Saturday, September 12, 2009

Why Double-Digit Unemployment will be Permanent

This week's Time magazine cover story asserts that double-digit employment is here to stay but, true to its ever more liberal bias, the article avoids the most potent reasons why:
  • Government, advocacy groups, and the media pressure employers to hire candidates based not purely on merit but also on race, ethnicity, gender, and age. For example, courts are increasingly using the "disparate impact" standard to judge racial discrimination. If, for example, a smaller percentage of African-Americans pass an employee-selection test, even if no test items were evaluated to be biased against African-Americans, the test's disparate impact on African-Americans would be legally admissible evidence that the employer was discriminatory. Being pressured to hire on non-merit-based criteria, of course, reduces employers' desire to hire at all.
  • Government has vastly increased the dollar and human costs of hiring people. Of course, there are the employer-paid payroll taxes: unemployment tax, Medicare, Medicaid and half of Social Security plus all the associated paperwork. But mandates such as the Family Leave Act, which allows workers to take up to 12 weeks of leave every year(!) with guaranteeed rights of return, imposes onerous demands on employers. And President Obama has proposed making that leave paid! And for the coup de gras, health care cost, already a huge employer expenditure will grow far larger under ObamaCare, under which employer taxes will be used to subsidize the poor's health care.

  • Living-wage laws, for example, those in San Francisco, require employers to pay all workers $11.54 an hour (usually plus benefits). Employers who could use an employee that would add any less value than $11.54 an hour plus benefits won't hire anyone at all--few employers want to take a loss in hiring an employee.
    • The hassle factor. Many American employees, especially in liberal cities, and especially young employees, feel a sense of entitlement and litigiousness. They view employers as necessary evils. Many employers find the hassles of dealing with such employees outweigh the profit they would generate.
    • Increased government worker protections create yet more disincentives to hire. For example, California law requires that even if a non-exempt worker works only four days a week, if an employer wants an employee to work a 9th hour on even one day, the worker must be paid 50% more for that one hour. Another example: sexual harassment laws have been so liberalized that, for example, if a person merely perceives a coworker to be making unwanted advances or is offended by a photo of a sexily-dressed person in an employee's cubicle, s/he could have grounds to build a case against the employer for condoning a "hostile environment," even if the employer was unaware of the photo!
    • It is very difficult to fire an unsatisfactory employee, especially if the employee is in a "protected class:" woman, minority, person over 40, person with a disability (everything from cancer to depression.) Many such employees file wrongful termination actions and the rate is growing. Those suits are not only costly and can take many years, they take a great psychological toll on employees being accused of or deposed about alleged racism, sexism, ageism, or a hostile environment.
    • The overall cost of regulation is enormous. A study by California State University economists reported today by Governor Schwarzennegar finds that the regulations cost the average small business and $134,000 every year, a total cost of $493 billion and 3.8 million jobs. And, of course, President Obama is calling for yet more regulation.
    Those are potent reasons why employers are ever more likely to not hire U.S. employees but rather to offshore or automate jobs, or simply to calculate that there's too little profit to justify the disadvantages of hiring. And to the extent hiring is necessary, employers are ever more often hiring workers on short-term contracts to reduce payroll costs and the risks of lawsuits.

    Time magazine proposes the typical liberal solutions that have already been tried and failed: funding colleges more and job retraining. We already have the highest percentage of college graduates in American history and as discussed earlier, employers are yawning at them because all we've done is taken weak high school students, lowered standards in college, but radicalized them to demand the moon from employers. So employers offshore, automate, or temp as many positions as possible. Regarding job retraining, it's been tried and tried, and those federal training programs fail: cost a fortune per trainee and most trainees don't land a job in their new career or don't last.

    In my view, two changes would have the biggest long-term impact on decreasing the unemployment rate:

    Training more entrepreneurs, starting in elementary school. That would yield more successfully self-employed people, more new ideas for products and services, which would create the need for more employees.

    Freeing business from most government regulation.

    Fat chance.

    Pete Murphy said...

    Unemployment, both in the U.S. and the world as a whole, marches ever higher because the field of economics doesn't account for the relationship between population density and per capita consumption.

    Following the beating the field of economics took over the seeming failure of Malthus' theory, economist adamantly refuse to ever again consider the effects of population growth. If they did, they might come to understand that once an optimum population density is breached, further over-crowding begins to erode per capita consumption and, consequently, per capita employment.

    And these effects of an excessive population density are actually imported when a nation like the U.S. attempts to trade freely with other nations much more densely populated - nations like China, Japan, Germany, Korea and a host of others. The result is an automatic trade deficit and loss of jobs - tantamount to economic suicide.

    Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

    If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at or where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at

    Pete Murphy
    Author, "Five Short Blasts"

    Cornhusker said...

    Here is something to remember if you move back to the "red" states from California. This was posted on the blog for the Lincoln Journal/Star:

    "I was born and raised in Lincoln and moved back last year to raise my family. Affordable housing, good schools and a lower cost of living shaped our decision. That said, our biggest challenge was in finding good paying jobs that helped pay the bills. We got lucky and I found a decent paying job in my field, and we're enjoying the change from California living.

    Nebraskans complain too much about taxes. Go live elsewhere if perceived high taxes is your biggest complaint. Or go live in California and see what you get for your taxes? In Lincoln we pay property taxes and have a great school system that contines to expand to meet the needs of the city. In California they're closing schools, consolidating schools and laying off teachers because their tax structure cannot pay for new schools. We all make our choices. I'll pay reasonable taxes if I see a return. Here in Lincoln the value of a good education is evident. My kids love the schools here.

    We just need better paying jobs with better benefits. And more rights for employees."

    Anonymous said...

