AMERICA’S jobs machine is still broken. As the economy slowly recovers, the labour market is struggling to follow suit. Unemployment remains stubbornly high, at 9.9% nationally, and full employment is years away.

To understand the labour market’s slow response to the recovery, The Economist went to Rhode Island, which entered the recession six months before the rest of the country. Its unemployment rate, one of the nation’s worst, peaked at a seasonally-adjusted 12.7% in December 2009 and remained there until February of this year. In Rhode Island, as in many states, cyclical problems including low consumer spending and tight credit markets only added to long-ignored structural issues, like dwindling manufacturing industries, an abyssal budget deficit, a poorly trained workforce, and a graying population. What we found is that unemployment cannot be resolved through national policies alone. State and local governments must also help themselves.

IF YOU’RE like most people you’ve not saved enough for retirement. There’s a good chance your savings and state pension (such as Social Security) will not provide enough income to live in the manner in which you’ve become accustomed for up to thirty years. But don’t feel too bad, many of us have been sold an unrealistic vision of retirement. The idea, for obvious reasons, has taken hold that after forty years of work we are entitled to spend a few decades of our life in leisure. And why not; who wouldn’t want to spend their golden years in a warm climate, playing golf, surrounded by peers who also have ample free time? It’s like being on spring break until you die.

But this is not realistic financial goal for most people. No matter how keen a saver you may be, raising children and maintaining even a modest lifestyle often does not leave enough money to spend a third of your life on holiday. Also, many people are simply not saving enough, forget the endless vacation—they will probably face a large cut in their standard of living after they retire.

From a historical perspective the entire retirement concept it is relatively new. For most of civilisation the average person worked until they became too sick or feeble, or died. According to Dora Costa’s book on the history of retirement, in 1880′s America more than three-quarters of men over 64 and half of 85-year olds still worked. When people did retire they had little wealth and often were dependent on relatives. The growth of retirement was driven by changes in the labour force (a move away from family farms and toward production and services), new social norms (which made retirement the expectation and created a critical mass of retirees), and financial incentives (income from state pensions and private pensions from employers). The introduction of state pensions was significant because it provided retirement income for everyone (including those too poor to save). This allowed elderly people to cease work and not be dependent on their families. To this day, many people rely on state benefits as their primary source of retirement income.

In late 19th-century Germany, Otto von Bismarck first introduced the concept of receipt of a state income after a pre-specified age. But keep in mind—he set the retirement age to 70, well beyond the average life expectancy then. Twenty-seven years later that age was lowered to 65. It’s extraordinary that the 65 retirement age seems to have stuck, or even been lowered, while life-expectancy has steadily increased. This means each generation gets successively longer retirement. Retirement, like other post-industrial inventions like electricity or television, has become a luxury we’ve come to expect and rely upon. Like consumption of other goods, as technology advances and we become wealthier, we expect more and better retirement. This is not entirely unreasonable. Western countries have more wealth than before and better technology to save, invest, and redistribute income. There is no need to go back to the work-until-you-die model. But this does not mean current retirement expectations are reasonable either, especially when so many depend on the government to provide their retirement income.

Demographic pressures on state pensions further complicate retirement planning. Individuals are more responsible than ever for saving and investing for their own retirement. Most people have individual accounts instead of defined-benefit pensions. Saving enough and investing to provide for a long retirement is a complex financial decision with many uncertain variables, like life expectancy and asset returns. State pensions are supposed to provide an income floor, keep you out of poverty, and provide some certainty. But there exists a great deal of uncertainty about how state pensions will continue to be financed. At least if you invest your pension assets in the stock market you have history of price movements to gauge and an ability to adjust your portfolio to your risk tolerance. But if a large chunk of your retirement income comes from the state, which is the case for many Americans and Europeans, it remains unclear how, if and for whom benefits will be cut.

Which is why governments must address their demographic time bombs sooner rather than later. Not only to get their fiscal houses in order, but to re-adjust retirement expectations. A later retirement age, indexed to life-expectancy, should be part of any plan. This will give individuals more certainty about one significant part of their retirement income and the appropriate retirement age. These facts are necessary to make a good decision about how much you need to save. For most people working longer and saving more is their only shot at a comfortable retirement.

HERE’S the European crisis in a nutshell:

Got it?

