TCS Daily

Korea's Jobless Recovery?

By Christopher Lingle - May 5, 2005 12:00 AM

Analysts from the Bank of Korea and various private economic research institutes speak often about a "jobless recovery". Similar concerns have been raised in the US and elsewhere.

Indeed, it appears that it may be a global phenomenon. According to the International Labor Office (ILO), a record number of 185.9 million people were unemployed in 2004, 6.2 percent of the total global labor force. (Of course, a partial explanation for this record number could be improved measurement and reporting.)

It turns out that the notion of a so-called jobless recovery is associated with an analysis of the US economy by Arthur Okun during the 1960s. He posited that unemployment could rise when there was economic growth if actual output is below long-term "potential" output.

His notion of an "output gap" reflects the erroneous assumption that consumer demand will lag behind productivity gains. As it turns out, productivity gains are not even a part of the macroeconomic equation.

First, it is a simple fact that employment gains always lag behind increases in output. Secondly, there is an inverse relationship between layoffs and productivity. For example, declining sales of output induce firms to fire workers so that measured productivity falls. As sales start rising, there will be increased hiring and productivity will begin to rise briskly as the recovery begins. In this sense, Okun reversed the direction of cause and effect.

In all events, the inability of those wishing to be employed but being unable to find a job cannot be traced to any single cause. Labor force activities reflect personal considerations and economic conditions as well as legislative and regulatory arrangements.

In any given year, workers move into the labor force and then withdraw. There are workers with seasonal commitments like students or those in the building and construction industries and some of them may be temporarily unemployed. At the same time, the effects of industrial and technological change force readjustments and relocation that induce a spell of unemployment.

Ironically, the ILO overlooks the introduction and enforcement of labor laws and regulations as an important cause of unemployment. This includes jobs lost due to mandated increases in wage or benefits, shortened workday or workweek, higher overtime pay or increased funds for sickness and old age. Indeed, any obligatory increase in employment costs will induce employers to shed marginal laborers whose performance barely covers those total costs.

Jobs lost through changes in law or the regulatory environment tend to be persistent. By contrast, seasonal unemployment or unemployment caused by industrial and technological change tends to be transitory.

The sort of government interventions that cause chronic unemployment will often be applied to remedy the situation they caused. It is cruel to induce citizens to believe that income and working conditions can be improved by legislation and regulation. Instead of encouraging people to take initiatives and dedicate themselves to work, this misguided belief encourages them to put their faith in collective force and coercion.

Raising the minimum wage and increasing mandated benefits will increase the costs of hiring labor that may do more harm than the intended good. While highly-skilled workers may produce enough to cover these costs, unskilled minimum-wage workers may not justify total compensation twice the minimum wage. It turns out that many young workers will accept payments for employment at market rates below the minimum in order to have a job and gain experience.

In the US, the minimum wage of $5.15 an hour may seem to be harshly low. However, businesses must also pay 7.65% of salaries to Social Security. And unemployment insurance premiums add from 2% to 10% while workmen compensation to cover on-the-job injuries add from 10% to 100%. These additional costs can bring total employment costs to as much as double the basic wage. And then there are fringe benefits like time off for vacation or sick leave or for national and local holidays and the payment for health and life insurance or pensions, etc.

In Korea, careful rethinking of the unemployment issue suggests that governments should measure how statutes and regulations aimed at the labor market contribute to joblessness. Of particular concern is the high and rising overall tax burden on households and businesses that reduces both consumption and investment as components of GDP. When domestic companies make fewer or smaller investments at home, fewer new jobs are created.

It is also a fact that militant labor unions inhibit employers from hiring new local staff. Consequently, businesses are being lured to foreign countries with more stable labor markets and more hospitable investment environments so that domestic employment prospects are worsening.

The government can promote conditions for the creation of new jobs by eliminating disincentives on capital formation that would lead to increased employment. For example, there are over 100 different laws that restrict land use and create unnecessary hurdles that inhibit corporate investment.

Before dreaming up more ways to intervene in labor markets or to redistribute income and wealth, policy makers have a lot of explaining to do for their own sins.

Christopher Lingle is Global Strategist for eConoLytics.



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