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Jobs in the US, job loss in the UK: a tale of two recoveries | David Blanchflower

The UK’s ruinous experiment with austerity only highlights how good the US economic news is for Obama’s re-election chances

There were two major pieces of good news Friday on the US economy. First, there was better-than-expected news from the non-manufacturing survey from the ISM, which added to a very positive sister survey of manufacturing earlier in the week. The combined message that can be drawn from the two surveys is that the US economy grew at the fastest rate for ten months in January. The surveys are broadly consistent with gross domestic product rising at an around 3.0% at the start of the year, setting the scene for a robust first quarter.

The ISM survey also brought goods news on employment, with a leap in non-manufacturing headcounts, following a more modest, though still substantial, rise in manufacturing jobs reported earlier in the week. The overall rise in employment was the largest since February 2006, with non-manufacturing jobs also showing the largest increase over that near-six-year period.

The good news on jobs kept on coming with the publication Friday by the Bureau of Labor Statistics of the latest data on the US labor market. An improving labor market boosts Obama’s re-election chances, given that both his likely Republican opponents have argued that his economic policies have not been working. The data are starting to suggest otherwise.

The rise in non-farm payrolls of 243,000 was larger than the consensus of around 150,000, with all of the increase in the private sector (+257,000), and only a small fall in public-sector employment. There was growth in employment across almost all sectors, with especially large increases in manufacturing (+50k), professional and business services (+70k) and leisure and hospitality and even construction (+21k). Non-farm payrolls are now up by nearly 2 million on the year; private-sector job creation of 2.22m far outweighs public-sector job declines of 275,000.

These employment numbers are derived from a survey of firms. Data are also reported in the release from a survey of households, which also provides a count of the number of jobs. Employment counts from the firm and establishment surveys often diverge since the coverage is different. (The household survey has a more expansive scope because it includes the self-employed, unpaid family workers, agricultural workers and private household workers, who are excluded by the establishment survey.) According to that measure, which can be pretty volatile, employment has grown by an unlikely 850,000 on the month; but on the year, the increase of 2.3m is very close to that derived from the firms’ count.

The household survey is also used to calculate the unemployment rate, which fell by more than expected, to 8.3%, the lowest level since February 2009. The number of unemployed also fell, by 340,000 on the month, and is now down by 1.1m on the year. Unemployment rates fell sharply for African Americans (from 15.8% to 13.6%), and somewhat for Hispanics (from 11.0% to 10.5%). Young adults aged 20-24 saw a sharp decline in their unemployment rates, from 14.4% to 13.3% on the month, as did high-school dropouts (13.8% to 13.1%) on the month.

Interestingly, the young, minorities and the least educated tend to do worst in slumps – and benefit, relatively, most in booms – as their unemployment experience tends to be more cyclically volatile than other groups such as the more highly-educated. So, these are all welcome signs and will alleviate some of the pressure on incomes at the low end of the US scale.

Of interest also is how the improvement in the unemployment rate is distributed across states. The latest data we have by states, up to December 2011, shows that 46 states registered unemployment rate decreases from a year earlier, while four states – Hawaii (6.3% to 6.6%); Illinois (9.2% to 9.8%); Mississippi (10.2% to 10.4%); North Carolina (9.8% to 9.9%); plus the District of Columbia (9.6% to 10.4%) – experienced increases. Currently, five states have double-digit unemployment rates – California (11.1%); DC (10.4%); Mississippi (10.4%) and Rhode Island (10.8%). But overall, the improvement is widespread and not limited to a few states, which should also help Obama in November.

An especially interesting comparison is between the United States and the United Kingdom, which implemented a package of austerity measures in 2010. US GDP growth for Q4/2011 was +0.7% compared with -0.2% for the UK. Both the UK and the US have large financial sectors and both were highly exposed to a financial sector shock. In March 2008, unemployment rates in the US and the UK were similar (5.1% and 5.2% respectively). The response in the US was for firms to shake out workers at early stages of the recession; thus, unemployment went up to 10% in October 2009 (see graph). UK firms appear to have hoarded labor, and by October 2009, it had only reached 7.9%; but they have now started to shake the tree.

So the situation has now reversed itself, and the two series are now moving in the opposite directions – US unemployment down and the UK’s up. We only have data for the UK up to November, as their surveys are small, so they only report rolling three-month averages, but all indications are that the series will cross in the next couple of months. The UK is in a jobless, or even a job-loss, recovery.

It is likely that Obama will run on a platform for jobs against an obstructionist Congress and a Republican party committed to fiscal austerity and a weakening of the Federal Reserve. As far as I can tell, they have no credible plan at all for jobs. The lab experiment that has been conducted in the UK, which essentially has done what Republicans advocate, which provides great ammunition for the Democrats since austerity has demonstrably failed in the UK – and with more than 90% of the proposed cuts yet to come. Despite both countries having their own exchange rate, and central banks that have cut interest rates to the nominal bound and which have injected large amounts of quantitative easing into the economy, outcomes on the job front are very different.

Unlike Greece and Ireland who are stuck in monetary union, the UK coalition government voluntarily decided to run the experiment to see if there is such a thing as an “expansionary fiscal contraction”. Now, they have found out that there isn’t.

The UK cut public spending and fired public-sector workers; over the last year for which we have data, public-sector employment fell by 276,000, while private-sector employment grew by 262,000, giving a net decline of 14,000. There has been no private-sector resurgence and a “expansionary” fiscal contraction has turned out, in fact, to be contractionary.

Interestingly, the UK coalition government is hugely supportive of loose monetary policy and more quantitative easing, which, they have made clear, is their plan B. Next week, the Bank of England will do more quantitative easing – probably, another £75bn injection – to make up for the fact that cutting public spending doesn’t work in a slump. Aren’t Republican nomination rivals Newt Gingrich and Mitt Romney (both pledged to implement, in large part if not all, the Ryan plan) proposing cuts in public spending? And are they not opposed to further QE by the Fed, a position that looks like a disaster to me, if the UK is anything to go by?

I suspect they would have a different view, if they were in power. But it is now starting to look as if we won’t have the chance to find out. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds