Hello everyone!
Here is the mandatory article that I have picked for the following lesson.
The three questions related are as follows:
1) Do you share author's opinion that raising immigration levels, reforming disability benefits and raising the retirement age would help to solve this problem?
2) Could you support or argue against the remark that appeared in the article about workers who are driven out of labor force by long-run unemployment? Back it up or disprove it by facts that you might be able to find.
3) What reasons do you see behind the fact that only 1/5 of the 10 million people who could enter work force are not interested in getting a job? Is that the fact that they still hope for studying at a college or a university or something completely different?
Where did everyone go?
Demography may explain the weakness of America’s recovery
Mar 23rd 2013
MILTON FRIEDMAN once compared the business cycle to an elastic string stretched on a board. How far the string is plucked determines how much it springs back; similarly, the depth of a recession decides the strength of recovery. America’s recent experience has not been kind to the plucking model. Although the recession was the deepest since the second world war, the recovery has been a disappointment. In the three years since the end of the recession in mid-2009, growth averaged 2.2%, barely half the 4.2% average of the seven previous recoveries.
In part, this is because recoveries from financial crises face greater difficulties. Consumers are too much in debt; businesses cannot or will not spend; a damaged banking system stifles credit. But in its annual economic report, issued on March 15th, Barack Obama’s Council of Economic Advisers argues that this is not the whole story. The plucking model presumes that after a recession, the economy returns to an underlying trend rate of growth that is determined by the supply of workers, capital and technology. Mr Obama’s economists argue that the trend is now much lower than in the past. The recovery, then, is not nearly as disappointing as it is often portrayed; Americans have set their sights too high.
The notion that America’s potential growth has slipped is not new. Some economists have argued that the crisis itself undermined potential by starving innovative companies of financing and driving some workers, whose skills have atrophied from long spells of unemployment, out of the labour force. Mr Obama’s council, however, makes a different argument: the lower trend was largely in place even before the recession hit.
The report cites three estimates of the extent to which a lower trend rate explains the weak recovery. One, published in 2012 by James Stock of Harvard University (now a council member) and Mark Watson of Princeton University, derives America’s potential growth rate from the long-term average of variables such as employment and productivity. This approach concludes that 80% of the two-percentage-point shortfall in growth relative to other recoveries is caused by slower potential. Mr Obama’s economists also estimated potential by using a long-run average of actual output, adjusted for the business cycle; they suggested lower trend growth accounted for a little over half of the shortfall.
The third estimate was from the Congressional Budget Office (CBO) last year. It teased out the underlying growth of labour, capital and “total factor productivity” (TFP), a proxy for technology that captures the efficiency with which capital and labour are used. The CBO blamed about two-thirds of the shortfall on slower potential. Using the CBO’s estimate, the economy would have to grow by only 2.9% now to perform as well, relative to potential, as it did in the previous seven recoveries. That is better than America has done to date, but a far cry from 4.2%, much less the 5.8% recorded after the worst previous recession, in 1981-82.
Lower potential growth would help answer one puzzle: why has unemployment fallen further than either the Federal Reserve or the White House expected, even though the economy has grown more slowly? Since the end of 2007 the population over 16 has grown by 11.6m people and the labour force (those either working or looking for work) has grown by just 1.6m. As a result, the share of the population actually in the labour force has fallen from 66% to 63.5%, a tie for the lowest level recorded in more than 30 years. If the other 10m want to work but simply are not looking, they should arguably be included among the unemployed. But in fact, only a fifth of them say they want to work.
The White House council reckons demography is driving this drop. Labour-force participation is highest between 25 and 54; if the share of the population under 25 or over 54 grows, that will drag down overall participation rates. To show this, the council constructed a “trend” participation rate by estimating a rate for each age and gender group and then using that to compute changes in total participation as each group’s share of the population shifts. In the early 1980s, when baby-boomers and women were pouring into the job market, this trend participation rate rose by nearly two percentage points (see left-hand chart). In the past five years, as the boomers began retiring and women’s participation levelled off, it has fallen by one point. In both periods, actual participation was about one percentage point lower than this trend rate, thanks to the influence of a weak economy.
This explanation still leaves some questions unanswered. Even after accounting for demographic shifts, participation among men aged 25 to 54 has still fallen much more sharply in America in the past decade than in other rich countries. That suggests that America does a poor job of keeping the unemployed, particularly the unskilled, in the workforce. Too many end up on disability support with little prospect of returning to work.
Blame the web
Lower participation cannot explain all the apparent slowing in potential growth. In another paper, John Fernald of the Federal Reserve Bank of San Francisco divided potential growth into its individual components—labour force, capital and TFP—and concluded that growth in both labour productivity and TFP began slowing before the recession. TFP growth in particular has been anaemic since 2003 (see right-hand chart), which is about when the productivity-enhancing impact of the internet began to wear off: “It is plausible that the low-hanging fruit was plucked by the mid-2000s,” says Mr Fernald, who thinks America’s long-term growth rate may now be just 2.1%, compared with an average of 3% in the 20 years before the recession.
Policymakers cannot rejuvenate long-term growth by inventing another internet, but they can boost the supply of workers. Mr Obama wants to raise immigration levels. Reforming disability benefits and raising the retirement age would also help.