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Economic Reporting Review

November 15, 1999:

Unemployment drop; Clinton's trade claims; IMF criticism

By Dean Baker

Employment | Trade | Social Security | Germany | IMF | Outstanding Stories

EMPLOYMENT

"Jobless Rate Down to 4.1 Percent in October"
John M. Berry
Washington Post, November 6, 1999, page E1

"Jobless Rate Drops to 4.1 Percent as Wages Rise by 1 Cent an Hour"
Louis Uchitelle
New York Times, November 6, 1999, page B1

These articles report on the Labor Department's release of employment data for the month of October. While both articles note the slight drop in the overall unemployment rate to 4.1 percent, and changes in the unemployment rate among various demographic groups, neither notes the large rise in unemployment among African-American teenagers that has taken place over the last several months.

In July, the unemployment rate for African-American teens was 22.9 percent. Since then it has risen by 8.6 percentage points to 31.5 percent. This figure is extremely erratic, but since this is the second consecutive month that the unemployment rate for African-Americans teens was over 31.0 percent, it suggests that there really has been a striking deterioration in their job prospects at a time when the labor market as a whole is quite strong.

The Post article notes the decline in manufacturing employment in recent months, which has been coupled with growth in manufacturing output. The article comments that this is evidence of rapid productivity growth in manufacturing. The Post article also notes rapid growth in employment in businesses that provide services to other businesses, such as temporary help agencies. This employment growth provides an alternative explanation for how employment can decline in manufacturing while output increases. If manufacturing firms are increasingly using contract labor or in other ways outsourcing jobs that used to be performed by employees on their payroll, they can have higher output and lower levels of employment without any increase in productivity.

The Times article comments that the low wage growth of recent years has been surprising since "most economists expected, as unemployment fell below 5 percent, that the scramble to find enough workers would force employers to bid up wages at an accelerating rate." Actually, prior to 1994, most economists argued that wage growth would begin to accelerate if the unemployment rate fell below 6 percent. (See, e.g., Congressional Budget Office, 1994, The Economic and Budget Outlook: An Update; or R.J. Gordon, "Inflation and Unemployment: Where Is the NAIRU?," paper presented at the Board of Governors of the Federal Reserve System Meeting of Academic Consultants, 12/1/94, Washington, D.C.). The unemployment rate has now been below this level for more than five full years.

"Help Wanted, Meaning Help Can Be Fussy"
Peter T. Kilborn
New York Times, November 6, 1999, page A1

This article discusses the impact that the tight labor market is having on workers' job opportunities. The article correctly points out that low unemployment has had an especially positive impact on the prospects for low-wage workers, but it does not put the situation in its proper historical context. The real value of the minimum wage, while it is above the low point it hit in the '80s, is still approximately 20 percent below its level of 30 years ago. As a result, about 15 percent of all workers are receiving an hourly wage that would have been below the legal floor of the late '60s.

The article also repeatedly asserts that firms cannot raise wages, because they can't pass on the cost in higher prices. There is another option: Higher wages could erode profit margins rather than leading to higher prices. The profit share of corporate income has risen by more than 3 percentage points since the last cyclical profit peak in 1988, pushing the profit rate to a post-war high. It is reasonable to expect that such high rates of profit will not be sustained indefinitely, and that the profit share will move back toward its historic average.

"Last Stand in Defense of a Hollow's History"
Francis X. Clines
New York Times, November 7, 1999, Section 1, page 16

"With 500 Miners as a Chorus, Byrd Attacks Court Ruling"
Francis X. Clines
New York Times, November 10, 1999, page A18

These articles report on the enforcement of an environmental regulation that will restrict strip mining in West Virginia. Both articles report on concerns and protests over the prospect of lost coal mining jobs. Actually, it is not clear that this regulation will, on net, lead to a loss of coal mining jobs in West Virginia. Strip mining employs very few people. It has been rapidly replacing underground mining, throwing thousands of miners out of work. West Virginia has lost close to half its coal mining jobs in the last five years. The industry now employs slightly more than 15,000 workers in the state. It is entirely possible that by restricting the practice of strip mining, this environmental regulation may in the long run actually save jobs for miners in the state.

