The Fruits of Civilization (60) Employment & Inflation

Employment & Inflation

In the years following the 2008 recession, the official unemployment rate fell far faster than the recoveries in American and Britain seemed to justify. Whereas the UK unemployment drop could be chalked up as job growth, US figures reflected frustrated workers leaving the labor force.

The dynamics of the British and American economies diverged in the wake of the 2008 crash. Output in both economies tumbled sharply, but the US bounced back relatively quickly, except in employment. In the UK, the trends were reversed: a brutal decline in output and feeble recovery, but the downturn in jobs was subdued. The distinction in employment practices reflected differences in inflation rates.

Relatively high inflation in UK meant that pay stubs shrank in real terms: British workers became cheaper relative to the prices of goods and services. Lower real wages encouraged hiring, while inflation checked borrowing for capital investment. Productivity fell, but employment was propped up. By mid-2018, official unemployment in the UK was miniscule but so were wages: less than they were a decade earlier, in the teeth of the 2008 recession.

America’s nominal wage growth was similar to Britain’s, but inflation was milder. As a result, real wages in the US nudged up following the 2008 crunch. That encouraged firms to squeeze more from their existing workforce rather than hire more workers.

In shock from a financial shelling, chastened banks are only willing to lend for tangible collateral – like buildings and equipment – that can be seized in a default. Companies that rely more upon machines than men therefore perform better in a recovery, pushing down demand for workers. Without a big drop in wages, weak labor demand yields a jobless recovery, or one that pays less for the workers who are hired: a rise in temporary positions, but not full-time employees. Such was the case in the US in the wake of the 2008 recession.

As the American economy continued to recover in the mid-2010s, the labor market tightened, but wages did not keep pace with inflation. This was quite unlike the beginning of the century, when wages rose with a tight jobs market. The situation in the 2010s demonstrated how strongly the market economy had become stacked against the average worker.

Labor-market recovery from financial crises is characterized by either higher unemployment (jobless recovery) or a lower real wage (wageless recovery). Inflation determines the type of recovery: low inflation is associated with jobless recovery, while high inflation is associated with wageless recovery. ~ Argentinean-American economist Guillermo Calvo et al