High unemployment in the US isn't as bad as you might think, at least not economically, though socially and politically it's a different story.
In light of it recently being labour day, given the remarkable unemployment statistics released recently, and the parallels some commentators draw between the Covid-19 economic downturn and the Great Depression of the 1930’s I want to spend some time discussing the political-economic labour system the American economy is built on, and why the American economy produces lower lows and faster recoveries than the European and east Asian labour markets which are more geared towards solidarity than raw economic efficiency.
More than most economies the American system is meant to embody the principles of classical economics. By allowing firms to hire and fire freely one creates a system which in theory will lead to the most efficient allocation of labour by making it easy for labour rich firms to downsize and labour hungry firms to hire with minimal restrictions. This creates a system which when times are bad can rapidly downsize and thus reach profitability again quite fast compared to more rigid labour markets. The results can be violent swings in employment where millions of people can lose their jobs in a few short months but be rehired by the productive firms which survived the downturn relatively shortly thereafter.
There are considerable economic benefits to such a system, but there are also some major social drawbacks. Unemployment is both a social and a political problem as well as an economic, which makes a model which accepts low job security and the potential of temporary mass unemployment a difficult sell in hard times; ironically when it’s the most useful. Polanyi argues, quite persuasively in my opinion, that a true labour market cannot be constructed, and that attempting to institute one undermines traditional social structures, and it’s in times of crisis the drawbacks become most apparent.
Still, if a v-shaped recovery is likely to occur anywhere it’s in the US. The high unemployment numbers and grim comparisons with the Great Depression makes it easy to become pessimistic but the current crisis is not at all analogous to the Great Depression. One of the defining features of the Great Depression which made it especially bad was the decision to shrink the money supply during the crisis which made things worse, today the Fed takes the opposite approach of massively expanding the money supply. At the end of the day one shouldn’t worry as much about the economic implications as the social and political. I’ve argued numerous times on the blog that across most of the West the millennials and gen z are worse off than their parents due to higher barriers to entry to the job market, very high student loans in some countries, and high costs of living due to a housing shortage. Couple that with the fact that the hardest hit industries like tourism and restaurants employ a lot of young people and it becomes clear that the political and social consequences will be more important than the economic effects in the US, in Europe though it’s a different story.
If you liked this post you can read last week's post here, and my most popular post about the similarities between the Euro and the gold standard here. Please come back next week for a new post, and I'd appreciate it if you recommended the blog to a friend or coworker who migh like it!
Written by Karl Johansson
Cover Photo by Pavel Chernonogov from Pexels