HICKS: EU crisis makes bad U.S. job market look good

June 30, 2012

This week, the U.S. Department of Labor will release its June employment report. As with the past several months, a number of economists are predicting job growth in the 150,000 range. That would be better news than the 77,000 jobs created in April and 69,000 added in May, but make no mistake: 150,000 new jobs ain’t good news.

The steady state of population growth means that, in any given month, about 350,000 young adults turn 18. They don’t immediately enter the labor force; most head off to college, trade school, the military, finish high school or whatever. But they leave these institutions at about the same rate they enter, so on average the young labor force grows steadily and inexorably at 350,000 per month.

At the same time, workers are leaving the labor force. We retire at a rate equivalent to almost 200,000 per month. Of course, this happens at different times in our lives. Some of us leave because of a disability or death, some to go back to school and some to start families. Taking both of those factors into consideration, the labor force should grow by 150,000 each month (350,000 minus 200,000).

One need not have done well in math to appreciate that the creation of 150,000 jobs per month is insufficient to budge the unemployment rate. In fact, it would take closer to a half-million new jobs each month to get us moving toward the kind of robust recovery we had at the end of the last big recession in 1982 and 1983.

More worrisome still is that June ought to be a blazing job-creation month. My advice: Brace yourself for more bad news.

Exacerbating the economic woes is the necessary asymmetry of the European financial problems. By this I mean that the downside and upside have wholly different outcomes for the world economy.

The worst-case scenario involves an unstructured exit from the Eurozone by Greece and other nations. In this event, there is a great likelihood that a number of financial institutions around the world will fail, making world financial markets resemble September 2008 once again, with similar world outcomes.

I don’t think that is especially likely, but InTrade is betting a 40 percent probability of a Greek exit. How smoothly that happens would be determined by the same political forces that got the country to this point—hardly a comfort.

The asymmetry is apparent in the slow and sullen upside. The very best economic outcome would be that no Euro dissolution occurs, and banks have already priced in the risk of default. This outcome further demands that governments with behemoth debts quickly persuade their citizens to accept reality. In this optimistic scenario, it will be months before the EU economy hits bottom.

All of this means that 150,000 new jobs per month are about as good as it is going to get for a long time.•


Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.


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