The role of unemployment and employment growth
 
Clearly, therefore, it is necessary to investigate patterns of employment and unemployment in the major advanced economies more closely. Chart 5 show the unemployment rates (as per cent of labour force) in the OECD economies, and shows how in all the major countries except US, unemployment rates have tended to increase over the latter part of the 1990s.

Chart 5>> Click to Enlarge

However, there are substantial differences in definition and measurement of open unemployment across the OECD, and therefore Chart 6 presents the standardised data which tries to use similar definitions. This presents a rather different picture. Thus, Japanese unemployment rates appear to rise more sharply while European unemployment rates appear to have fallen slightly.

Chart 6>> Click to Enlarge
 
A major problem with such data is the growing presence of the “discouraged worker effect”, whereby potential workers and long term unemployed (especially but not exclusively women) tend to drop out of the labour force and therefore disappear from both numerator and denominator. This problem has been evident in Europe for some time, but there are indications that it has been growing in the US as well in recent times. Thus the slight fall in the unemployment rate in January 2002 from 5.8 per cent to 5.6 per cent, has been widely attributed to the “discouraged worker effect”.
 
Because of this, rates of aggregate employment growth may be a slightly better indicator of labour market conditions than open unemployment rates. Of course, even these do not give us an idea of the nature and quality of employment, as most governments increasingly include a range of part-time and casual employment as well, which may reflect distressed worker involvement. Nevertheless, Chart 7 presents the evidence on rates of employment growth in the major OECD countries.

Chart 7>> Click to Enlarge
 
The picture that emerges is that of fluctuating rates of expansion, but overall a fairly dismal performance. The other point to note is that the employment expansion of the US economy is not all that impressive in comparative perspective, and has been less than 2 per cent per annum over the past five years on average.
 
This is confirmed by the rather rough estimates of employment elasticity of aggregate output (per cent change in employment by per cent change in real output) that are provided in Chart 8. Once again, after the early 1990s,  the US economy does not emerge as considerably more dynamic than other OECD countries in terms of generating more employment. (It should be noted, however, that the figure of 1 for the European Union for the period 1990-94 is misleading, for it refers to a period when both output and employment growth were mildly negative.) In fact, in recent years the employment elasticity of output growth in the US economy appears to have been very low.

Chart 8>> Click to Enlarge

This points to a major structural weakness of the past growth pattern, which is likely to have important effects on the prospects for early recovery in the developed world. As long as basic employment conditions do not improve, attempts to generate economic expansion by encouraging private savings and investment – such as in the form of tax cuts and easy money through low interest rates - are likely to falter. This is because those in employment are likely to guard against the possibility of future job loss by saving more rather than spending more. To counter such a tendency, fiscal packages have to be not only very large but also explicitly directed at job creation. This has not been the case so far in either US or Japan, while in Europe the fiscal stimulus has in any case been weak.
 
In addition to this, there are other reasons why it may be futile to expect another US-led boom to bring about a recovery in the world economy once again. After all, the current recession in the US reflects the collapse of a speculative bubble, and it would be strange if the economy could immediately create another such bubble to generate that kind of economic growth.
 
At present, the bursting of the bubble involves the corporate sector cutting back investment because of overcapacity and the household sector reducing its consumption because it is already financed by record levels of private debt. A rapid reversal of these tendencies is not only unlikely, but it would also require additional international financing, with the rest of the world’s savings once again rushing in to maintain high levels of US consumption and economic activity.
 
An increase in US growth levels sufficient to lift the world economy would lead to a further rapid widening of the US balance of payments deficit, which is already at more than 4.5 percent of GDP. Such a payments gap would in turn require an increased financial inflow from the rest of the world to sustain it. But the rest of the world already provides nearly $2 billion per day in their savings to the US economy. It is difficult to see how this can be increased in a wider international context of lower income growth and stagnant employment generation.
 
Clearly, the only feasible solution for international capitalism is concerted expansion, directed by a responsible world “leader” who would behave in a Kindleberger fashion to organise such an expansion. But the current international political economy suggests that such a solution is not feasible or likely at the moment. Therefore, some sort of world depression does indeed seem likely.