AT VOX, Mirco Tonin and Michael Vlassopoulos describe two kinds of altruism:

• A worker may enjoy contributing to a cause he or she cares about. This joy that arises from the act of contributing is referred to as “warm glow”…For example, a nurse may enjoy to be actively involved improving the lives of sick people.
• A worker may be directly concerned about the well-being of others. Such individuals are referred to as “pure altruists”. For example, a nurse may be interested in the fact that patients’ health improves, regardless of whether he or she has a personal role in this.

And they discuss their research:

We find that women’s effort is positively affected by an environment that induces warm-glow altruism, while there is no additional impact due to pure altruism. In particular, in the treatment condition eliciting warm-glow altruism, women increase their productivity between the two sessions by an additional 10% compared to women in the control group.

On the other hand, we find no statistically significant differences in productivity changes between the control and any of the treatment groups for male subjects. This unresponsiveness suggests that pro-social preferences are less relevant for men than for female workers in our sample. This finding is consistent with other research on gender differences in social preferences…

The finding of a gender difference in pro-social behaviour in a workplace setting may have important implications for understanding women’s economic outcomes. If women are indeed motivated by a concern for the social cause pursued by the organisation they work for, then they will be more likely to enter occupations and sectors with characteristics that engender pro-social behaviour (such as health, education and social care) and will require less monetary compensation. Gender differences in pro-social motivation might therefore help explain the observed occupational segregation by gender that accounts for a substantial portion of the overall gender earnings gap.

It’s an interesting result, but one should be very careful in drawing conclusions about occupational segregation. In particular, it’s worth pointing out that gender segregation is self-reinforcing. Fields with a large share of female workers will feature less on-the-job discrimination and harrassment, benefits packages will better incorporate female priorities, and so on.

Click on grapic to enlarge.  Source: Scott Hodge from Tax Policy Center estimates.

Images: 

AMERICA’S economy performed just a little worse in the first quarter of 2010 than the Bureau of Economic Analysis previously estimated. Economists were expecting a slight upward revision to growth in the BEA’s second estimate of first quarter GDP, from the initial 3.2% expansion to 3.4%. Instead, growth was nudged downward, to 3.0%. The American economy expanded in the fourth quarter of 2009 by 5.6%.

As disappointing as the downward revision is the source of the changes to the estimate. Key growth components like personal consumption and spending on business equipment contributed less to the first quarter performance than originally estimated. This was partially offset by a better than initially reported number for inventory investment. Inventory changes typically boost output figures early in recovery but are not a source of sustainable GDP growth. Both imports and exports were revised upward, making for a wash for net growth.

The bigger picture is of an economy working to return to self-sustaining growth. Residential investment and state and local government spending continue to be a drag on growth. Inventory changes and federal spending have offset these effects, but their contributions will wind down throughout 2010. And that will place the burden of growth on private households and businesses. Expansion is expected to continue at a near-3% pace through 2010. But there are real risks to this outlook. Household balance sheets remain in bad shape, and savings rates are once again falling. Without big improvements in labour markets, it may be tough for consumers to keep up spending. Meanwhile, troubles in Europe and an appreciating dollar could dent export growth. And with home prices falling once more, recovery in housing markets could be farther off than anticipated, and residential investment could prove more of a drag than initially foreseen.

Still, these are small revisions to what was a generally good first quarter GDP report. The American economy has now expanded for three consecutive quarters, as of March of 2010. New reports on durable goods orders and manufacturing activity show continued growth in April. This will slowly but surely translate into rising employment, which will ultimately feed back to rising spending and investment.

America’s recovery remains young and fragile. Still, many developed nations would be happy to have a nine-month performance like the one the American economy has managed since returning to growth.

HOPEFULLY, you’ve had a chance to click over to the latest Economist debate, on the motion: This house believes the euro area will fragment over the next ten years. There have been some very good contributions from Martin Feldstein and Charles Wyplosz. Tomorrow will feature commentary from Barry Eichengreen, with Daniel Gros to follow on Monday. I think Mr Wyplosz is on solid ground in arguing that the euro is likely to endure. Exit from the currency zone by a southern European economy would be chaotic and potentially economically devastating (with the benefits of currency depreciation offset by capital flight, financial crisis, increased borrowing costs, and inflation). And European leaders have so far proven willing to commit vast sums to keeping to the area together. In my mind, the most likely scenario for a break-up is one Mr Feldstein posits, in which German citizens decide they have had enough and opt out of the currency. But that, too, strikes me as an unlikely outcome.

So far, readers agree with me. The numbers are running 59% against the motion to 41% for it. The punters over at Intrade see it the same way. What do you think? Have your say in comments here and at the live debate.