    While you've cogently presented employers' motivations for not hiring, I must admit my visceral distaste for much of what you've written, in light of the possible implications for, well, the "ungifted", of whose ranks many would consider me a member.

    - While I agree that employers should not be required to pay employees while they're on FMLA leave, the very existence of the FMLA provision makes it possible for many of those having caregiving obligations to remain gainfully employed. If FMLA were rolled back or revoked, I'm concerned that the ultimate effect would be to render that portion of the workforce having recurring caregiving obligations effectively unemployable. At this time in our history, particularly compared with the pre-WWII era, many working adults lack a support network of available and responsible family or friends willing and able to assist with caregiving obligations that inevitably occur during business hours, including transportation to medical appointments, assisting children, spouses, or aged parents undergoing/convalescing from surgeries or other medical procedures, etc.

    Were FMLA to be repealed, workers who are terminated or encouraged to quit when their caregiving obligations became too inconvenient for their employers to bear would quickly find themselves radioactive and able to obtain employment only as independent contractors (those who have highly sought after expertise or skills), contingent workers (those whose skills are marketable though common), or menial labor (semi or unskilled labor). The latter two - and particularly the last - group are at high risk of having their lives descend into what can be best described as a death spiral of downward mobility. Imagine having to explain to a prospective employer that you were terminated because you used too much vacation time in order to care for a sick spouse - talk about radioactive.

    - I disagree with your generalization concerning younger members of the workforce. In my own case, I found it considerably easier from both a stamina and logistical standpoint to work frequent 60-70+ hour workweeks when I was in my late 20s and 30s than I do today because I was more energetic at that age and my family obligations had yet to reach a critical mass to the point where they competed with work as a priority. Additionally, I’ve encountered numerous young professionals whose efforts equaled or even surpassed what I put forth back in the day.

    - I agree that a slacker employee shouldn't be able to play "cards" (race, gender, or even disability) to thwart an employer’s efforts to rid themselves of a problem. However, laws that protect employees should be modified surgically rather than gutted. For example, should an employer be permitted to fire an employee solely because a boss happened to inadvertently notice a prescription bottle for, say, prozac in the employee's name if the employee is otherwise in good standing? If a company is undergoing layoffs and had a workforce that was 20% minority prior to the layoffs...but 70% of those laid off were minorities (controlling for positions, departments, etc.), shouldn't the laid off have some means of redress if race can be definitively established as a motivating factor?

    - I'm not persuaded that training displaced workers is an exercise in futility - based on my own experience and success with pursuing retraining about a decade or so ago (on my own dime). Displaced workers have families that depend upon them for their very survival. Even if today’s retraining all too frequently fails, I can’t agree that government should provide no such assistance. Further, while I like your idea of teaching entrepreneurship from an early age, not everyone is cut out for it.

    I'm certainly not asking you to modify your own views - only to be mindful that even the most economically rational and cost-benefit analysis-certified policy prescriptions can, if enacted, have very adverse consequences for those who are vulnerable and are unfortunate enough to be caught in their blowback.

    Marty Nemko said...

    Anonymous, I appreciate the thoughtful post but I raise the following rejoinders:

    1. How confident are you that the amount of legitimate use of FMLA outweighs its dissembling use?

    2. TODAY's 20-somethings have very different attitudes toward work than the previous generation's.

    3. An extreme example of employer bad behavior such as firing someone because he's got a bottle of prozac on his desk is too atypical to be a sound counterargument.

    4. You may--in part because you paid for it yourself and in part because you are brigh--have benefited from job retraining, but as a national effort, the data is clear that it's been a dismal failure.

    Anonymous said...

    I work for an agency that has access to federal job-training funds. We recently received a report on our job-placement performance for the previous fiscal year. We trained 27 people in truck driving -- none have gotten jobs (no commerce, no jobs moving goods); 10 people in solar installation -- one has gotten a job; 5 people in a maritime program -- one has gotten a job. We won't even send people to phlebotomy training anymore; there are too many unemployed experienced phlebotomists competing with our new, inexperienced grads. The same is beginning to happen for medical billing/ coding, pharmacy technology and even medical assisting.

    I think two conditions led to this state:

    1) More people go into training programs during a down economy because they can't find jobs. So more people are coming out of a training program at the very time when there are few openings for them. If it weren't for the economy, most of these people would still be employed and wouldn't even be coming to us for retraining.

    2) Areas where there is actually job growth, e.g., the skilled trades, don't seem to be on anyone's radar -- not clients' and not counselors'. Yes, union apprenticeships are difficult to get into and most are only open every year or two, but there are community college classes to help people pass the entrance exams, some are open enrollment and there are also non-union programs to investigate.

    Related to #2 is the fact that a couple of areas -- healthcare and green tech -- got a little *too* popular. They are seen as quick career fixes by clients who have previously held only warehouse, customer service or retail jobs. People who want speedy training to give them a "career" have flooded the lower levels of these fields. Yes, healthcare can absorb a lot -- and it did -- but at all levels -- and even it became over-subscribed. I heard that 80% of a recent graduating class of nurses at a local community college hadn't found jobs even several months after graduating -- a year ago, such a class all would have had job offers waiting. And I know three middle managers in healthcare who can't find work. As for the green tide that is to raise all boats, Marty is right: we have a legion of trained solar installers with no place to put them to work except in volunteer efforts such as GRID Alternatives.

    Solutions? I dunno. Before being accepted into training, clients are required to provide labor market info "proving" employability after training, but LMI is a lagging indicator. Known no-growth areas are still labeled "in demand" on the national and California sites. The saddest thing is all the truck drivers, many of whom are ex-felons, desperately trying to "make it" on the outside and avoid going back to prison.