Vicious Cycles

There has been much talk recently about the damaging long-term impact on employment and economic potential of prolonged cyclical unemployment. South Africa doesn’t have as much a cyclical unemployment problem as it does a structural unemployment problem, but there are some common worries.

Long-term cyclical unemployment damages thee commit prospects through the stagnation of skills amongst the unemployed, the interruption of normal career progress for new school and university leavers, and through reduced investment in capital since there is so little pressure from tight labour markets to push up wages and motivate for increased investment in capital.

This means that the growth in potential GDP slows down, lowering average living standards even if the economy eventually returns to full employment.

The tragic turn if this story is when we relate it to long term structural unemployment (a mismatch of skills available and required and additional market failures that mean wages can’t automatically adjust downwards to increase the demand for the over supplied skills).

Fundamentally broken education over decades provides the oversupply of unskilled labour in South Africa. Minimum wages, labour inflexibility, large distances between places of work and homes and expensive transport options amongst others give rise to the structural unemployment in South Africa and the inability of wages to decline to the level required to mop up unskilled labour. Sadly, shortages and high prices (i.e. wages) of skilled labour through emigration also serves to reduce demand for unskilled labour.

These unskilled and unemployed persons gain no or little workplace experience. They rapidly become unemployable, permanently unemployable. Eventually they will fall out of the traditional definition of unemployment rates since they will become discouraged job-seekers and stop looking for work. Some of the other problems facing South Africa, such as crime, are at least partly intertwined with hopelessness and unemployment.

The boom in economic growth in the US after WWII is a product of many things, but one of these is the increase in the labour force participation rate as women increasingly left the home and worked, had careers and contributed more directly to the economy. In South Africa, the labour force participation rate is too low because of exactly the same reasons as unemployment is high. These discouraged workers are lost to the economy, placing our economic potential way below what iSight have been.

Structural unemployment begets structural unemployment and reduced labour force participation. Income inequality begets social immobility and more income inequality as totally deficient public schooling for those with the least means sentences children of poor families to near-lotto chances of breaking free.

Book Review: The End of Influence

Brad de Long and Stephen S. Cohen have a new book called The End of Influence: What Happens When Other Countries Have the Money.  It’s an interesting, informative, provocative and relevant read, providing context for the economic position the US finds itself in now. Perhaps of more direct interest, the issues of currency manipulation (done to the US), foreign policy, industrial (and defence) policy, trade deficits and long-term structural problems within an economy are definitely relevant to South Africa.

The rise of the Asian Tigers (and Japan and China included in the wider group) and the role government policies on both sides of the Pacific played there should hold lessons for South Africa.  Hell, even France and Britain are thrown in for good measure, demonstrating the successes and failures of neo-liberal market oriented policies.

This book must really be read in conjunction with This Time is Different as together they reinforce the unavoidable conclusion that overzealous reducing regulation, liberating markets and increasing financial complexity are almost guaranteed to lead to disaster. The Anglo-Saxon mantra for a couple of decades at least now has been that those very things were the answer to our problems, not the cause.

I read the book on holiday. It’s not the traditional rip-roaring holiday read, but the style is light enough to enjoy and doesn’t have the density of statistics and numerical proof offered by This Time is Different. The explanation of how we got to where we are are fascinating and definitely food for thought for South Africa and other emerging markets, but their prognosis of how the US’s power will fade dramatically now that they no longer have The Money is even more evocative. I spent as much time holding my kindle to one side while thinking about the implications as I did reading the words and frantically clicking the next page button to get to the next page.

Buy it, read it and join the conversation on economic policies for South Africa and emerging markets.

Brad de Long has an economics (and a few others things) blog that I read from time to time. I’ve also watched several of his economic lecture videos available freely on iTunes University.  He’s worth paying attention to. I haven’t had contact with his co-author before, but if de Long likes writing with him he’s probably smarter than most people you or I have heard of before.