The changing face of the US labour market

23rd August 2012

Reversion to the mean

Mark Urquhart, investment manager at Baillie Gifford suggests that the really dangerous words in investment are not ‘this time it's different', but ‘reversion to the mean'. He says that despite the ubiquitous risk warnings, investors persist in assuming that the past is a guide to the future and it can be extremely costly. He believes that there is a profound tension between innovation and longevity of growth and concludes: "being open to the idea that things do not revert to the mean is useful…after all, in the 20th century 90% of all businesses failed while the majority of the world's population experienced monumental political change'.

US labour market

Urquhart gives the example of communist countries, but an example closer to home would be the changes at work in the US labour market. In the Financial Times, Sebastian Mallaby points out that there has been a huge change in the US labour market that is creating ripples across the whole US economy: "US unemployment has gone from lowest in the G7 to third highest. Because workers have become discouraged, the US labour force participation rate has slipped from the top spot to the middle of the pack. In consequence, the share of Americans in work has declined by fully 7 percentage points, a fall nearly three times more drastic than experienced in the UK."

He argues that the US's traditional ‘carrot and stick' approach to labour laws – where low unemployment benefit was countered by plentiful employment opportunities – is no longer working: Technical change has reduced opportunities for low-skilled men, who often find it impossible to re-enter employment once they have lost their jobs. The crisis also impacted construction, leaving 35% of working age US men without a high school diploma out of work (up from 25% in 2005). This has meant the Government has had to hike previously low unemployment benefits.

Mallaby's solution? "Payroll taxes should be reduced, especially for low-income workers. Enrolment on disability should be policed for abuses, and the disabled should be encouraged to re-enter the workforce where possible." 

Plenty disagreed. On the comments board Nnelg says: "Companies aren't hiring because consumers aren't spending — at least not like they were. And consumers aren't spending because many of them are out of work, under-employed or have seen their nest eggs (in the form of the home value or retirement accounts) plummet in worth. You don't break that cycle by forcing discouraged workers back into the labor force." Rogerbater blames outsourcing: "Massive numbers of low skilled (but well-paid jobs) have been exported together with the industries that supported them – never to return." 

Although it can be difficult to see through the mire of employment statistics – it is clear that a shift is taking place. The unemployment rate in the United States remained at 8.3% in July of 2012. Historically, from 1948 until 2012, the United States Unemployment Rate averaged 5.8%.

Could this be why Romney is now coming out in support of heavy industry?

His recent volte-face on the coal industry may be a recognition that these low-skilled jobs are diminishing: "Romney, who as Massachusetts governor vowed to close an aging coal-fired power plant because it "kills people," has embraced the coal industry in his presidential bid, with Murray proving a key ally. He touts coal development as central to his aim of achieving "North American energy independence" at the end of a second term in office."

The shifts in the labour market may have other unintended consequences. Previously, US demographics have always been relatively strong. There is a danger that the paucity of jobs may threaten this. Many couples are postponing or forgoing marriage until the financial foundations of their relationship improve," said sociologist Bradford Wilcox, director of the National Marriage Project at the University of Virginia in Charlottesville. "Given high rates of unemployment and underemployment for young adults, this pattern of postponing the wedding among many young adults is likely to continue until the United States sees a robust recovery kick in."

Rise of the robots

On Mindful Money we have already discussed how robots may be cutting out low-skilled jobs in China. There is every danger that they will do the same thing in the US:

"Robotisation has the capacity to do for manufacturing labour what digital did to analogue or the printed word. It can make complex items such as mobile phones which are currently churned out in China by hundreds of thousands of workers."

The shift in the US labour market is profound and long-term and has the potential to impact on the country's favourable demographics. Reversion to the mean is a seductive theory, but there may be far-reaching changes in economies, investment markets and companies that investors should factor into their decision-making.


More on Mindful Money:

The Financialist: 'This chart sums up 80 years of US energy policy'

Should China be worried by the rise of the robots?

