselves for their economic situation.

The struggles of working Americans

In a Reuters article, Jonathan Spicer illustrates the fact that “behind the headlines of roaring job growth and consumer spending . . . the boom continues in large part by the poorer half of Americans fleecing their savings and piling up debt.”

The figure below shows the median income for each of five groups of Americans based on their before-tax income.

The next figure shows, for 2017, the difference between expenses and pre-tax income for each of the five groups.  As one can see, expenses (red circle) outstrip income (blue circle) for the bottom two groups or 40 percent of the population.  Those in the third group are barely keeping their heads above water.

The last figure below shows that 2017 was no aberration.  Despite the longest expansion in post-war US history, most Americans are struggling to meet expenses.  As Spicer comments, “lower-earners have been sinking deeper into red over the last five years.”

It is no wonder that the Federal Reserve, in its Report on the Economic Well-Being of US Households in 2017, found that forty percent of American adults don’t have enough savings to cover a $400 emergency expense such as an unexpected medical bill, car problem or home repair.

One important reason for these depressing trends is that there has been little growth in wages.   And as Jared Bernstein explains in the New York Times, that outcome is largely due to the exercise of class power:

The United States labor market is closing in on full employment in an economic expansion that just began its 10th year, and yet the real hourly wage for the working class has been essentially flat for two years running. Why is that?

Economists ask this question every month when the government reports labor statistics. We repeatedly get solid job growth and lower unemployment, but not much to show for wages. Part of that has to do with inflation, productivity and remaining slack in the labor market.

But stagnant wages for factory workers and non-managers in the service sector — together they represent 82 percent of the labor force — is mainly the outcome of a long power struggle that workers are losing. Even at a time of low unemployment, their bargaining power is feeble, the weakest I’ve seen in decades. Hostile institutions — the Trump administration, the courts, the corporate sector — are limiting their avenues for demanding higher pay.

It matters how Americans understand their situation and the broader dynamics that shape it.  Challenging the ideology that misleads popular understandings, and that includes fanciful notions of what pulling on bootstraps can accomplish, is an important part of the movement building process needed to achieve any meaningful social change.

US Manufacturing Is Far From Healthy And The Main Reason Appears To Be Globalization

Public awareness and acceptance of the negative consequences of corporate-driven globalization on US workers has grown dramatically over the last years, aided in part by Donald Trump’s attacks on trade agreements like NAFTA.  Of course, Trump deliberately and misleadingly claims that US corporations have also suffered.  And, his tariff-raising actions are an ineffective response to worker difficulties.

Still, many economists continue to argue that the concern over trade is misplaced, that the US manufacturing sector is generally healthy, and it is technology, in particular automation, that is the main reason for the decline in US manufacturing employment.

A new paper by the economist Susan Houseman, “Understanding the Decline of US Manufacturing Employment,” is an effective rebuttal to their arguments. As she concludes: “The widespread denial of domestic manufacturing’s weakness and globalization’s role in its employment collapse has inhibited much-needed, informed debate over trade policies.”

What’s up with the manufacturing sector?  

Figure 1 shows that manufacturing employment remained roughly stable from the mid-1960s through the early 1980s, then began a slow decline until 2000, after which it fell dramatically.

Figure 2 compares the performance of the manufacturing sector–production and employment–with that of the private sector as a whole.  As we can see, the real GDP growth of the manufacturing sector has roughly matched the real GDP growth of the private sector (red and yellow lines; left scale).

Figure 2 also shows that manufacturing’s share of private sector GDP and employment has steadily fallen (green and blue-gray lines; right scale). Manufacturing’s share of private sector GDP peaked at 33 percent in 1953, falling to 13 percent in 2016.  Manufacturing’s share of private sector employment peaked at 35 percent, also in 1953, and fell to just under 10 percent in 2016.

Those who argue that our manufacturing sector remains healthy do so on the basis of the sector’s relatively strong growth record and the fact that it was achieved with ever fewer workers.  As Houseman comments:

many [research economists] have taken it as strong prima facie evidence that higher productivity growth in manufacturing—implicitly or explicitly assumed to reflect automation—has largely caused the relative and absolute declines of manufacturing employment. Even when some role for trade is recognized, it is deemed small, and the decline is taken as inevitable.

However, there is a bit of a puzzle here.  Figure 2 shows that manufacturing GDP growth has generally matched the GDP growth of the entire private sector at the same time that manufacturing’s share of private GDP has steadily fallen.  Houseman offers the solution to this puzzle: “If real GDP growth for manufacturing has kept pace with real GDP growth in the aggregate economy yet manufacturing’s share of private sector GDP is falling, then it must be the case that the average price growth of manufactured goods has been slower than the average price growth for the goods and services produced in the economy.”

In other words, a relatively slow growth in the price of manufactured goods would boost the real value of the goods produced.  At the same time, it would also cause a decline in the manufacturing sector’s share of total output.  And, an examination of price deflators shows just such price trends, with the overall price deflator for the private sector steadily rising and the price deflator for manufacturing remaining relatively constant in the post 1980 period.  Thus, the strong growth in manufacturing GDP and its related productivity/automation story rests heavily on the striking behavior of the manufacturing price deflator.

And therein lies the problem.  Houseman finds that the strong growth in real manufacturing GDP is driven by the price behavior of goods produced by a small subset of manufacturing, namely the computer industry (which she broadens to include semiconductors).  “Although the computer industry has accounted for less than 15 percent of value-added in manufacturing throughout the period, it has an outsized effect on measured real output and productivity growth in the sector, skewing these statistics and giving a misleading impression of the health of American manufacturing.”

Digging into the data 

Figure 4 shows price indices for private industry and manufacturing, omitting the computer industry, and for the computer industry alone. Without the computer industry, the price indices for private industry and manufacturing have largely tracked each other.  The computer industry price index, on the other hand, has marched to the beat of a far different drummer.

