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Some of the reasoning for why unemployment is still lagging was explained in the article I posted:
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Although we clearly can reject the claim that the current labor market is the worst since the Great Depression, we still want to know why employment growth has remained negative despite the recent pickup in gross domestic product growth. One common explanation is that employment growth and the jobless rate are lagging indicators. There's some truth to this. When the GDP changes, some of the shift in employment shows up only after one or two quarters. But most of the change usually occurs within the same quarter as the change in GDP. Moreover, even a one- to two-quarter lag would not explain why employment growth has remained sluggish for 2 1/2 years now. Given the historical link between GDP growth and employment, job growth has been lower than expected in the last nine quarters. This extremely unusual pattern suggests that some basic change may have occurred in the relation between employment and GDP growth.
One way to look at the change is that the GDP growth required to get positive employment growth has risen substantially. In the long-term relationship, employment growth tended to be positive whenever GDP growth was mildly positive -- only something less than 1% GDP growth was required. Since 2001, however, GDP growth apparently has had to exceed 2.5% to 3% for employment to begin climbing. That's why employment is still decreasing.
The other way to look at the numbers is that, since GDP growth has been positive and employment growth has been negative, the economy has been able to produce more goods with fewer workers. In other words, productivity measured by GDP per worker has been rising strongly. (An adjustment for hours worked strengthens this scenario.) Since the second quarter of 2001, productivity has grown by 3.1% a year, compared with the long-term average of 1.4%. The key question is how long this high productivity growth will last.
If the high productivity gains continue, the economy will benefit tremendously for many years to come. In the longer term, employment growth corresponds to increases in the labor force, which depends on trends in population and labor-force participation. If the labor force expands at its long-term average of 1.5% to 2% per year, employment growth will be about the same. To determine long-term GDP growth, we have to add the productivity growth rate. Thus, if productivity grows at 3.1%, the GDP growth rate would be around 5%, compared with the historical average of 3.3%. That would be very nice. For Republicans, an important question is whether this pleasantness will materialize by election time in 2004. That is a question I cannot answer.
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But you are correct about the tax cuts not resolving the current stagnation of the labor market. One wonders if and when the benefits will materialize in unemployment in the near future. However, it can be argued that the situation of the economy would be in a FAR worse state without the tax cuts and patience is needed to see the benefits of this fiscal policy on the economy:
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U.S.: Consumers Will Keep Carrying the Ball
True, jobs aren't back. But tax cuts and refinancings are doing the trick
The surprising deterioration of the labor markets in August would seem to throw a wrench into increasing expectations of strong economic growth in the second half. After all, consumers can't possibly keep leading this recovery without a pickup in job growth, can they?
Yes, they can in the short run. Despite last month's job losses, back-to-school sales and vehicle buying were strong, and September is looking busy for retailers, too. Consumers are reaping the benefits of tax cuts and low interest rates, policy moves that give households extra income. Plus, rising stock prices are adding to wealth. These positive trends provide a bridge for consumers to cross until demand gets another boost when businesses start hiring once more.
The spurt comes at an opportune time. Businesses are buying new equipment again, inventories need rebuilding, and the economy in general shows signs of renewed vigor. The Institute for Supply Management's business activity index for the nonmanufacturing sector has risen for five months in a row, with the August index at a high of 65.1%.
Also, factory orders rose 1.6% in July, while inventories fell 0.5%. The mix suggests factories will have to increase production to meet new demand. And the National Federation of Independent Business said its small-business optimism index jumped a record 4.1 points in August, to 104.7.
These upbeat reports suggest the economy in the second half could post the best back-to-back quarterly growth rates since early 2000. The strong performance underscores the notion that, with the right policy and accommodative financial conditions in place, consumers will keep shopping despite concerns over jobs.
OF COURSE, LABOR MARKETS MATTER. That's why the news of 93,000 more jobs lost in August was a head-turner. Economists had expected a small gain in jobs. Instead, the August decline brought the number of layoffs this year to 437,000.
All of the recent job losses have been in manufacturing. Since the recovery began in November, 2001, factory payrolls have shrunk by 1.2 million, while employment elsewhere has grown by 97,000.
Also, the dip in the unemployment rate, to 6.1% from July's 6.2%, was not a signal of labor-market improvement. The drop was caused by more people leaving the labor force. The percentage of the U.S. adult population working or looking for work stayed at 66.2%, the lowest participation rate in a decade.
One bit of good news came from the continued advance in temporary-help positions. Businesses usually take on contingent workers until they feel confident enough to add permanent positions. And temp help has grown strongly for four months in a row.
Moreover, although the Labor Dept.'s survey of businesses shows continued layoffs, its survey of 60,000 households shows an increase of 868,000 jobs over the past year. About 140,000 of those jobs were in nonfarm industries, while 558,000 jobs reflected people listing themselves as self-employed.