How exactly can the ECB 'save the Euro'?

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The Financialist

26 thoughts on “The changing face of the US labour market”

  1. James says:

    Hi Shaun
    One of the interesting things about your blog is that you look at short term, medium term and long term trends looking backwards. They all point to the same thing, namely that we cannot rely on growth to dig us out of the fiscal mess that we are in. While the austerity may or may not be inhibiting growth :
    1. Debt is still rising at an amazing rate throughout most of Europe;
    2. While politicians fiddle at the edges, raising VAT, marginal tax rates, tax avoidance etc, none of them takes a fundamental look at what to do if European economies are simply not capable of getting back to growth because of fundamentally uncompetetive things like the Euro, wage rates, labour laws etc
    If one just forgets the poltitics for a moment and looks at the maths (particularly taking into account aging populations etc), i can no longer see any way out of this mess. We are going to have very low growth, high unemployment, higher taxes and deficits for many years to come. I am not sure that I would want to be the politician winning the next election in any major European country except Germany.

    1. pavlaki says:

      Without significant growth there really isn’t any way out of this mess, as you point out above. For decades politicians have expanded the states liabilities by offering ever more generous benefits that have to be funded by future generations of tax payers. Add to this the demographics of most European countries (ageing populations that are living longer and low birth rates) and you have a recipe for serious problems in future. These issues are coming to a head rather sooner than expected in countries such as Portugal, Spain, Greece and Ireland where the best and the brightest of the workforce are emigrating and seeking employment elsewhere. These countries not only suffer economic decline (and hence lower tax contributions) but a decline in the number of workers who are expected to support the state ponzi scheme in future. Only a radical overhaul of state benefits (i.e a reduction ) will help this and I wouldn’t want to be the politician trying to sell that one! The alternative is ever increasing government debt as they put off the evil day into the future. Growth therefore has to be a huge priority and if I was an Italian politician, I would look seriously at abandoning the Euro to try to achieve this. National interest must override the Euro project when faced with such stark choices. The UK is not immune to this problem either but our high levels of immigration pushes the day of reckoning into the future. Which, given the current debate about levels of immigration, has a certain irony about it!

      1. MS says:

        Well, the mess itself is that there’s no growth, so it’d be rather hard to fix that without actually getting growth. What you say about demographics, taxes, and the ever-growing state is more or less indisputable (at least in my mind).

        Ever-increasing government debt is no alternative, either, since any possible creditors with a brain can see they won’t be getting any money back going down that path.

        So basically, where do you go from here? I suppose one solution is to start hacking off entire limbs of goverment spending and taxes, as you say, but I don’t think that’s a popular option in Italy, nor one politicians are usually fans of. Italy could also certainly benefit from a return to her own currency, as well, but again, not a popular option, though as I understand it, it’s on the table for Grillo’s party. One more thing which is often overlooked is the rather depressing amount of bureaucracy, corruption, and ‘protected’ professions in countries like Italy. I’m sure none of that is doing much good for the economy, either.

        So basically the options are:

        1) Make some serious reforms;
        2) Do nothing and pray things work out;

        I wonder which one will be chosen…

    2. Dan Hill says:

      A debt based monetary system sheltering zombie corporations and zombie banks certainly hinders things. The system clearly doesn’t work and yet nothing has been done to reform it. We still continue to abide by the rules of a discredited game and wonder why the situation doesn’t get any better.

  2. Justathought says:

    Hi Shaun,

    No doubt the data’s release are all pointing out toward a recovery so dear to the elite of the EZ. We are indeed on track as the pace of recovery is fastening up. If millions livelihood of people would not be at stake, I will definitively vote for this wonderful soapy… Our elite already got the Nobel price, so another title might be at hand…

    1. Anonymous says:

      Hi Justathought

      Yes the prize givers/awarders at the Nobel Institute need to take a long hard look at the peace prize. First they give it to a US President who is involved in two wars and then to the European Union which had done what exactly? I would imagine the soldiers,sailors and air(wo)men of NATO must have felt cheated…

      Although Tom Lehrer was there early.

