New Normal: Lousy Labor Market (if You're a Worker)

Excerpts from What Will the "New Normal" for America Be? by Brad DeLong of the Oregon Economic Forum (October 2013). Brad DeLong is a professor of economics at U.C. Berkeley, chair of the Political Economy of Industrial Societies and a research associate of the National Bureau of Economic Research (NBER).

The dominant and most likely scenario for America's "new normal" that Brad DeLong predicts:

Things will be substantially different from the "old normal" we thought we understood back so long ago, back in 2007 and early 2008. Thus I am here to talk about what the new normal is likely to be.

The new normal is not an employment-to-population ratio of 63%. It’s an employment to population ratio of 59%. Out of every 15 people who we would have expected to have a job in the America of 2007 doesn’t have a job in the America of today. There is no sign that this will change. We have now seen four years without appreciable recovery in the employment-to-population ratio to what we used to think of as normal. And labor-force participation rate is now falling much much faster than we can justify from the demography.

In long-run historical perspective, we are back to a labor force share of the population that we had in the late 1970s, when American feminism was at most only half-completed. An awful lot of those who are unemployed are long-term unemployed. Employers look at them askance when they apply for jobs. An awful lot more of the employment shortfall is people who have simply dropped out of the labor force, and I don't see what forces will push them to come back in. Thus we are likely to have a lot of slack in the American labor market--and a large shortfall of aggregate demand below potential supply--as far into the future as we can see.

If you are running a business, demand for your products will be low. But if you are ruining a business, it is also a fact that your margins are likely to be high. For businesses, these two effects more or less offset each other, and businesses wind up with the operative cash flow they would have expected--and with lower borrowing costs because of low interest rates. This means the "new normal" is better for non-financial businesses than we thought we would see back in 2007.

And the "new normal" is considerably worse for workers than the normal of 2007. On the labor side, it looks like jobs are going to be scarce for at least a decade to come. Few people will dare to ask for a raise. Few people will dare to quit.

There are worries that the Federal Reserve has shot its political bolt, and won’t be able to rescue everyone the next time there’s a financial crisis. That would mean that the next financial crisis would produce not just a recession but a depression. And that means that an abandonment of monetary ease and tighter monetary policy now are the right course: accept higher unemployment now in the future to make sure to prevent the growth of any bubble that might be followed by a crash. If the Federal Reserve's Open Market Committee follows this line of reasoning, then all of a sudden our current situation with 7.5% unemployment and a 59% employment-to-population ratio and stagnant real wages--especially for people in the less-educated half of the population--truly becomes the "new normal" immediately.

There is the global saving glut. A large number of countries abroad with very many people are becoming richer faster. Their rich want to diversify their portfolios globally. Buying US assets is one very important way to do this. The United States has an extraordinary and exorbitant privilege: the liabilities of our government are today's gold standard for assets--in fact, they’re better than gold because they pay interest. Almost everybody would rather have a 30-year US Treasury bond to hypothecate and re-hypothecate and use to grease the wheels of all kinds of financial transactions, if offered a choice between it and a lump of gold. The fact that we’ve gotten ourselves into this extraordinary situation as the lynchpin of global finance means that unless the US government actively threatens to default, anything that increases risk means that the interest rate on US treasury bonds would go down.

Now I’ve come to the end of my time. So let me simply summarize. The new normal for the American economy is likely to see:

• a lousy labor market if you’re a worker
• a relatively good labor market if you’re an employer
• lower demand relative to the size of the economy’s productive potential than we would have expected
• higher margins than we would have expected.

Brad DeLong's thoughts on Obamacare:

If the Affordable Care Act works, it means freedom: freedom for people to move and change jobs as they will no longer be locked into their current jobs with their current bureaucracies by fear of losing affordable health insurance...It's a major boost to the health care sector: the equivalent of adding an extra 25 million customers to the health sector, with the federal government picking up the tab, for people with health insurance go to the doctor about twice as often as people who don't [but] there has been little thought on where the doctors, nurses and orderlies to provide treatment for this extra 25 million people's worth of customers are going to come from.

* Bottom Line: According to Brad DeLong, going forward into the future, expect a "lousy labor market" where there might be a shortage of those in the healthcare industry. So if you're in high school today, start getting prepared.