Good Set Of Paul Krugman Lectures On The Great Recession

You can find links to the slides for a class he taught over at his NY Times blog.

One important chart I found interesting:

fed_portfolio_crisis

 

It shows the expansion of the Federal Reserve’s balance sheet since the start of the GFC. An increase in a central bank balance sheet is the same thing as an increase in the money supply.

Some people would look at this chart and say “hyperinflation is coming!” but if you look at core inflation in the US there’s not much support for that conclusion.

If you want to save time and only read one of the lectures, “The Spread of the Crisis” is a good look at differences in how the crisis developed in the US and Europe.

The “Euro Crisis” lecture has some good charts showing differences in unit labour costs across different EU countries. One of the key advantages Germany has over France or Italy is lower unit labour costs (wages) and more flexible labour markets.

Lehman Bankruptcy Attorney Miller Blames Treasury, Calls Paulson’s Book “Revisionist History”

Harvey Miller, a partner at Weil, Gotshal & Manges LLP, who guided Lehman Brothers Holdings Inc. through the biggest-ever U.S. bankruptcy, says the refusal of the U.S. Treasury to save Lehman Brothers was “a gross miscalculation” and Henry Paulson’s account of the events is “revisionist history.” Miller talks with Bloomberg’s Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance.”

Listen to the interesting interview on Tom Keene’s Surveillance – a deal could have been done to save Lehman. How do we know this? Well, $40 billion+ has been returned to Lehman creditors since it entered Chapter 11 bankruptcy. If the Treasury financed an orderly sale of assets like it did with Long Term Capital Management perhaps the severity of the Lehman shock wouldn’t have been as bad. Interesting, we still don’t know the full story here.

Revisiting Lehman Brothers Chapter 11 Filing Five Years Ago

Five years ago today, Lehman Brothers, one of the world’s largest investment banks, filed for Chapter 11 bankruptcy protection.

I thought this weekend would be an opportune time to revisit the report of the Examiner, Anton Valukus, chairman of accounting firm Jenner & Block.

The global financial crisis has created a non-trivial community of bloggers and commentators who write angry screeds against the financial sector, but don’t take the time to read the detailed reports like this.

There was clearly no need for TARP or giving investment banks access to the discount window. There is nothing wrong with imposing losses on shareholders, but when executives have little skin in the game because they didn’t really fork out for their equity holdings in their employers, of course there will be issues around risk taking.

The Chapter 11 documentation website shows the difference between how the US deals with corporate insolvency and how New Zealand and Australia do.

Michael West, writing in the Sydney Morning Herald, points out how the Australian arm of Lehman Brothers has paid out millions of dollars to liquidators and lawyers but nothing to creditors yet.

From an economists perspective, if you are an unsecured creditor, you now need to account for the opportunity cost of money tied up in insolvency proceedings. This means that less credit will be available, less deals will get done and the silent recovery will take a lot longer.

When Technocrats Strike (Bank Of International Settlements Basel III Edition)

Over at TVHE, Matt writes about the BIS arguing that structural adjustments and balance sheet restructuring should be imposed on the world without any democratic input. He makes it clear that there has to be some democratic input into these processes. I argue that the BIS has already won a cold war against risky lending with Basel III.

The Bank of International Settlements is a technocratic institution based in Basel, Switzerland. Alongside providing a lot of good stuff in the form of supervising global payments systems and coming up with some very good global settlement policy, it has also produced one of the most complicated pieces of technocrat policy since Bretton-Woods.

That would be Basel III – a series of capital and liquidity requirements for all banks around the world. Check your local bank’s Key Disclosure Statement – you’ll find a lot of footnotes stating how they’re transitioning towards Basel III compliance and some banks are even raising additional capital so that their Tier 1 capital ratio is higher than it needs to be “just in case”.