THE Congressional Budget Office has released its latest assessment of America’s 2009 fiscal stimulus, for the first quarter of 2010. Calculated Risk summarises:

CBO estimates that in the first quarter of calendar year 2010, ARRA’s policies:

Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.2 percent,

Lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points,

Increased the number of people employed by between 1.2 million and 2.8 million, and

Increased the number of full-time-equivalent jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise.

The effects of ARRA on output and employment are expected to increase further during calendar year 2010 but then diminish in 2011 and fade away by the end of 2012.

In fact, as Mr Risk explains, the impact of stimulus will actually peak in the current quarter and decline thereafter, since stimulus spending, while still positive, will be declining. That’s somewhat distressing, given that the sustainability of underlying growth isn’t yet clear (to me, at least; Mark Zandi said today that he is convinced that recovery is now self-sustaining).

Of course, some might argue that it’s about time for stimulus to wind down. Tyler Cowen links today to new research by Lauren Cohen, Joshua Coval, and Christopher Malloy, who chart the impact of increased government spending on private investment. The paper considers what happens when a local legislator attains seniority and improves his or her ability to deliver earmark spending, and concludes:

Seniority shocks result in economically and statistically significant declines in firm capital expenditures. Across all measures of seniority, the declines are large and highly significant….The coefficient implies a 1.2% drop in scaled capital expenditures []. Since firms have average capital expenditures of 8 percent of assets, Senate chairmanship causes a roughly 15 percent reduction in the representative firm’s capex.

But Kevin Drum notes that there is an important caveat:

Some of the dollars directly supplant private-sector activity — they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this. Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. For instance, our effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.

Obviously, one has to set short-term investment declines against the potential long-term benefits of certain kinds of spending. A big, local infrastructure project might generate a pause in investment as private actors assess how their business models may change, but growth may eventually be stronger than previously expected (though certainly, some spending won’t meet desired cost-benefit goals). But the capacity utilisation point strikes me as pretty important. Clearly one downside to government spending is crowding out, of investment and local resources (including labour). That ceases to be a big problem when an area is deep in recession. Indeed, resource utilisation is the whole point.

And there is still plenty of slack in most American metropolitan economies. And in much of Europe. Which makes this a bit unfortunate:

Fearful of becoming the next Greece, European governments are lining up to demonstrate to investors, who have long helped finance their spending, that an era of austerity has begun…

The most significant retrenchment programs on a per capita basis have been those of Greece. The steps included increasing the broader retirement age to 65 and cutting public salaries to bring the deficit down from the current 13.6 percent of G.D.P. to less than 3 percent in 2014.

In Madrid, Prime Minister José Luis Rodríguez Zapatero also presented sweeping spending cuts this month, reversing promises to spare pensions and public-sector salaries. He announced pay cuts of about 5 percent for civil servants — and 15 percent for government ministers — as well as other measures totaling 15 billion euros. He also reversed a previous decision to increase pensions next year and said Spain would scrap a subsidy of 2,500 euros for new parents.

This month, the Portuguese government agreed with the main opposition party on more austerity measures to cut its deficit faster than planned, to 4.6 percent of Portugal’s gross domestic product next year from 9.4 percent last year. Prime Minister José Sócrates, a Socialist, will rely on tax increases and cuts in public-sector wages and corporate subsidies.

In Britain, the new chancellor of the Exchequer, George Osborne, said on Monday that he would push through £6 billion ($8.65 billion) in spending cuts in an effort to convince skittish markets that the new government led by David Cameron was committed to fiscal restraint. More detailed cutbacks will be announced in a new budget next month.

In France, the government is approaching the issue gingerly. It has acknowledged that the deficit, forecast at 8 percent of G.D.P. this year, needs to fall. Paris is aware that if it is unable to tackle the issue of its pension shortfall, France’s triple-A credit rating may be cut.

The government is currently negotiating with unions over the tricky issue of retirement. It is expected to increase the retirement age to 62 or 63 from 60, while lengthening the duration of contributions required for a full pension.

Italy has also announced about €25 billion in budget cuts. The logic behind these measures is clear. Fiscal spending isn’t stimulative if it results in significantly higher debt costs. And the European situation is a testament to why it’s useful to maintain budget discipline in good times: so that when recession hits, you have the capacity to respond with a fiscal boost. But these measures will suck some wind out of an already meagre European recovery. The European Central Bank should step in to replace the lost demand, both to reduce the pain of high unemployment and to make these fiscal adjustments easier. But such assistance appears not to be forthcoming. Which could make for a difficult couple of years in Europe, even without a major euro meltdown.