A riddle in the labor market

Why is the unemployment rate among youths dropping steeply in Kazakhstan?

In the queue for jobs, youths are almost always at the rear. In the United States, the rate of unemployment among those aged 16 to19 is about 24%, almost three times higher than the rate for the general population (about 8.1% to 8.5%). In Greece, Italy and Spain, high rates of youth unemployment may thwart austerity programs.  Economists attribute the disparity to youths’ lack of education and work experience. In Kazakhstan, however, the unemployment rate is lower among youths than adults.

The unemployment rate – the share of the workforce that is seeking futilely for jobs – has been falling in Kazakhstan since 2001 at least. The decline is especially sharp for youths. In 2001, the unemployment rate for those aged 15 through 24 was almost twice as high as that for the population in general (19.1% and 10.4% respectively). By 2010, the unemployment rate for youths had fallen beneath the general rate (5.2% and 5.8%). That trend continued in 2011 (4.6% and 5.4%). Youth unemployment is no longer a special problem in Kazakhstan. Why not?

Service with a smile

One clue may lie in the changing nature of work in Kazakhstan. Like unemployment in general, that among youths has been seasonal, with the peak in the first quarter and the trough in the third. But seasonality has virtually disappeared in both unemployment rates since 2010. The most likely explanation is that outdoors work has become less common than it was. The economy is shifting from farming to services.

Some services – such as education, health and finance – require skills acquired only in school. If youths are better educated than adults, then the demand to hire them, rather than adults, may be increasing. But this would imply that areas where production is relatively intensive in these skills -- the cities – might see a drop in relative unemployment. In reality, the unemployment rates in Almaty and Astana were higher than the national rate from 2005 through 2010. Almaty's rate was a sixth higher in 2009 and remained a tenth higher in 2010. Astana's rate has been consistently lower than Almaty's but was still a twentieth higher than the national rate in 2010. Among the oblasts, the only unemployment rate that was consistently as high as those of the cities was Mangistau's.

The unemployment rate might also drop among youths because they are leaving the labor force in order to return to school. After all, the unemployment rate is the ratio of unemployed workers to the labor force. When an unemployed worker stops looking for work, thus departing the labor force, the relative reduction in the numerator of this ratio exceeds the one in its denominator, so the ratio falls. (An example might make this clearer. Begin with the fraction 4/5, or .8. Subtract 1 from the numerator and the denominator. The resulting fraction is ¾, or .75 – lower than before.)

But in general, dropping out of the labor force does not dominate the unemployment rate. If it did, then the fall in the number of unemployed workers should exceed the rise in the number of employed workers. But in Kazakhstan, the annual number of newly employed workers is seven times the annual reduction in the number of unemployed workers. The economy tends to create jobs rather than discourage workers.

The rising tide lifts the smallest boats

A final possibility is that the labor force creates more jobs for the young than for adults, so that the unemployment rate falls more steeply among youths than among older workers. In Kazakhstan, the rate of increase in jobs is not impressive -- an average of 2.2% from 2003 through 2010, only a fraction of the growth rate of the national economy. However, the population is also growing slowly – generally from 1% to 2% per year – so that growth in the labor force might easily cover growth in the population.

Perhaps the unemployment rate among youths is falling because economic growth creates jobs especially for the “first hired, last fired.” In a recession, firms lay off youths because these are their most inexperienced workers. When recovery ensues, firms hire them back. But this applies to most market economies, where the youth unemployment rate usually exceeds the adult rate.  Perhaps the longevity of the economic recovery here – 15 years, except possibly for 2009 – increases relative demand for young workers, since most adult workers who are capable have already been hired.  Such speculation aside, the mystery of the missing jobless among Kazakhstani youths continues. --Leon Taylor, tayloralmaty@gmail.com


Notes

All Kazakhstani figures are from the national statistical agency (www.stat.kz). The U.S. data are from the U.S. Bureau of Labor Statistics (www.bls.gov).

The economy after

Why is the world economy still weak?

Virtually all analysts blame the global recession of 2008-9 on the financial collapse at that time – and for good reason.  In Kazakhstan, the government took over some of the largest financial institutions – including BTA and Allianz banks – to dissuade foreign investors from yanking their funds out of the finance sector, which could have brought on a general default.      

Yet, five years later, the world’s largest economies still ail.  The United States economy grows by less than 2% per year; Japan’s is stagnant; the euro area is contracting slightly.  Even the BRICs are disappointing: Brazil, 1.4%; Russia, 2.9%; India, 4.5%; China, 7.9%.  What gives?

In the gloomy postwar period, the idiosyncratic  economist Joseph Schumpeter suggested that capitalism would so succeed that it would fail. 