It might be easy to dismiss the rise in self-employment as merely a way for some to deny their unemployed status. But the trend in proprietors' income -- earnings derived mostly from privately owned businesses -- supports the idea that this jobless recovery is pushing more people to become successful entrepreneurs. Nonfarm proprietors' income was up 9.1% in the year ended in July, a pace equal to the gains posted in the 1990s boom. These earnings, while 10% of all personal income, have accounted for nearly a quarter of the increase in overall income over the past year. Those gains partly explain why consumer demand is strong even while businesses are reluctant to hire.
THE TWO BIGGEST REASONS, though, are the July tax cuts and mortgage refinancings. The tax cuts, along with the child-credit rebate checks, should provide $35 billion in extra cash in the second half. The boost can already be seen in the July data on personal income. Real income was flat, but aftertax pay jumped 1.3%. That was the largest gain since the earlier Bush tax cuts were implemented in January, 2002.
Meanwhile, homeowners are improving their finances by refinancing their mortgages. When long-term interest rates fell to 45-year lows in late spring, refi applications hit a record. As these loans close, millions of homeowners will lower their house payments or liquefy thousands of dollars of their homes' net equity.
Federal Reserve Chairman Alan Greenspan has focused on the boost that refinancings give to current spending. But the refi madness of the past year has come at a cost. For the first time in a decade, housing wealth fell in the second quarter. According to the latest Fed data, owners' net equity in real estate fell by $45 billion, the biggest drop since the first quarter of 1993.
Back in the early 1990s, the drop was caused by a flattening-out in home values. This time, the decline can be traced to the growth in mortgages overwhelming the increase in home values. With refi activity slowing, housing equity should turn up in coming quarters. That suggests wealth should remain on the rise for the rest of the year, especially since balance sheets will also get a boost from the ongoing gains in the stock market.
INDEED, THE STOCK MARKET RALLY was mainly responsible for last quarter's advance in household wealth. According to the Fed, net worth -- personal assets minus liabilities -- edged up by $1.7 trillion in the second quarter from the first. Personal holdings of stocks and mutual funds increased by $944 billion. Consumers also boosted the amount of money in their savings accounts.
After the bear stock market caused wealth to shrink from 2000 to mid-2002, consumer balance sheets are on the mend. At $41.2 trillion in the second quarter, total household wealth is just 5% shy of equalling its record of 2000. If the equity gains continue and refis slow, net worth should overtake the old peak within the next year. That's another plus for future spending, since households tend to use a small percentage of their long-held wealth to finance current outlays.
Taken together, the latest data on wealth, refinancings, and tax cuts mean consumers will increase their purchases throughout the second half. But those supports can last only so long. By early 2004, the lift from tax cuts will peter out, and cashouts from refinancings will be much lower.
As any economist can tell you, job and wage growth are the prime movers of consumer spending in the long run. Businesses must start hiring if the economy is to maintain its new momentum. Nascent signs, from the rise in temp jobs to the surprise strength in demand, suggest that help-wanted signs will soon be appearing in greater numbers. That's good news for the 2004 outlook -- and for the millions of job-seekers around the country.
http://www.businessweek.com/@@fSr17...50028_mz010.htm
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Personally I don't think that there's much that can be done about the weakening manufacturing sector (or I don't know what should be done). I think the situation of manufacturing jobs is a much more complicated problem that cannot be readily resolved with simple, short term fiscal policies.
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The misery of manufacturing
Sep 25th 2003 | BRUSSELS, CHICAGO, LONDON, NEW YORK, TOKYO
From The Economist print edition
Why there is a new panic over manufacturing in the rich world
RICH-COUNTRY manufacturing has supposedly been in decline for so long that it is surprising that the politicians, unions and journalists who leap so nobly to its defence find much left to save. But they do: after years of silence on this hoariest of economic fallacies—that manufacturing is something special—the alarm bells are now ringing louder than ever. American politicians are rushing to aid the manufacturing lobby. In Britain the rebranded engineering workers union, Amicus, is raising the issue to embarrass the government at the Labour Party conference next week; it is asking for a minister for manufacturing and loads of government help.
Politicians love manufacturing because it provides lots of visible, reasonably well-paid jobs. That is why American states fight each other with subsidies to land each new Japanese car-assembly plant, and central European countries do the same, knowing that no new car factories will be built in western Europe.
In Japan, politicians decry the “hollowing out” of Japanese manufacturing, as large-firm production seems to flee offshore. In Europe, the French are normally stoutest in defence of their national champions. But Germany is newly fierce; its chancellor, Gerhard Schröder, has picked a fight with the European Commission, denouncing its “anti-industrial bias” as it seeks to stop subsidised state loans and other favours for German industry.
Maybe this onslaught on the commission explains why its president, Romano Prodi, wrote plaintively in Le Monde this week of the “deindustrialisation of Europe”. But at least another Italian economist, the competition commissioner Mario Monti, is questioning yet another French bail-out, this time of an engineering giant, Alstom, where around 100,000 French jobs are at risk (see article).
