“He who asks a question is a fool for five minutes; he who does not ask a question is a fool forever.” –Chinese proverb
For centuries before Michael Faraday, scientists had speculated that rather than being a unique phenomenon, electricity was linked to magnetism and gravitational forces. But how? For Faraday the answer lay in “having a model to teach me what to avoid.”1 The preponderance of discussions today about jobs is not done in the context of a model of the economy nor does such discussion take into account the influences of growth, interest rates or exchange rates. This paper seeks to remedy that situation.
Moreover, most policy discussions focus primarily on domestic factors as the drivers of employment and incomes (labor market usage and returns). However, both the amount and compensation of labor are determined in a global setting, and reflect developments in goods, credit and exchange markets. Therefore, the global forces driving labor market performance are far beyond the control of local politicians who claim the credit for creating jobs, but never take blame for losing them.
Finally, anyone discussing jobs in America or China needs to recognize the unstable linkage identified by Niall Ferguson as “Chimerica.”2 This linkage reflects the unbalanced current and fiscal accounts, as well as the underlying excess demand for goods in the United States (a lack of saving) and the excess dependence on exports in China. Political rhetoric walks a tightrope that is unstable given the strong winds of economic imbalances.
Framework: Once We Frame the Question Properly, the Solution Reveals Itself
Three elements are essential to properly frame the workings of our modern labor markets. First, labor market employment and returns are determined in a global (rather than a domestic) marketplace. Second, labor market returns and the quantity of labor employed reflect the interdependence of global economies and their respective labor markets. Finally, interdependence is also characterized by the numerous factors across many markets beyond just the labor markets. Labor market outcomes do not reflect the partial equilibrium results of a standalone labor market but rather the impact of several markets each affecting the myriad of macro factors that determine labor market outcomes.
For much of the post-WWII period, the U.S. economy and its labor market operated very much as a closed economy—with very limited trade impacts and no serious global competitor. Over time both Germany and Japan emerged as competitors, yet the scale of each economy left the United States as the still-dominant force, setting the pace of global demand, inflation and interest rates. Meanwhile, the U.S. economy was not dramatically affected by global trading forces. In fact, during the 1960-1980 era global competition took place primarily in the arena of political thought between capitalism and communism. Today the competition is in the economic arena and this shift has been dramatic. As stated by Prasad and Gu, “China and the U.S. are slowly adjusting to two major realities—their increasingly mutual economic dependence and the rising heft of China on the global economic stage.”
In this report, we focus on the interdependence created by multiple markets for goods, credit, foreign exchange and labor within the context of a global trading environment. We offer a very stylized view of each market with the emphasis on the continued disequilibrium in some markets that are driving the failure of markets to clear and putting continued pressure on other markets to adjust. The outcome is that the labor market also does not clear.
For centuries before Michael Faraday, scientists had speculated that rather than being a unique phenomenon, electricity was linked to magnetism and gravitational forces. But how? For Faraday the answer lay in “having a model to teach me what to avoid.”1 The preponderance of discussions today about jobs is not done in the context of a model of the economy nor does such discussion take into account the influences of growth, interest rates or exchange rates. This paper seeks to remedy that situation.
Moreover, most policy discussions focus primarily on domestic factors as the drivers of employment and incomes (labor market usage and returns). However, both the amount and compensation of labor are determined in a global setting, and reflect developments in goods, credit and exchange markets. Therefore, the global forces driving labor market performance are far beyond the control of local politicians who claim the credit for creating jobs, but never take blame for losing them.
Finally, anyone discussing jobs in America or China needs to recognize the unstable linkage identified by Niall Ferguson as “Chimerica.”2 This linkage reflects the unbalanced current and fiscal accounts, as well as the underlying excess demand for goods in the United States (a lack of saving) and the excess dependence on exports in China. Political rhetoric walks a tightrope that is unstable given the strong winds of economic imbalances.
Framework: Once We Frame the Question Properly, the Solution Reveals Itself
Three elements are essential to properly frame the workings of our modern labor markets. First, labor market employment and returns are determined in a global (rather than a domestic) marketplace. Second, labor market returns and the quantity of labor employed reflect the interdependence of global economies and their respective labor markets. Finally, interdependence is also characterized by the numerous factors across many markets beyond just the labor markets. Labor market outcomes do not reflect the partial equilibrium results of a standalone labor market but rather the impact of several markets each affecting the myriad of macro factors that determine labor market outcomes.
For much of the post-WWII period, the U.S. economy and its labor market operated very much as a closed economy—with very limited trade impacts and no serious global competitor. Over time both Germany and Japan emerged as competitors, yet the scale of each economy left the United States as the still-dominant force, setting the pace of global demand, inflation and interest rates. Meanwhile, the U.S. economy was not dramatically affected by global trading forces. In fact, during the 1960-1980 era global competition took place primarily in the arena of political thought between capitalism and communism. Today the competition is in the economic arena and this shift has been dramatic. As stated by Prasad and Gu, “China and the U.S. are slowly adjusting to two major realities—their increasingly mutual economic dependence and the rising heft of China on the global economic stage.”
In this report, we focus on the interdependence created by multiple markets for goods, credit, foreign exchange and labor within the context of a global trading environment. We offer a very stylized view of each market with the emphasis on the continued disequilibrium in some markets that are driving the failure of markets to clear and putting continued pressure on other markets to adjust. The outcome is that the labor market also does not clear.
