US Living Standards To Decline

US non-farm payrolls plummeted 533,000 in November, the largest drop since December 1974, as the credit crunch's toll on businesses mounted. But downward revisions to jobs figures for September and October suggest fierce global cost competition is also a factor, and one that may
persist beyond a credit market recovery.

“Largest since 1974” in a negative economic number is much more profound than the usual “largest since 2001” -- there have been some good-sized recessions since 1974. The November figure results partly from the credit crunch, which has begun to cause more companies to hit the wall than would be the case in a crunch-less downturn. However the September-November job
loss of 1,257,000 is an even more impressive number, and suggests that factors beyond the credit crunch are also to blame.

Economically, the intensification of globalisation since 1995 should have had two effects. It should have increased global real incomes, as billions of new productive workers began to fully articipate in the global economy. It should also have compressed income differentials, as emerging market workers gained skills and experience that made them more competitive with their US counterparts. Its overall effect on US living standards would depend on whether global differentials were compressed more or less rapidly than global incomes improved.

The stock bubble of 1996-2000 and the housing bubble of 2002-07 masked globalisation’s pressure on US living standards, because they artificially increased the US capital stock and in housing’s case provided substantial employment directly in construction and mortgage-related businesses. With those bubbles now popped, the effect of intensified global competition on the US workforce should be easier to see.

In a friction-free economy, US wages would decline as necessary, without increasing unemployment. However as Keynes pointed out, wages are sticky on the downside. Thus in November, wage rates actually increased 0.4%, even though unemployment skyrocketed.
Employment increased only in education, healthcare and government, all sectors that are protected from foreign competition. Similar wage stickiness was a problem in the 1930s, when unionised and government workers won chunky improvements in living standards while unemployment topped 20%.

Cyclically, Great Depression II still seems highly unlikely. However, globalization may be causing a longer-term secular decline in US living standards.