These capital and liquidity requirements are obviously a good idea in the aftermath of the global financial crisis. Investment banks like Lehman Brothers and Bear Stearns over-extended themselves on mortgage-backed securities and when they marked their positions to market, they essentially were worthless.

The US Treasury, using AIG Financial Products as a conduit, paid out the credit default swaps on all of these sub-prime CDOs at 100 cents on the dollar. This transferred hundreds of billions of dollars from US taxpayers to Wall Street banks.

In essence, Basel III is a technocratic series of rules and committee based supervision (seriously) that aims to avoid a repeat of 2008. The theory goes that if banks have to hold more capital and make fewer risky loans, then the financial system will be more stable and there’ll be no need for big bank bailouts.

The BIS has essentially changed the way every single bank abiding by or transitioning to Basel III does business. Why? Because different types of loans require different levels of reserves held against them in case of default. Different types of equity offer different levels of capital the bank can use in calculating its compliance with Basel III.

This means that, without any democratic input, the BIS and everyone participating in the Basel III process has already imposed massive structural adjustments on how capital is allocated in literally every single country! The technocrats have already changed how every single bank in the world prepares its financial statements and manages its balance sheet! If that isn’t a technocratic imposition without reference to democratic processes I don’t know what is.

Why are banks happy to lend on houses but not to small businesses? Because they need higher loss reserves for business lending. Ergo, you can borrow a $1 million for a house but borrowing $1 million for a development to increase housing supply is almost impossible unless you already have $1 million in net assets as security, rendering the whole point of participating in the bank lending market moot and the likelihood of any economic recovery relying on credit negligible.

What does this have to do with Basel III? Well, with quantitative easing injecting enormous amounts of liquidity into the financial system at the same time that higher capital requirements and liquidity constraints have been imposed on banks and financial institutions, it simply makes more sense to keep stuff on your balance sheet in assets that enable you to count them as Tier 1 capital under Basel III rules. That is why financial institutions have returned to profitability so quickly.

Thus, in the pursuit of financial stability, the Basel III process has also made it less likely that loans will be granted to the risky activities that will bring the Western economies back into growth mode. There is a trade-off between financial stability and credit being allocated towards risky activities like business startups and property development.

Remember, when private sector demand for credit is down, and banks need to raise enormous amounts of capital to meet Basel III requirements, how focused will they be on performing their role as a capital allocation utility i.e. the reason they’re given banking licenses? How focused can you be on business development in property lending when you made big mistakes in the last boom and now have a whole plethora of new rules around who you can lend money to?

It’s almost as if the technocrats did not believe that there were any tradeoffs in pursuing policy that, funnily enough, I think the average person in the street would wholeheartedly approve of. Regulation has consequences. We should be very concerned that the Reserve Bank wants to increase its level of “macro-prudential supervision” through loan-to-value restrictions.

Book Review: The AIG Story by Maurice R. Greenberg

The problem with a population that doesn’t read widely is that they take whatever they hear on the news or read from their favourite columnist and repeat it verbatim. There is no critical examination of the facts, and because hardly anyone reads widely, they cannot plug new information into a matrix of what they have already learned and retained.

American Insurance Group was one of the most savaged brands in the aftermath of the global financial crisis. The New York Federal Reserve and US Treasury, with Tim Geithner and Hank Paulson at the helm decided to use AIG as a way to transfer tens of billions of dollars to Wall Street banks and other counterparties of AIG’s Financial Products division.

The popular narrative is that AIG was a corrupt company. This book is an attempt by the CEO and man who grew it from $100 million in revenue in the 1960’s to over $800 billion in assets in 2008 – Maurice “Hank” Greenberg – to set the record straight. It is written by Lawrence Cunningham after a lot of research and interviews. As always, it is more revealing when you learn who did not want to give an interview to an author than who actually did.

The book starts from the beginning with a clear explanation of how AIG played an important role in the globalisation of financial services and had a “profit center” mentality. Each individual underwriting unit was expected to earn a profit on its own. This was distinct from many insurance companies that simply lowered their premiums below the market rate to gain market share at the expense of higher loss rates.