      “Political satire became obsolete when Henry Kissinger was awarded the Nobel Peace Prize.”

  3. steve says:

    I can’t understand why UKIP do not form a European wide party as they’d surely storm to power in most of the southern countries. If they don’t they may end up with an even more extreme solution.

  4. Rods says:

    Hi Shaun,

    Another excellent analysis.

    Unfortunately, I can’t see where in the short, medium or long term where growth is going to come within the EU due to demographics, high taxes and uncompetitive wages and labour laws. The EU currently accounts for about 20% of world trade, which is expected to drop to about 15% by 2020. By far the richest countries are the two EFA members. All the advantages of the single market without the onerous regulation.

    I think there is a good chance that Italy will be the first country to implement a political solution to the Euro problem where they at the next election will make Beppo’s party the biggest. I can then see Italy exiting the Euro, maybe defaulting and implementing some sort of growth strategy.

    If communism is going to teach us something it is that governments create growth, they can only set the conditions so that private enterprise does. So Van Rumpuy’s and Barroso talking about growth strategies is meaningless as the EU cannot and will not repeal any of their many damaging directives.

    In all EU countries, including the UK, austerity has been implemented in the most politically easy and most damaging way of tax cuts up front and back loaded spending cuts. There never seems to be a problem in raising the economically damaging tax burden, but many spending cuts that would be beneficial never seem to happen or are eaten up with increased social payments due to falling GDP and rising unemployment due to the tax increases!

    In the Ukraine, they have had a tax reduction program where VAT should have decreased from 20% to 17% by 2015 along with some deductions in social taxes. Where 2012 was a difficult year due to it being in recession and also where they are running a current account deficit, they applied to the WTO last year to increase a range of import tariffs with those permitted now implemented. It is going to be interesting to see if in the second half of 2013 and 2014 if this alternative strategy provides a better economic outcome for the country, compared to EU countries austerity. However, they do have one advantage of a 1.3% deficit and debts just below 40%.

    1. Anonymous says:

      Hi Rods

      Thank you.Some countries were on their way to demographic problems and the credit crunch has brought them on early by its effect on emigration. Just at the same time they have been made weaker by the credit crunch and this could yet be the economic equivalent of a perfect storm. How about they go through all this economic pain and then have to devalue and default anyway?

  5. Anonymous says:

    Hi Shaun,

    Today I sent 300 euro to Italy. Unicredit euro account here to unicredit euro account in Italy. They charged 16 euro fees and may also charge the receiving account. This harms trade within the so called single European market.

    If the euro leaders want to improve the European business environment & encourage trade, they should reform the banking system to create a low cost single currency payment area. In short it would help Italian etc manufacturers to supply customers direct without extortionate payment fees. American companies like visa and paypal lead the pack for small item payments across the single market.

    Business friendly banking reform is urgently needed.

    1. Anonymous says:

      Hi ExpatInBG

      I entirely agree that such fees mean that the Euro is not living up to the claims made on its behalf. Unfortunately we see one more implicit subsidy for the banks so something being done about it seems unlikely for now.

  6. DOW52 says:


    Your Posts are always very insightful and help us less educated to understand some of what is really happening. It does seem to be developing into a downward spiral, especially in Europe. The impression is that no-one really knows what to do and that the politicians behaviour swings between the laid back Sgt. Wilson and the more dramatic antics of Corporal Jones.

    As the debt mountains compound growth figures seem to be largely ignored I cannot help but feel that eventually something will have to blow to cause an almighty domino effect. Until the slate is wiped pretty clean there surely cannot be any long-term answer to the debts.

    1. Anonymous says:

      Hi DOW52

      Thank you and welcome to my part of the blogosphere.

