Sunday, January 24, 2010

Economies and Unemployment Numbers

Executive Summary: How are different economies handling the levels of unemployment numbers they face due to the economic crisis? One approach is to look at unemployment numbers across economies*** and then look for factors across various economies that would help them manage the rise in unemployment. We wind up by considering education, skills and animal spirits as potential factors for recovery, and identifying questions that will give us more granular understanding of how governments can impact recovery.

Some Country Unemployment Rates
The Economist had a great chart in the fourth quarter of calendar year 2009 that showed pre-financial crisis and post financial crisis unemployment numbers. If you compare post crisis numbers, Spain looked to be in much more pain than the U.S., coming in at 19.3%, with Germany looking to be relatively better off at 8.1%. Despite Spain, the Euro area may have seemed to be handling this pretty well- with the unemployment rate under 10%. Australia seemed to be doing fantastic at 5.7%.

Changes in Country Unemployment Rates
However, when we look at the relative changes from pre to post-crisis numbers, an interesting story emerges.
1. Spain's unemployment rate had changed by a multiple of 1.7 (70% increase).
2. The US rate had changed by a multiple of 2 (100% increase).
3. The British rate had changed 2.5 times. The Japanese rate changed by a little more than that. The rate for France and Netherlands had changed by a multiple of 4.
4. The German unemployment rate had change by more than a multiple of 8!
5. The Australian unemployment rate had changed by a factor of 3.

Finding the Questions in the Numbers- Before Finding the Answers
Interesting numbers? There's more food for thought below.

1. How are specific regions affection these country numbers? E.g. Spain has abysmal numbers- are they tied to a specific region or a sector?
* Geography and sector: In the U.S., California has been among the worst hit economies. A real estate bubble is one cause of the problems.
* Other categorizations: The Indian economy may show a dichotomy with the rural markets being more buffeted from global turbulence than the urban markets.

2. What do these reported numbers mean, on the ground, beyond the reporting methodologies?
* In the US, the "real" unemployment rate is being touted at 16% as people are no longer looking for full time employment.

3. What do the low pre-financial crisis numbers in certain economies mean?
* Global trade: 43% of the Australian economy is driven by trade. Its trade with China and East Asian economies has increased significantly in the past few years.
* Socio-Economic & Political Support Systems: European economies have significant support tools (including labor laws) built into the socio-economic system.

4. What does the wide variance in % change in unemployment rate mean?
* Impact of Global Trade: The German, Australian and Japanese economies have trade as a higher component of their GDP, compared to US which has consumption as a massive component. Does that explain their unemployment rate multiples being higher than those of the US?
* Impact on Recovery: Does a higher mutiple of unemployment rate mean that the economic recovery for these economies would take longer?

5. Does a country's pattern of a country's/ region's economic structure impact the behaviour of the unemployment rate- runaway unemployment, exponential unemployment, high/ low bounded unemployment?
* Trade with (Still) Growing Partners: Consider Australia, which trades with growing economies China and Indonesia. The increase in its unemployment rate was much more than that of the US. Does that mean trade with growing partners is irrelevant to the unemployment rate of a country in a crisis?
* Labor Force Characteristics: Could skills and education create a natural upper bound to an increasing unemployment rate? Or is it something deeper- related to "animal spirits"?
* Recovery: Do certain charts/ patterns of unemployment rate increases lead to quicker recoveries? E.g. Would unemployment rates in a highly skilled sector recover quicker? Could Iceland be an example here? Its unemployment rate changed from an estimated 1% in 2007 to 10% in 2010.

6. How well are country economic systems structured to handle increases unemployment?
* Work Force Finding Work Again: Do economic systems- taxation, socio-economic support features- help the workforce find work again quicker? If so, which economies would recover quickest from the crisis?
* Animal Spirits: What role do "animal spirits" play here? Would "animal spirits" be dulled by excessive state support during a crisis? Would states that provide a clear path for "animal spirits" to run free recover fastest? Does the previous question imply that states can "encourage" animal spirits in a particular direction? Does that hold up against research on state support for "private" innovation? How are the two scenarios different?
* Recovery: What elements of the economic system would lead to the quickest recovery? Would unemployment rate be the only ture indicator of a recovery? Case in point- Japan.

A Country Economic Employment Absorption Index?My first reaction was to consider building an index to compare country economic systems to indicate which ones would recover quickest from the crises.

While reading papers comparing labor markets like the US and France would be the first step, currently, the World Bank has some indices that attempt to characterize the flexibility of economies in labor markets, based on a study of labor market regulation across economies:

Prof. Rosensweig*** suggested looking up "Labor Market Flexibility" and notes from the OECD and the ILO. I have found some interesting perspectives in some Economist articles. You are welcome to challenge the ideas presented below.

Readings from the Economist
European Approaches to Unemployment
European Decline?

Globally Divergent Challenges to Recovery
The Great Stabilisation
Leaders and laggards

Promoting Entrepreneurship

What do you think? Stay tuned!

*** First discussed (including some of the questions raised) at a macroeconomic forum guided by Prof. Rosensweig on Dec. 15, 2009.

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