Greenberg and his executives achieved very low expense ratios and loss ratios relative to the rest of the insurance industry. After he was forced to resign profit margin went from 16% to below 4%. Under his leadership AIG became a behemoth because they really were the best. They were using advanced actuarial stuff before anyone else, their senior executives had no employment contracts so were always incentivised to outperform and their long-term interests were tied to AIG because a separate company, SICO, owned a massive chunk of AIG shares that eligible AIG employees only received when they hit 65.

I am familiar with how the derivatives market works. When financial institutions trade between one another, many can do so on the back of their AAA or AAA- credit rating. They don’t even need to post collateral. The downfall of AIG came from a reduced credit rating and abandoning a policy under Greenberg of always “laying off the risk” in derivatives trades by hedging each position and therefore making a margin on what they received in premiums on a product and paid out in premiums to other firms.

In essence, before Greenberg’s departure, AIG ran their derivatives business properly with strong risk management controls. But after his departure they entered into more than $80 billion dollars of unhedged exposure. There was a massive legal wrangle over accounting inanities and at the heart of it all was former New York governor Eliot Spitzer. Yeah, that hypocrite who went after Wall Street while simultaneously engaging in (at least in the USSA) illegal activity with high end escorts.

Then, a phrase came up that immediately gave me flashbacks to a book I read about Conrad Black. The “corporate governance” mafia were responsible for the downfall of AIG. Experienced insurance and banking industry stalwarts were forced off the board in the name of “independence” and effectively hijacked a successful firm from people who knew what they were doing to people with no insurance or even financial experience.

This “corporate governance” scheme involves reforming management and the board of directors of a corporation to serve the interests of the independent directors. The interests of the shareholders, executives and employees are tertiary. The primary goal of the corporate governance movement is to enable a cottage industry of law firms, “corporate governance experts” and accountants to make enormous sums of money leeching off successful corporations.

Immediately, I plugged what I was reading into the matrix of what I have read about “corporate governance” over the years. The downfall of AIG all made sense. When you replace people who managed risk for a living, with people whose biggest risk in life was whether to attend Harvard or Yale for law school, you sure as hell will have poor oversight.

And at AIG that’s exactly what happened. The executive committee of 4 top directors that met almost weekly as a way of ensuring oversight of big decisions and risks in between full board meetings was abandoned. There was “no one in charge” and the corporation devolved into factional infighting. The board of directors was so concerned with destroying Hank Greenberg it did not take any steps to monitor risk at AIG Financial Products.

While at some points in the book it was clear that Hank Greenberg is a very American-style CEO, the parallels with Conrad Black (charged with $400M embezzlement, convicted on $285,000, destroyed in order to let corporate governance types bilk Hollinger International) were completely uncanny. The pettiness and immorality of these leeches of the boardroom is amazing.

What is even more disturbing is that basic economics tells us that Greenberg, as largest shareholder of AIG and heir of C.V  Starr, had the strongest incentives to protect AIG shareholders, employees and customers. The directors that were not former executives of AIG and associated companies had tenuous incentives – their fees, some restricted stock and “prestige”. They were “captured” by outside counsel that saw a massive opportunity to bill AIG tens of millions of dollars in legal fees.

When all of the AIG legal and accounting fees are added up, over $1 billion was spent sacrificing AIG at the altar of corporate governance. And this was before the US used AIG as a bailout conduit where derivatives counterparties were paid out at 100 cents on the dollar when market conditions made it obvious that discounts were acceptable settlements of AIG Financial Products’ liabilities.

I recommend you read this book as an antidote to the anti-AIG propaganda that the media have repeated ad-nauseam. The dodgy executives at AIG were only enabled to do what they did because the corporate governance movement hobbled their in-house risk control mechanisms in the pursuit of “good governance practise”.

