America’s Labor Advantages

3rd Quarter 2014 Hotline
Market Watch

Certainly much ink has been spilled writing about the end of the American labor market’s advantages over the rest of the world.  The pundits claimed, as they so frequently do, that this time it would be different for the American labor market.  Long-term joblessness would lead to skill degradation creating a permanently unemployable group of people.  Low home prices would restrict families’ ability to move for better jobs.  The dearth of new jobs would make people reluctant to quit in search of better careers.  Unemployment benefit largesse would reduce incentives to find new jobs.

All of these claims are based in fact, but all of these claims fail to capture the entire set of facts.  Although labor’s (wage) share of U.S. GDP has been falling steadily since the early 1970s (from about 73% to 63%), supply-side labor dynamics remain hugely important to the capacity of economy.  In this respect, the United States has some enduring advantages.

Despite the commencing Baby Boomer retirement, America actually has a stable generational balance compared with many other developed nations, so, when combined with a relatively liberal immigration policy and high birth rate, the United States is projected to continue having a labor surplus for decades to come.  While a labor surplus sounds ominous, from a company’s perspective when locating a new call center, manufacturing facility, or headquarters, the idea of locating in a country where there are too few workers to fill existing jobs sounds much worse.

Countries from Japan to Germany are facing acute labor shortages in the coming years as lower birth rates and stricter immigration policies have created large generational imbalances.  For example, Germany expects its 41MM labor force will shrink by 5MM over the next 15 years.  For a country with a 5.2% unemployment, loss of labor might lead companies to invest elsewhere, might lead to outsized wage growth that stirs inflation, or might reduce the country’s potential output, the maximum GDP that a country can theoretically produce.

Just as important, the United States holds a continuing advantage to other developed countries such as the European Union, Japan, or the United Kingdom with the ease of realignment of labor.  A flexible labor market requires flexible labor laws and the ability to close unsuccessful enterprises at minimal cost.  Compared to the three major economies listed above, the United States has a distinct advantage with the ability to close down unprofitable entities.  In some cases, the above economies require a period of one to two years of lost employment compensation or pre-termination notices; thus, the cost of closing unsuccessful enterprises is dramatically lower in the US.

With all the above being said, these points will drive CEOs to make more pragmatic decisions concerning availability of labor and cost to close unprofitable enterprises that will positively affect the U.S. for years to come.  While this view is not yet widely held, it clearly is beginning to play out in the fields of commerce.


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