Figure 5 illustrates the importance of the above deflators to the debate about the health of the manufacturing sector.  Starting in the mid-1980s we see an ever-greater gap between the real GDP growth of manufacturing without the computer industry (blue-gray line) and the growth of real GDP in the private sector and manufacturing (including the computer industry).

More specifically, “From 1979 to 2000, measured real GDP growth in manufacturing was 97 percent of the average for the private sector; when the computer industry is dropped from both series, manufacturing’s real GDP growth rate is just 45 percent that of the private sector average.” Growth in the manufacturing sector, with the computer industry omitted, has been exceptionally slow over the years 2000 to 2016. Over that period, “real GDP growth in manufacturing was 63 percent of the average private sector growth. Omitting the computer industry from each series, manufacturing’s measured real output growth is near zero (about 0.2 percent per year) and just 12 percent of the average for the private sector in the 2000s.”

So, without the computer industry, manufacturing is clearly struggling.  But what explains the strong computer industry performance?  As we see next, there is also reason to believe that the computer industry’s performance, and thus its contribution to the manufacturing sector, is also seriously overstated, thereby further undermining claims of manufacturing’s health.

The computer industry

The real GDP of an industry is calculated by dividing the yearly dollar value of industry sales by its price deflator.  A real increase in output thus requires that industry sales grow faster than industry prices; if sales double and prices double there is no real gain.

Product quality changes slowly in most industries allowing rather straightforward year to year comparisons of dollar output.  However, the computer industry stands as an outlier; for years now, it has produced significantly more powerful products each year.  And, on top of that, it has even lowered their prices.

As a result of this unusual behavior, estimating the real growth of the computer industry requires a complicated adjustment of the industry’s price index to account for the yearly increase in computer power and speed.  In broad brush the adjustment is handled as follows: If a consumer buys a computer that has 20 percent more computing power than the previous year’s model, the government considers that every 100 new computers produced are the equivalent of 120 of the previous year’s model.  The result of such an adjustment is a significant increase in the industry’s output even if the same number of actual computers are produced, an increase that is further magnified by the decline in industry prices.

While it is entirely reasonable to adjust the computer industry’s output for quality when studying the performance of that industry, we have to be careful when the results are used in the calculation of manufacturing’s overall performance. In fact, the computer industry’s rapid gains, based on significant increases in output with declining employment, are misleading as a measure of actual manufacturing activity for two reasons: first, they owe more to difficult-to-measure quality improvements driven by research and development, and second, a growing share of computer industry production has been globalized which means that it takes place outside the country.

As Houseman says, “quality adjustment [for the computer industry] can make the numbers difficult to interpret. Because the computer industry, though small in dollar terms, skews the aggregate manufacturing statistics and has led to much confusion, figures that exclude this industry, as shown in Figure 5, provide a clearer picture of trends in manufacturing output.”  And as we can see those trends do not support the claims made that we have a healthy manufacturing sector.

The decline in manufacturing employment

Houseman similarly shows that productivity’s role in the decline in manufacturing employment has also been seriously overstated. As Figure 1, above, makes clear, the number of manufacturing workers has been falling for some time.

From 1979 to 1989 manufacturing lost 1.4 million jobs, with the losses concentrated in the primary metals and textile and apparel industries. “Employment in manufacturing was relatively stable in the 1990s. Although measured employment declined by about 700,000, or 4 percent, from 1989 to 2000, the net decline in jobs can be entirely explained by the [domestic] outsourcing of tasks previously done in-house. . . . Had these workers been counted in manufacturing, manufacturing employment would have risen by an estimated 1.3 percent rather than declining.”

As Figure 1 also shows, the explosive decline in manufacturing employment begins in the 2000s.  From 2000 to 2007, manufacturing employment fell by 3.4 million, or 20 percent. From 2007 to 2016, manufacturing fell by another 1.5 million.  And, of course, this was a period of intensified globalization, perhaps best marked by China’s 2001 entry into the WTO.

Examining the data, Houseman found that average annual employment growth in manufacturing was approximately 2.5 percent lower than the average employment growth in the private sector as a whole over the period 1977 to 2016.  Only 15 percent of that differential is accounted for by lower output growth in manufacturing, the rest is explained by higher productivity growth.  However, “When the computer industry is omitted from both series, 61 percent of the lower manufacturing employment growth is accounted for by manufacturing’s lower output growth, and just 39 percent by its higher labor productivity growth.”

As Housemen comments, “The point of this exercise is to show that there is no prima facie evidence that productivity growth is entirely or primarily responsible for the relative and absolute decline in manufacturing employment.”

And there is also reason to question the meaning of the strong computer industry productivity figures. Labor productivity is defined as the value-added of an industry divided by labor input.  In the case of the computer industry, the industry’s productivity growth was probably driven most by product improvements, not automation, that boosted its value added. However, global outsourcing of production also made a contribution. While outsourcing reduces the value added of the industry, the decline in labor input is far greater. Thus, it remains unclear how much productivity increases based on the automation of production have actually contributed to the decline in US manufacturing employment, even in the computer industry.

Most importantly, there is a growing body of research that points to globalization as the major factor behind the recent decline in US manufacturing employment.  For example, Economists David Autor, David Dorn and Gordon Hanson “conservatively estimate that Chinese import competition explains 16 percent of the U.S. manufacturing employment decline between 1990 and 2000, 26 percent of the decline between 2000 and 2007, and 21 percent of the decline over the full period.”  They also find that Chinese import competition “significantly reduces earnings in sectors outside manufacturing.”

In sum, there are good reasons for concern about the health of the US manufacturing sector and opposition to corporate-driven globalization strategies.