If that hadn’t happened, all of the losses would have been borne by those who knew the risks – the shareholders. Instead, a weak board of directors let the Fed and the Treasury hijack their company and use it as a bailout conduit. You should buy a copy of The AIG Story this weekend. It’s a compelling tale of what happens when people don’t stand up to legalistic bullies.

The Risk Free Rate Of Return

The risk free rate of return is the rate of return an investor could earn with “zero risk”. Since the global financial crisis and Asian financial crisis, we’ve been reminded constantly that there is no such thing as “zero risk”.

But the risk free rate of return is useful for comparing the rate of return other assets earn in relation to it. There is no point taking enormous risk to earn a slightly higher return than you could get from government bonds.

The standard global “risk free” rate of return is the 3 month US Treasury bill rate. For New Zealand investors, we could use the 90 Day Bank Bill Rate. As of writing that’s 2.71% on an annualised basis.

That means that if we wanted to lower our private sector risk and rely on the government, and had access to the institutional money markets, we could make 2.71% a year with low “risk”.

The problem with this sort of thinking is that it uses one metric – the “risk free rate of return” – as a decision making tool. The other risks your investment will be exposed to can be ignored.

For example, during the Asian Financial Crisis, many governments defaulted on their sovereign debt. This was in 1997. Attracted by high yields and assuming that governments would always pay their bondholders back, investors piled into markets in Thailand, Malaysia, Indonesia, Korea, Russia, Argentina and Brazil.

Many were heavily burned by forgetting that some countries have completely different attitudes towards debt repayment. Look at Greece – it has survived in the euro zone so far only because hundreds of billions of Euros has been transferred to it by other member countries.

It would have been cheaper for the Eurozone to underwrite Greece’s structural deficits since it entered the Eurozone fraudulently. At least then the true picture of the Eurozone’s complete failure to pursue balanced budgets would have been there for the world to see.

Because the common currency established a central “risk free rate of return” available from the European Central Bank, it effectively subsidised the interest rates payable by poor governments in Greece, Portugal and Spain.

Ratings agencies and investment banks papered over the enormous problems in the European economies to enable continued debt issuance and debt rollovers that failed to address the sick problems in their economies.

Even Germany has enormous external debt to GDP because it has pursued expensive social policies while reforming its economy and lowering labour costs. France has failed to lower labour costs and improve competitiveness, making it an economic zombie doomed to default at some point in the future.

The problem with financial theory is that its proponents will argue that concepts like “risk free rate of return” don’t lead to bigger problems when applied on a global scale. That’s patently false.

If financial theorists didn’t pollute the world with their fake models and theories better suited for the complexity of a village cattle market, groupthink – an entire industry thinking that government debt has little to no risk – would not have occurred on a scale this bad.

Coming back to the risk free rate of return in New Zealand, it is unlikely that New Zealand would default on its debt. But we have no idea about what could happen to New Zealand’s economy over the next decade.

Treasury and Reserve Bank predictions are relied on by the government to conduct “long term budgeting”. All of the predictions are wrong. All of the predictions are arrogant. We would be better off if they came clean and admitted – we can’t predict the state of government finances and when we’ll return to surplus.

As an example of the poor thinking behind these forecasts, cast your mind back to 2008. The National government engaged in “fiscally neutral tax cuts” that cut personal income tax and raised GST simultaneously.

Funnily enough, all that happened was the loss of billions of dollars in tax revenue over the past couple of years. When you add in the cost of the Christchurch earthquake, that’s billions of dollars in extra borrowing the government has taken on.

Forecasts for tax revenue have consistently been revised downwards. That’s because we’re in the stage of a multi-year recession where companies who have been trucking along suddenly default on all of their tax obligations. Even though IRD can be secured creditors, if there’s nothing in the entity they don’t get a dollar.