For economic growth, we should thank the entrepreneur who newly organizes production, Schumpeter said.  Price competition is anemic; it is the entrepreneur who blasts markets wide open. The airplane, the telephone, the automobile, the computer: Those remake the economy, not Red Tag Specials.

Economists are not always cognizant of this.  “…The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them,” Schumpeter wrote.  “….A theoretical construction which neglects this essential element of the case neglects all that is most typically capitalist about it; even if correct in logic as well as in fact, it is like Hamlet without the Danish prince.”

Let’s play ‘Monopoly’

Far from the economist’s paragon of an economy of many small firms, entrepreneurs construct monopolies.  Innovation in the rayon industry enabled three firms to control 90% of U.S. production soon after World War I, noted Schumpeter, an economic historian.  With a lockhold on the market for a unique product, the entrepreneur will sock the consumer with high prices.  Schumpeter thus doubts the neoclassical conclusion that economic profits are a sign that resources – what we use in production – are allocated inefficiently.  If Microsoft makes economic profits by selling Windows – which used to be a given -- then it must not face enough competition, say the neoclassical economists; the profits, which are due to scarcity, signal that the market is not producing enough operating systems to satisfy consumers.  Schumpeter counters that the entrepreneur must anticipate economic profits before he will risk innovation.  Profits that look inefficient in the short run may stimulate economic growth in the long run.  The very precariousness of these profits leads the monopoly to erect barriers to entry in the short run; the barriers do not create the profits but result from them.  Even if a hurdle could somehow generate profits, these would attract the debilitating attentions of rivals soon enough.   

In a sense, we become creatures of the entrepreneur.  “It is…the producer who as a rule initiates economic change, and consumers are educated by him if necessary; they are, as it were, taught to want new things….” So it may not be surprising that we don't really want the entrepreneur.  He doesn't fit into the comfortable society that he has made possible for us.  Unlike us, he is not a hedonist, since the diminishing satisfaction of another dollar consumed would long ago have discouraged his pursuit of billions.  He is instead driven by the terrifying desires to conquer others and to found a dynasty comparable to a “medieval lordship.”  “Successful innovation is…a task sui generis.  It is a feat not of intellect, but of will.  It is a special case of the social phenomenon of leadership.”

Even his “joy of creating” threatens the comfort that we take in familiar surroundings.   His independence, his penchant for taking risks, frighten us; we just want to hang onto our pleasant lives.  “…Stabilized capitalism is a contradiction in terms.” 

So, over time, we drive him out of existence, probably through government regulation.  “There would be nothing left for entrepreneurs to do.” Profits would vanish.  The rate of interest would fall to zero, since the only function of interest is to divert resources from conventional uses toward entrepreneurial ones; rentiers would pass from the scene.  Capitalism would lead to affluence, but affluence would lead to timidity – and that, in turn, to socialism.  “The true pacemakers of socialism were not the intellectuals or agitators who preached it but the Vanderbilts, Carnegies and Rockefellers.”  Although Schumpeter thought that socialism would survive, he did not enthuse over the prospect. For him, socialism was the land of the lotus eaters.

For whom the bell tolls

The entrepreneur colludes in his own extinction by providing the means of replacing him – information about innovating that can generate a routine.  “The more accurately…we learn to know the natural and social world, the more perfect our control of facts becomes; and the greater the extent, with time and progressive rationalization, within which things can be simply calculated, and indeed quickly and reliably calculated, the more the significance of [the entrepreneurial] function decreases.”  “…Innovation itself is being reduced to routine.”  The rise of the corporation was evidence of this trend; divested of managerial duties, the owner’s attitude becomes “more distant, less personal, more rationalized.”  In not the most prescient of comparisons, Schumpeter suggests that the entrepreneur will become enervated, “just as the importance of the military commander has already diminished.”  Business management will resemble a bureaucracy. Most important, the leader will yield to the mundane: “The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and ‘expropriates’ its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income but also what is infinitely more important, its function.”  Capitalism would destroy the old order just as surely as it had created it.

The decline of the entrepreneur will gentle the business cycle and retard economic growth.  Output also stabilizes because the number of large firms grows with cumulative innovations over time.  New entrepreneurs can then introduce their innovations by taking over existing large firms rather than by driving small ones into bankruptcy. 

When the entrepreneur finally was dead, then the affluence of the society that he had created could easily provide a surplus from which to support those who could no longer find the jobs that had once been created by his gambles.