      As to your prognosis I completely agree and often argue on here for reform and facing up to difficult decisions. Many of these are with the banks -both in the UK and Europe- and accordingly any real reform and plan for improvement needs to start there. Or there will be more lost decades…

  7. Patrick says:

    Seems as though there’s some consensus in the comments on this post, that benefits and taxation are entirely the problem… Isn’t the incredible wealth disparity both in terms of owned assets and ‘earned’ rewards just as much of a problem both practically and in terms of the example it sets?
    We live in a country where a Russian billionaire is due to sanction the purchase of a continental footballer for circa £44,000,000, and paying him around £150,000 a week on top. In that same country, we are still taxing an individual’s earnings on any income above £9,440 A YEAR, after 5 years of over target (and perceivably inaccurate) inflation figures.

    1. forbin says:

      no consensus from me about the benefits and taxation – I agree some others have forgotten the last 30 year clamp down on benefit fraudsters seems to have got us no where and that lowering taxes doesn’t mean we’ll all better off either

      But that could be just politics – and Shaun doesn’t do politics

      too much tax = bad , too little tax also bad

      Sweden or Somalia ? oh the choices …..

      We spend more time chasing pennies from benefits fraudsters than we do big banks or businesses – I’d say go for the big bucks anytime , we also allowed them to off shore profits in an obscene way – we allow that fraud.

      NOTE : I am considered left wing by my right wing friends and also right wing by my left wing friends – guess I must be doing something right then !


      PS: Popcorn has taste , not politics , yum!

      1. Anonymous says:

        Benefit fraud : sending poor people to jail for swindling small change out of the system

        Banking rescue : rewarding failure, fraud etc for highly paid banksters who receive huge amounts of taxpayers money.

        If only the crown prosecution service would treat the banksters as harshly as they treat benefit fraudsters…. and using the asset recovery laws could also discourage future bankster scams.

      2. James says:

        Left or right wing, the politicians we have do not:
        1. Tell us the truth (perhaps they don’t understand)
        2. Seem to believe that we can carry on borrowing more every year, which seems implausible to me if economies are not growing.
        Whether you increase taxes and/or decrease spending is probably political, which is not the way this blog works (thank goodness), but what bothers me is that Greece/Cyprus/Portugal are good examples of what it is really like if you stop being able to borrow money on the markets. It is not encouraging.

      3. Anonymous says:

        Hi Forbin,

        I think what some might have missed is the relationship between taxation, cronyism and a vital free market.

        While i agree that to an extent the level of taxation a community supports represents the degree it wants equality, compassion, safety-nets etc versus individuality and self interest, opportunity, etc, and in that sense is a matter of political “taste”. ie More taxation or less would not necessarily impact the economy.

        But where it breaks down is when the political class acts according to their own self interest. In this case increased taxation results in increased control being handed over to the political class and their big business buddies. This is what has happened in Greece. Productivity of the economy of a whole is reduced as more and more effort is directed to activities which do not have a net benefit to the community. Welfare, in this sense, is simply a form of control, so corrupt governments will tend to support it. Eg see Greece over the last 10 years.

        So morality is a critical issue in economics and varies greatly from country to country, but i dont believe is factored in to any economic models, which is another reason why they’re always wrong.


        1. Anonymous says:

          Hi Brad,

          Sorry I disagree – morality has little benefit. The taliban claim to have great moral virtues, yet their failed states are poverty stricken. Communists claimed the morality of equality.

          I suggest that accountability is the critical attribute. Well regulated fair markets bring economic and social benefits. Unregulated (and ineffectively regulated) markets allow harmful monopolies, cartels and other shenanigans. Iceland and the USA have attempted to jail banksters, where Britain’s efforts are pathetic. No Greek politicians are being held to account. Which countries are recovering ?

          Taxation levels are a big discussion in themselves, I regard 20%+ VAT a drag on Europe’s economies & businesses. The Laffer curve shows that excess taxation is destructive.

