The Daily Cow

In the previous article, I briefly laid out the case for a jobless recovery in the short run. However, despite the immediate pain, it has positive long-term consequences.

• The federal government has more time to fix the entitlements issue with regards to the boomers. Their accumulated skills and experience are necessary in the workplace, and with last year's market decline, they have a stronger incentive to work--and pay taxes--than retire--and draw entitlement funds.
• Greater investment in capital will allow us to achieve the same level of production using fewer people, or equivalently, more production using the same number of people.
• The above, combined with our lessened propensity to consume, will help lower (or perhaps altogether eliminate) the trade imbalance (net exports)
• The savings rate going back to a more normal level will help investments in future growth

Perhaps the US will be in a less unsustainable path of unbridled consumption after this transformation.

There are three key reasons why this recovery will be fairly jobless in the short run:

• Aggregate demand is below the normal level because of increased propensity to save and the permanent rise in energy costs (Oil likely won't return to pre-Katrina levels)
• The workforce is above the normal level because of the recently-devastated retirement accounts of the boomers; they have to work a few more years to compensate for the lost retirement value
• Companies are increasingly turning towards technology and automation as the way to increase margins and profits. Capital investment is long-lasting and should provide them with increased capacity (at any given labor employment level).

The increased capacity due to both a larger workforce and capital expenditures, combined with lower aggregate demand for the final products will lead to a near-term squeeze on employment and wages. For the inflation hawks, this means wage-pressure inflation still has a long way to go before becoming an issue.

See below (I superimposed a best-fit normal curve on top of the graph):

How come we're off the target for June?