Schumpeter summarizes his argument: “Capitalism, whilst economically stable, and even gaining in stability, creates, by rationalizing the human mind, a mentality and a way of life incompatible with its own fundamental conditions, motives and social institutions, and will be changed, although not by economic necessity and probably at even some sacrifice of economic welfare, into an order of things which it will be merely matter of taste and terminology to call Socialism or not.” The Keynesian notion that more consumption could salvage an economy from depression was, in fact, a product of capitalism itself, which had created a class too affluent to worry about saving for the future.

Schumpeter – a failed banker himself -- did not deny the importance of banks.  The entrepreneur must turn to them to create credit for her; otherwise, she will not be able to bid away resources from normal production.  It is the banker, not the entrepreneur, who truly assumes risk – and maybe too much of it, judging from 2008.  At the same time, the re-regulation of banks ensuing from 2008 may block entrepreneurial breakthroughs that could resuscitate a comatose economy – in a Schumpeterian perspective, at least. 

The most contrarian argument of this contrarian Austrian is that we should view today’s economy against the long sweep of social forces and history.     -- Leon Taylor, tayloralmaty@gmail.com

Notes

1.  The reported rates of economic growth are in gross domestic product, adjusted for inflation, and come from the back pages of The Economist.

2.  All quotes are from Schumpeter’s writings.

“…Danish prince”: Capitalism, socialism and democracy, pages 84-6

Rayon industry: Business cycles, page 316.

“want new things”:  The theory of economic development, page 65.

 

“medieval lordship”:  The theory of economic development, page 93

“phenomenon of leadership”: “The instability of capitalism,” page 379

“joy of creating”:  The theory of economic development, pages 93-4

“contradiction in terms”:  Business cycles, page 405.

“entrepreneurs to do”:  Capitalism, socialism and democracy, page 131

“Carnegies and Rockfellers”: Capitalism, socialism and democracy, page 134 

“function decreases”:  The theory of economic development, pages 85-6

“more rationalized”:  Business cycles, page 282

“military commander has already diminished”:  The theory of economic development, page 86

“infinitely more important, its function”:  Capitalism, socialism and democracy, page 134

Driving small firms bankrupt:  “The explanation of the business cycle”, page 299.

“call Socialism or not”:  “The instability of capitalism”, 385-386.

Good reading (all from Schumpeter)

Business cycles: A theoretical, historical, and statistical analysis of the capitalist process.. New York: McGraw-Hill.  Abridged.  1964 [1939].

Capitalism, socialism and democracy.  New York: Harper.  Third edition.  2008 [1950].

“The explanation of the business cycle”.  Economica 21.  December 1927.  

“The instability of capitalism”.   The Economic Journal 38.  September 1928

The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle.  New Jersey: Transaction.  1982 [1911].

Cash ‘n tarry

How will Uzbekistan’s debit policy affect its economy?


Uzbekistan is moving toward a cash-free economy, by asphyxiating it with red tape. Now a typical worker in the country’s bulimic government can spend his paycheck only by using a debit card at approved stores, reports EurasiaNet.org, a Soros offshoot. This policy is supposed to discourage tax evasion by eliminating cash income. But it may have a few other effects as well.

Consumer spending may fall, because it is more troublesome than before. This may slow the economy. Not by much, perhaps: To keep its economy afloat, Uzbekistan relies heavily on sales to foreigners; exports are almost a third of the economy (as measured by gross domestic product), estimated the World Bank. But at a time when residents of most countries still seem to spend too little, yet another constraint on consumption is hardly welcome.

The debit policy may affect financial markets in curious ways. Initially, the amount of money supplied need not change, since this is the sum of cash and checking accounts. The government is just substituting the latter for the former. But the banks may lend out the money that is added to checking accounts, and this will increase money supply. Moreover, if the banks lend to producers rather than consumers, then a rise in real investment – such as expansions of factories and farms -- may offset the fall in consumption. The economy’s capacity to produce will grow; but as long as world demand for Uzbek products remains anemic, the new capacity will go unused.

Because spending has become inconvenient, the demand for Uzbek money will fall. This will pull down the price of holding a som – the amount of interest that the som could have earned had it been lent out rather than held. Interest rates will fall; borrowing will become cheaper. Producers may borrow more to finance new capacity, even if they can’t use it right away.

In short, the debit policy may tilt the Uzbek economy toward investment and away from private consumption. Since the government still controls much production, its new policy may increase the state’s presence in the economy over time. Tashkent, which has never welcomed markets with as much verve as Astana has, thus delays its transition to a Western-style economy, just as it has for 20 years. Foreign investors won’t rejoice. –Leon Taylor, tayloralmaty@gmail.com


References

Joanna Lillis. Malls muscling out markets in Tashkent. February 28, 2013. EurasiaNet.org

World Bank. World Development Indicators. www.worldbank.org