Pessimism in the American Populist Movement

The 2016 presidential election cycle has featured many themes of increasing absurdity, especially between the two populist candidates (Trump and Sanders). The primary focus here has been an America in decline. Thoughts among the two’s supporters seem to be that manufacturing has been shipped overseas and that the establishment has stood by while our huge multi-national corporations exported jobs and used loopholes to avoid taxes. Trump and Sanders agree that free trade has crushed the middle class and harmed the American economy. Without delving too deeply into the problems with populism in politics, I’d like to address the rampant misinformation involved in these claims.

Let’s talk about manufacturing first. Given the way it is spoken about, you’d think manufacturing in the US has been decimated. In fact, real output is the highest it has ever been. As shown in the chart below, we have even surpassed the peak immediately preceding the financial crisis. This would seem to show that neither Mexico nor China have stolen our manufacturing. It’s at an all-time high. However, this isn’t the whole story.

What about unemployment? They have both spoken about how we have supposedly lost millions of jobs to the various trade agreements we have in place. What does our unemployment rate look like? In fact, unemployment is sitting right at five percent. Five percent is what most economists would consider our “natural” unemployment rate. Natural unemployment just refers to the unemployment rate that we would  expect in a healthy economy.

No discussion of populism in America today would be complete without talking about wages. As any $15/hr protester would tell you, middle class wages have been stagnating for nearly a decade (even as average wages have risen, median wages have not). This has been nothing more than a simple function of supply of workers and demand for employees. Even as the unemployment numbers have been plummeting more people have been entering the workforce. While a plethora of other factors exist, these two are the most important. However, there has been cause for some optimism on this front as well. Wage growth has ticked up recently (shown to the right) and should show more signs of life going forward. I will delve more deeply into this at a later time.

Continuing on that theme, we can talk about labor force participation. During the great recession, labor force participation plummeted and has been taking an enormous amount of time to recover. At this point the labor force participation rate has almost fully recovered to its pre-recession levels (controlling for demographic) as shown to the left. This will push wages higher as employers compete for labor.

Where we will likely experience more difficulty is among unskilled labor. They may see a temporary boost as manufacturers push for more output, but as wages increase we will likely see more investment in automation. As it stands, employment in manufacturing has contracted significantly and shows few signs of real improvement. It’s just no longer possible to work and provide for a family with comfortable wages while lacking skills. At a minimum, vocational training is necessary. Finding a place for unskilled labor in the modern economy is the biggest problem facing the world right now. In fact, some skilled labor will likely even be supplanted as AI becomes more prevalent. The structural shift we are undergoing is worthy of more detail and so I will not continue to discuss it here. We’ll end with a few sobering graphs for the disenfranchised:

The skills gap between jobs available and the unemployed/marginally employed is growing.

Most employment growth has been taking place at the top. This is good news if you chose STEM (Science Technology Engineering and Math).

Manufacturing has largely been automated. We’re producing more with fewer workers. This will accelerate as labor becomes more expensive. Those fighting for the $15/hr minimum wage should take notice.