We need to move away from messy thinking about risk and reward. Using the risk free rate of return is insane in an era where we really have no ability to predict which government will be at risk of default next. The past few years have surely shown us that what finance academics think is clearly not in touch with this thing called “the real world”.

I’d appreciate your comments on this. Do you think that economists and financial “experts” are living in a fantasy world?

No Recovery Can Be Guaranteed

 

A recovery from the global financial crisis can’t be guaranteed. There’s no reason why employment, consumer spending and business confidence have to recover in New Zealand.

The unwinding of what George Soros calls the “superbubble of credit” has barely begun.

For a while there I thought that we’d start to see some sanity around housing. But prices are on an upwards march again, absolving the need for the government to address rising superannuation costs.

 

Banks are relaxing lending standards and setting themselves up to pass stress tests. Financial stability is apparently high, but we can’t see the models the RBA and RBNZ use because that would reveal how precarious the situation actually is.

If banks stop the growth in mortgage lending, the whole house of cards will collapse. In order for perpetual growth to shine upon their balance sheets and executives to get their million-plus bonuses they can’t afford to stop lending on housing stock.

In order for a recovery to be called a recovery, hundreds of thousands of people unemployed or under-employed have to get something out of it.

It’s not like they control any capital with which to benefit from gains in technology, automation or inflation.

For those at the top of the food chain, there hasn’t been much of a recession. Only those who borrowed far too much had their wings clipped.

All the others have kept on benefiting from asset-price inflation and successfully watered down any attempts to reign in excess.

During the 2000s, rising house prices and easier credit papered over the stagnating New Zealand economy.

But interest-free repayment periods come to an end and the flow-on effect of a protracted downturn in construction hits people on lower incomes even harder than Radio New Zealand listeners could comprehend.

The exodus to Australia, driven by the working class and skilled tradespeople, can’t be permanent. Under the Special Category Visa regime Kiwis aren’t eligible for Australian welfare payments.

This means that when the mining bubble collapses and destroys the house of cards that is the Australian economy, the reversal of emigration will turn New Zealand into an even more screwed country.

I laugh when I read articles about “average pay rises”. The only people who get pay rises are connected to the public sector in some way, shape or form.

Out there in the real world, casualisation and sub-contracting arrangements that resemble old employer-employee relationships in every which way except name, have hollowed out the labour market and turned it into a project-specific skills market where the risk is borne by the contractor.

No recovery can be guaranteed because the risk/reward equation is so heavily skewed towards people who’ve already made a bundle, having no incentive to put what they’ve earned in the boom at risk by taking on additional investment projects.

Reality Check On BRIC Stories

The Brazil-Russia-India-China acronym was first coined by Goldman Sachs economist Jim O’Neill.

Ostensibly, it’s a prediction that these four countries will take over the world because of the massive increase in their population, GDP and status as creditors to the developed world.

In reality, the BRIC economies are not as rosy as we might think.

Instead of focusing on GDP as the measure of a nation’s success, the real statistic we care about is real GDP per capita on a purchasing power parity basis.

In this statistic, the BRIC countries fall down in any reasonable assessment of their economic performance.

Let’s compare the BRIC GDP per capita with countries New Zealand would like to compare itself to economically:

What this tells us is that in order for the BRIC countries to truly say they’re economic powerhouses, they’ll need to more than double their real GDP per capita on a PPP basis to even surpass little old New Zealand.

With China currently slowing down, Russia propped up by oil prices, Brazil engaging in destructive monetary policy and India struggling to export anything other than call centre services I don’t see how this is going to happen.

Particularly when a key determinant of BRIC countries growth is demand in countries like the US, Canada, the European Union, Australia and New Zealand. If there is less demand for exports, growth plummets accordingly.

Because external debt must be repaid in foreign currency, export earnings are pretty important. So what do they look like per capita for the BRIC countries plus Greece for an illustration of relative position?

Interesting. Now, putting aside how external debt actually functions i.e. lots of rollovers and reissues from time to time, if all export earnings were applied to running down external debt, how long would it take different countries to do so?