"Senate Passes Minimum Wage Hike"
Helen Dewar
Washington Post, November 10, 1999, page A4

This article reports on the Senate's passage of a bill that would raise the minimum wage to $6.15 over 28 months. The article includes a chart which shows the changes in the value of the minimum wage through time. One line in the chart shows the value of the minimum wage in 1999 dollars. This line shows a large decline over the last 20 years. The other line is labeled "in real dollars." This line shows an increase in the minimum wage through time. This label is presumably a typographical error. The line showing the minimum wage in the 1999 dollars is presenting the value of the minimum wage "in real dollars." The other line is showing the value of the minimum wage measured in nominal dollars.

See more about labor.

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TRADE

"Clinton Hits the Road to Boost Trade"
Charles Babington
Washington Post, November 11, 1999, page A4

This article discusses President Clinton's trade agenda. At several points it suggests that the president is a supporter of free trade or of opening trade. This is not accurate, since President Clinton has done little or nothing to free trade in many areas such as doctors' or lawyers' services. He has also attempted to restrict free trade in many products by imposing copyright or patent protection on items sold in developing nations. President Clinton has only consistently supported freer trade on the production of manufactured goods.

At one point, the article comments that the president "repeated his trade mantra: The United States has 4 percent of the world's population, and 22 percent of its income, so 'we've got to sell something to the other 96 percent. . . . But we will never be able to do it unless working people believe that trade benefits ordinary American families.'"

This statement is literally incoherent. It would make no more (or less) sense if the United States had 22 percent of the world's population and 4 percent of its income. There is absolutely no logical link between these numbers and what the United States needs to do in terms of trade policy. It is noteworthy that such a statement would now be the president's mantra for advancing his trade policy.

See more about trade.

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SOCIAL SECURITY

"House Passes Compromise Bill for $13.5 Billion in Foreign Aid"
Eric Schmitt
New York Times, November 6, 1999, page A6

This articles reports on the passage of a foreign aid bill by the House of Representatives. At one point it discusses the possibility that current spending levels could "raid" Social Security if they required spending a portion of the Social Security surplus.

In reality, the Social Security system will not be affected at all by the outcome of this budget debate, as has been pointed out in previous articles (see e.g. "Hands-Off Social Security Vow Ignores Reality, Experts Say," by George Hager, Washington Post, 10/10/99, page A5; or "Noble Talk of Saving Social Security Is Muted by Political Gamesmanship," by Richard W. Stevenson, New York Times, 9/29/99, page A20; and ERR, 11/1/99).

See more about Social Security.

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GERMANY

"Siblings' Lives Trace a U.S.-German Divide"
Roger Cohen
New York Times, November 7, 1999, Section 1, page 1

This page 1 article contrasts the lives of a German brother and sister who were separated as teenagers, just before the building of the Berlin war. The sister came to the United States and lives in rural Missouri. The brother remained in what was then East Germany. The article discusses the two as "national symbols" of the United States and Germany, respectively, characterizing the sister as an "assertive American" and the brother as a "compliant German." The article includes numerous assertions about both countries that are not supported by evidence.

For example, the article asserts at various points that Germany's welfare state is "no-longer-affordable," "beyond its means," "carrying more weight than it can bear," and that its "time has run out." At present, German's annual budget deficit is approximately 2.5 percent of GDP. It's national debt is slightly above 60 percent of GDP. At Germany's current growth rate, this is a situation that could be sustained indefinitely.

It is also worth noting that, according to data from the Bureau of Labor Statistics and the Conference Board, Germany has consistently maintained productivity growth rates of approximately 2.0 percent annually. This is considerably higher than the productivity growth rates experienced in the United States over most of the last 20 years, and will allow for more rapid growth in wages and living standards in Germany. It also means that Germany in 1999 is far richer than it was in 1979 or 1989. If the nation was able to afford its welfare state in prior decades, it is difficult to understand how it can no longer afford benefits that have actually become somewhat less generous through time.

The article also asserts that the ratio of retirees to workers is projected to more than double over the next 30 years. According to projections from the World Bank, the percentage of the population over age 60 is projected to increase by slightly less than 50 percent over this period (the normal retirement age in Germany is age 65). However, since there are many people under age 60 who can't currently find work, the ratio of retirees to active workers is likely to increase by less than would be implied by the population shifts alone, since the percentage of unemployed among the working age population should decline through time.

