10 Million US Jobs are Missing

That’s according to calculations by Northwestern University economist Robert J Gordon:

High and persistent unemployment in the US has emerged as one of the most important macroeconomic legacies of the 2007-09 world economic crisis. While the decline of business activity in the US was no larger than in Europe, the US is an outlier in its outsized response of the unemployment rate to its decline of output (IMF 2011).

Here we quantify the shortfall of US employment – some 10.4 million missing jobs – and ask: Why did the number of jobs decline so much and why has it recovered so little? Two sets of causes stand out.

  • First, there has been a changing balance of economic power in the US between management and labour in the past two decades that has led to more aggressive firing of workers when business profits head south.
  • Second, the large negative output gap (actual real GDP below trend or potential) is not shrinking, due to the “double hangover” persisting in the aftermath of the housing bubble. . . .

Once the bubble burst and house prices began to tumble, the ‘double hangover’ began.

  • The first hangover was the excess supply of housing.

This led to a glut of unsold houses and condos that put continuous downward pressure on home prices. . . . Many homeowners avoided foreclosure but were “underwater,” with houses now worth less than the face value of the mortgage and thus faced the hapless choice of draining resources to pay the mortgages or defaulting, with the consequence of a ruined credit rating.

  • The second hangover was the impact of excessive indebtedness.

Just as consumption could exceed income as debts were being run up, so the second hangover required consumption to be below income while debts were paid off. The ratio of total household indebtedness to personal disposable income rose from 90% in 1995 to 133% in 2007 and has since fallen just to 120%. Year after year of saving and underconsumption will continue as households continue to pay off debts.

You can read his full analysis here.

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