This isn’t a completely out-of-left-field thought experiment – foreign currency has to come from somewhere.

A year has 365 days so Greece would have to apply all of its export earnings for almost 20 years in order to retire external debt whereas China would have to do so for just 8.5 months.

While this though experiment relates to gross exports as opposed to net margin made by exports – which can be enormous – it’s still indicative of how paying down external debt is almost impossible.

It has to keep on being rolled over and new debt issued to pay off the old debt. Both the public and private sector in the BRIC countries and developed countries have binged on debt for far too long.

At some point, there has to be a reckoning. It will be painful, and no amount of central bank intervention or fiscal policy responses can dull the pain of a real debt crisis.

 

Australia Is In For A Hard Landing

Starting in 2005 a resource boom in Australia has propelled their economy onwards and upwards. All good things come to an end, and I believe that Australia is in for a hard landing. The combination of a shock to commodity prices, piercing of a housing bubble and extremely poor productivity growth since 2005 could lead to a serious drop in Australian GDP when the day of reckoning arrives.

McKinsey Global Institute have produced an essential study that breaks down what has caused Australia’s growth spurt since 2005, and how the causes of growth have differed from previous growth spurts in the early 1990’s and early 2000’s. It’s called “Beyond the boom: Australia’s productivity imperative“.

Their analysis looks at five different contributors to growth:

Terms of trade: The effect of changing prices for imports and exports

The increase in terms of trade has been fuelled by massive increases in commodity prices. The Reserve Bank of Australia governor is quoted in the report that while one container of iron ore was worth 2,200 flatscreen TVs in 2005 it’s now worth over 22,000 flatscreen TVs. The Australian dollar is at very high levels and is currently at 1.03 USD/AUD – above parity!
Additional capital: The increase in capital stock

The increase in capital stock in Australia since 2005 is astonishing – some A$120 billion in additional capital investment has been made in iron ore and coal mines, roads, ports, natural gas exploration and other resource industry projects. That alone is responsible for 53% of the growth since 2005, meaning any reduction in capital investment would significantly reduce Australian economic growth.

Additional labour: The increase in the total number of hours worked in the economy

Since 1993 Australia has averaged 143,000 immigrants per year and its own growing population has led to a massive increase in the size of the workforce. Massive Kiwi immigration has thus played a key role in accelerating Australian growth. MGI state that the increase in labour is the steadiest contributor to Australia’s growth.

What does this mean if lots and lots of Kiwis return to New Zealand? Well, the Australian economy recovery could potentially be lower than if they stayed there. The same obviously applies to other sources of Australian immigration – Southeast Asia, UK, Ireland, South Africa. Birth rates in Australia seem to be propped up by the baby bonus they have there. If fiscal necessity means that has to be cut the rise in natural born population will decrease sharply and affect this contributor to growth by the 2020s/2030s.
Capital productivity: The amount of output generated per unit of capital stock

Between 2005 and 2011 capital productivity has plummeted and led to tens of billions of dollars in losses of national income. MGI argue that this is because of the massive time lags between planning a resource project and getting the first shipment despatched, which can feasibly take years because of the size of the projects.

This finding is amazing – all of this capital investment, yet the losing capital investments are essentially cancelling out many of the one-off gains from a resource boom. This does not bode well if commodity prices decline, because that would reduce the value of resource projects already committed to and underway even further.

Despite hundreds of billions in domestic wealth, hundreds of billions more is being borrowed from overseas to finance these capital investments. If Australia’s exchange rate plummets in the wake of reduced commodity prices the repayments on bonds issued in USD, EUR, JPY, RMB or even SGD will skyrocket and reinforce a downward spiral of investment.
Labour productivity: The amount of output generated per hour worked

Despite having 25% more capital at their disposal from 2005 to 2011, output only increased 7%. Over the past 6 years labour productivity increases have only contributed a roughly a third as much as they did between 1993 and 1999. (A$17 billion vs A$57 billion). Other sectors in Australia have been achieving lacklustre labour productivity growth of ~1% a year.