While the article repeatedly calls attention to Germany's high unemployment rate, it never notes the most obvious explanation for the continuation of high unemployment-- the contractionary monetary policy pursued first by the Bundesbank and now by the European Central Bank. The European Central Bank just raised the real short-term interest in Europe to 2.0 percent. By contrast, the U.S. Federal Reserve Board allowed the real short-term interest rate to remain near zero for two years when the United States was recovering from its last recession between 1992 and 1994. The predicted result of the contractionary monetary policy pursued by European Central Banks is precisely the high unemployment that Germany and other European countries are experiencing. This point was recently argued in a statement signed by many of the world's most prominent economists. (See "An Economists' Manifesto on Unemployment in the European Union," BNL Quarterly Review, 9/98.)

The article also asserts that Germany "desperately needs more risk-taking," pointing out that Americans are nearly four times as likely to start a business as Germans. While it is certainly possible that Germany would benefit if more people would take the risk of starting a business, it is also possible that the United States is hurt by too many people taking this risk. Most new businesses fail. When they do, it often results in considerable resources being wasted.

For example, Amazon.com has absorbed billions of dollars that could have been used for other productive investments. It has never made a profit, and its top executives still cannot predict when they expect it to be profitable. If it turns out that Amazon.com can never make a profit and the business eventually collapses, most of the resources that have gone into the firm to date will have been completely wasted. If an economy produces a large number of such unsuccessful firms, it would be an enormous drain on its productivity. In the absence of other evidence, there is no reason to believe that the rate of business creation in the United States is closer to the optimal rate than the rate in Germany.

Finally, it is worth noting that the woman who lives in Missouri is a farmer. At one point, she is quoted as saying that, in contrast to her brother who is unemployed and waiting for his government pension when he turns 60, "I never could bring myself to sit in some county office and ask for some handout like food stamps." The U.S. government has paid out farm subsidies that have averaged more than $15 billion annually over the last fifteen years. This averages more than $10,000 per farmer each year. This government subsidy is far larger than the food stamp allotment available to poor families in the United States, and is approximately the same size as the pension that her brother is waiting to receive.

See more about Europe.

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INTERNATIONAL MONETARY FUND

"Camdessus to Quit as Head of IMF"
John Burgess
Washington Post, November 10, 1999, page E1

"Longtime IMF Director Resigns in Midterm"
David E. Sanger
New York Times, November 10, 1999, page C1

Both of these articles discuss the decision of Michel Camdessus, the director of the IMF, to resign his position in the middle of his term. Both articles downplay the severity of the criticism that was directed against the policies pursued by the IMF under Camdessus.

For example, Joseph Stiglitz, the chief economist at the World Bank, was harshly critical of the IMF for insisting on economic policies that led to the collapse of the Russian economy and forced tens of millions of Russians into poverty (see "Wither Reform: Ten Years of the Transition," by Joseph E. Stiglitz, www.worldbank.org/research/abcde/stiglitz.html). To take another example, the IMF forced Brazil to waste billions of dollars in the last year, supporting its currency at an above market rate.

The Post article notes the views of Camdessus' critics on the left. It claims that they viewed him as "a heartless bureaucrat" who demanded large sacrifices from the poor in countries that sought IMF assistance. It is unlikely that many on the left would claim insight into the nature of Mr. Camdessus' heart. Most on the left would probably criticize him for insisting on policies that have consistently produced poor economic results in developing nations, and left most of their populations significantly worse off.

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OUTSTANDING STORIES OF THE WEEK

"Medical Journal Cites Misleading Drug Research"
Denise Grady
New York Times, November 10, 1999, page A18

This article reports the findings of a new study in the Journal of the American Medical Association, that scientific studies have a bias towards exaggerating the effectiveness of new drugs. According to the article, the study cites a variety of reasons for this bias, including the fact that the pharmaceutical industry is responsible for funding a growing portion of research on drug safety and efficacy.

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Dean Baker is a senior research fellow at the Preamble Center and at the Century Foundation.

ERR is edited by Jim Naureckas.


Recent articles can be found on the websites of the New York Times and Washington Post.

You can sign up to receive ERR via email every week at www.preamble.org/columns/subbaker.htm. ERR is archived at www.fair.org/err/.


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