          Govt spending is also a big discussion. For example the USA very wastefully is throwing unwanted Abrahams tanks at the US army in pork barrel politics. Agricultural subsidies are also a huge waste of US taxpayer money. The Bulgarian govt spends very little, but we pay in other ways. For example I’ll be paying for a private school from next autumn & we pay various “optional fees” for medical care. The traffic police are always looking for cash on petty infringements, yet show little interest in policing dangerous overtaking. The useful measure is what social and economic benefits the spending brings.

          1. Anonymous says:

            Hi ExpatInBG,

            “Claimed morality” clearly doesnt equal morality! The Taleban were acting in self-interest, pushing their view of the world as it should be rather then promoting personal freedom, which is immoral in an objective sense. Although I’m sure they earnestly believed they were doing the right thing. And i’m sure the same could be said for EU technocrats.

            Morality itself does not impact an economy, but when the ruling class is immoral (in the sense that it is not acting in the best interests of the community) AND government is a large proportion of the economy then this will drag on the economy.

            A 20% VAT alone would not necessarily drag on an economy. Its possible that the money could be spent with greater utility by the government then the private individuals. OK, you can stop laughing, i said **possible**, not *likely*.

            The laffer curve shows a correlation between tax and growth, but it does not describe a causative link between the two. And thats because the causative factor is an independent variable – morality of the ruling class, which determines the utility of the tax dollars spent.

            When you speak of”accountability”, why is this important? I’ll answer. Its because the threat of being held to account either forces them to be moral, or they get kicked out. So yes, accountability is important, it is a mechanism by which our system should remain virtuous. And yet … why would those in power want to make rules to constrain themselves? Surely, given the opportunity, they will wiggle out of them? And clearly, they do have the opportunity. So we need an alternative mechanism.

            I’ve heard it said that the best form of government is dictatorship with an occasional assassination…


          2. Anonymous says:

            Correct, accountability allows us to enforce our morality on the politicians and sack them without bloodshed as needed.

            On government spending money efficiently, the best example I have is to compare private US health insurers to the Australian publicly funded health insurance. The US loses badly, it costs more, coverage is uncertain and the US insurers practice of denying medical claims on technicalities borders on murder.

          3. Anonymous says:

            Thats a good example. There is a lot of ignorant debate on both sides like “government is too big” or “the free market has failed”, when in reality whether we should have government or private sector involvement in some activity just depends. But its apparent to me that when government has lost its morality, then until it can be restored, the more money the government spends the worse off the economy as a whole will be.

  8. ninoinoz says:

    “It was only on the 29th of April that I wrote a post discussing
    whether the new Italian government under Senor Letta would find its role
    to be one of managing an economic decline.”

    Yep, you sure did. I’ve just gone and checked because ……… I just wondered why I hadn’t corrected you in that piece.

    Enrico Letta, as you correctly called him, is Signor Letta. You’re thinking of Spanish.

    I can understand how all these crises can blur into one!

    Keep up the good work.

    1. Anonymous says:

      Hi ninoinoz

      Thank you and apologies. I think I have made that mistake in the past so I will have to make an effort to stop it.

  9. MS says:

    Inflation dropping off is rather odd. Well, odd relative to the anomaly which has become normality, anyhow. Do you happen to know if Italy’s CPI calculation happens to have any interesting ‘oddities’?

    1. Anonymous says:

      Hi MS

      The Italian CPI is lower than the European standard or HICP (confusingly called CPI in the UK…) which poses a question in itself.

      “In April 2013, the Italian consumer price index for the whole nation (NIC) held steady compared with the previous month and increased by 1.1% with respect to April 2012 (0.5 lower than in March 2013) (provisional estimate was 1.2%).”

      “In April 2013, the Italian harmonized index of consumer prices (HICP) increased by 0.3% compared with the previous month and by 1.3% with respect to April 2012 (0.5 lower than in March 2013. In this case, final data confirmed the preliminary ones).”

      So there is a different pattern but I do not have a breakdown sorry.

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