All in all, MGI conclude that at least 50% of the growth from 2005 to today is one-off effects of the mining boom. The reality is that Australian multifactor productivity is actually declining at 0.7% a year. McKinsey talk about four different scenarios for Australia, linked directly to how much they increase productivity. They call these scenarios “hangover”, “lucky escape”, “earned rewards” and “paradise”.

This is how they arrived at their numbers:

 

Using the methodology that MGI used to calculate these 4 scenarios, what happens if we make the assumptions slightly more negative? If the “hangover” situation occurs, there is not much breathing room until the total change of total income becomes negative.

In the “hangover” situation, if the relationship between additional capital and capital productivity (-43/120) holds the negative contribution of capital productivity would surely be (-43/120)*107= -$38.34 billion. That would change the “hangover” calculation to : -109+107+28-38+8= -$4 billion.

Any further deterioration in Australia’s terms of trade would make the reduction in total income even higher. Any decrease in additional capital would make the reduction in total income even higher. This report reinforces my bearish opinion of Australia – they’re squandering their resource boom resources and not focusing aggressively enough on improving multi-factor productivity.

And let’s not forget where a lot of this capital investment is coming from:

When Australia’s terms of trade decline, any foreign-denominated borrowings will be more expensive to repay. This could prove fatal to any recovery because a substantial proportion of national income will be spent on debt service instead of capital investment, further reinforcing the hard landing provided by a decline in commodity prices.

Australia is in for a hard landing because they’ve squandered their natural resource dividend on a housing boom and holiday homes in Bali. Their failure to address productivity issues in the resource sector and other sectors will make the inevitable recession far more painful than it could have been if a more responsible approach to shoring up the long-term prospects of Australia had been taken.

Are Jobless Recoveries The New Norm?

This week at Vox EU an interesting piece by Henry Siu & Nir Jaimovich argues that jobless recoveries, at least in the United States, are the new norm. It’s called “Jobless recoveries and the disappearance of routine occupations“.

They talk about job polarisation where there is an increasing division between high skill and low skill jobs, with the “middle” jobs that are routine and can be automated or mechanised are no longer needed. The reduced reliance on labour-intensive production methods in manufacturing and increased reliance on software and robots to perform routine tasks is an example of this trend.

To examine this against they data they constructed a counterfactual scenario – if routine employment rebounded after a recession the same way as it did before job polarisation started happening, what would total employment look like?

In the 2001 recession:

For the global financial crisis:

They conclude:

The loss of routine jobs in recent recessions has given rise to jobless recoveries. Aggregate employment struggles to rebound following recessions since middle-wage, routine occupations no longer recover. Moreover, employment growth following recent recessions has been unevenly distributed across pay, concentrated in high- and low-wage occupations. A recent report by the National Employment Law Project (2012) indicates that the recovery from the Great Recession has been particularly lopsided, with the majority of jobs added being low-paying jobs.

What does this mean for New Zealand’s unemployment crisis? If the US situation applies to New Zealand then we should be very concerned indeed. We already suffer from low levels of labour productivity and rising labour costs. More flexible hiring practises including the 90 day trial period have not made any difference in net job creation.

It means that we need to think careful when thinking about who is unemployed. Are they unemployed for cyclical reasons – because their employers failed due to lower demand for the goods and services they produced? Or are they unemployed because their job is no longer needed or they no longer have the skills necessary to perform a similar job in the same industry?

If the structural changes in the labour market are not addressed promptly, hysteresis will set in and the long-term unemployed from the past few years will be permanently locked out of the labour market. The urgency of addressing this problem is clear – if workers aren’t supported through the retraining and adding skills process they will not be able to participate in any recovery in the labour market.