Wednesday, December 28, 2005

Why America’s Economy is so Resilient:

When the most recent unemployment data was released earlier in the month, it had shown that the United States unemployment rate was 5%. In an economy as large as ours with a population as big as ours, a 5% unemployment rate is not only amazing (5% is generally considered to be full employment for a country) but is half of most other developed nations like France and Germany.

When the U.S. had fallen into a brief recession after the .com crash U.S businesses from small to large were quick to go into layoff mode. The move caused our unemployment rate to rise but was necessary so companies could make their businesses more efficient during times of difficulty so they can be in a better position to stay in business until good times come again. It’s the old saying; sometimes you need to take one step back so you can take two steps forward. Sure enough over the last three years as the economy has come out of its recession, U.S. companies were quick to start hiring again, reflecting the improvement in their bottom lines. As company profits improved they moved quickly to add to their labor force so they could maximize production and the business opportunities presented.

Like the U.S. other countries like France and Germany have also seen their economies accelerate and decline and most recently accelerate again. However in the case of France and Germany, their unemployment rates have continued to hover at around 10% (9.7% for France and 11.5% for Germany) even when their economies have shown signs of improvement. On the surface it may appear that those European companies don’t have the ability to increase their labor force but in actuality that is not correct. The truth is that companies located in France and Germany do not want to increase their labor force even though doing so would increase production and most likely profits at times when their economies are doing well.

The reason, unlike the U.S., France and Germany don’t increase their labor force when times improve is do to one word, flexibility. Because of our belief in the free market system and very little union exposure companies in the U.S. can hire and fire quickly to take advantage of the current environment. In the case of France and Germany because of unfriendly labor laws and a large union presence companies don’t hire even when the business environment is telling them they should. The reason is companies know that if they are to hire someone, if the environment turns and goes negative they are basically stuck with that person on their payroll so companies would rather forgo profits in the present to save larger losses in the future. It is our labor flexibility that has seen U.S. GDP growth surpass 4% in the latest global expansion that has taken place while France and Germany have only seen roughly 1% GDP growth. It’s not that Germany and France are not capable of better growth it’s just that because of strict labor protection, companies won’t invest the capital necessary to attain it.

I bring this up because of the debate we have been having regarding the benefits of unions. As I mentioned yesterday, if we look at the industries in this country that have had the biggest problems it is the airlines and auto companies, which are burdened with large expensive unions. Interestingly if we look at the one airline that is economically the most solvent, productive and profitable, it is Jet Blue, which coincidently doesn’t allow its employees to unionize.

One-thing unions and strict labor laws don’t do is give companies labor cost-controllability. The only thing that give companies the ability to adapt to the environment is the flexibility of knowing you can change your pay, benefit and size of your labor force at anytime, something contracts don’t do and why our economy accelerates quicker and greater than others. In the end we can look at the issue of having a union legally as our President Dennis did and justify their existence. However if we view the idea of a union economically for the benefit of not only the underlying business but also economy in the form of GDP growth, we see their existence is not justified. Sure layoffs aren’t fair but giving companies the flexibility allows our economy to take those two steps forward and everyone else better off in the end, unlike strafing from left to right like they do in Europe. It’s just a matter of having faith that the “invisible hand” of capitalism makes it all work out in the end.

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