Made (too much of) in America
But the clamour is loudest in America. In the 1980s, the enemy was Japan: now it is China. “Walk around Wal-Mart,” says Jack Smith, until this spring chairman of General Motors, “and it looks as if everything is made in China.” This week, America's National Association of Manufacturers (NAM) resolved to press Congress to sanction China for “manipulating” its currency markets (ie, keeping its exchange rate low).
Protectionist bills may begin to proliferate in Washington DC. John Snow, the treasury secretary, jawbones the Chinese about the yuan. George Bush has a raft of initiatives to keep manufacturers afloat, including a new office at the Commerce Department to monitor unfair trade, and an assistant secretary to co-ordinate manufacturing policies. The anti-Japan campaign in the 1980s wreaked havoc on international trade relations and currency markets. What will happen in the China row?
One minor obstacle, then as now, is the awkwardness of facts. Manufacturing has only recently, and with unusual lethargy, emerged from a global recession. (From a peak in June 2000 to a trough in December 2001, manufacturing output shrank by 7.6% in America.) But, on a longer view, rich-world manufacturing is in terrific shape (see chart). Amicus may have a point that Britain under-performs its peers in manufacturing. But that is only because Britain's competitors—particularly America—have done so well. Since 1970, America's manufacturing output has more than doubled. Even after the recession, American manufacturing output is almost 50% higher than in 1992.
What really animates the China-bashers, of course, is not the decline of manufacturing, but the loss of rich-world manufacturing jobs, as firms cut payrolls by using more sophisticated processes. In 1947, according to the Federal Reserve Bank of Chicago, 35% of America's workforce were employed in manufacturing. By 2002, this figure had fallen to just 12%. With employment falling and output rising, America has enjoyed soaring manufacturing productivity, a feat repeated to some extent elsewhere in the rich world. On the one hand, NAM suggests that “manufacturing's future in America is now in jeopardy”. On the other, NAM boasts that American manufacturing is “innovative, productive and efficient”. Which is it?
The Chinese facts are even more awkward. What alarmists really hear when they tune into the “giant sucking sound” (or whatever) of American factories disappearing into China is mostly the continuing stampede of its firms into other rich countries' markets. Though growing rapidly, American manufacturing investment in China is still a trickle compared to the far larger flows into other rich countries.
Despite the pull of China's cheap labour, firms find lots of reasons to keep lots of manufacturing at home. One is that, as rich-country factories employ fewer workers, labour costs no longer make or break decisions about where to put a factory. Frank Vargo of NAM, for instance, calculates that payroll costs account for just 11% of overall manufacturing costs in America. Because shipping costs and speedy distribution are more important than relative wages, Dell builds its computer-assembly plants near to its customers, both in rich and poor countries. Moreover, Mike Kilgore, a consultant with Chainalytics in Atlanta, says firms often underestimate the cost of overseas manufacturing, particularly those associated with transportation, extra inventory, and political and security risks. Meanwhile, growing demand for prompt delivery from retailers such as Wal-Mart in America and Carrefour in France also pulls manufacturing home.
Primitive mercantilist views about the piling up of foreign currency by a nation selling more than it buys from abroad still rule in parts of Europe, notably Paris. In Britain, on the other hand, the unions may find their latest campaign tough going. The Labour government of Tony Blair has, at least until now, cast off its old pro-manufacturing socialist bias and embraced the mostly neutral policies towards manufacturing of its Conservative predecessor. Amicus's pleas over the 2,500 manufacturing jobs it claims are lost in Britain every week will probably fall on deaf ears in Britain, which despite slow economic growth still has more or less full employment—unlike America or Japan.
In Japan China is a favourite bugbear of nationalist politicians—and Japanese racists in general. Yet the ruling Liberal Democratic Party finds some of its baser instincts leavened by its desire to please big Japanese manufacturers, such as the car companies and electronics firms, which are finding both selling to and investing in China so attractive.
Hopefully, similar common sense will prevail in America, where big firms are indeed worried about growing protectionist sentiment towards China. But it may not. America's presidential elections next year will follow a recession that has cost 2.7m jobs. Politicians will feel the sharp anger of thousands of smaller American manufacturers, from furniture firms in North Carolina to car-parts makers in the Midwest. These firms really are taking a beating from China. An early test of Mr Bush's mettle will be how he handles a review of America's steel tariffs, slapped on 18 months ago at the behest of its ailing foundries. Expect more fireworks.
http://www.economist.com/business/displayStory.cfm?story_id=2087788
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Sorry for all the long economics articles 
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Retro ...
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. And that war was World War 2. The year 2011 is when all those baby-boomers turn 65. Economists are predicting a huge shortage in the labor market as all these people begin to retire.
