Saturday, March 06, 2010

Lessons from McKinsey: job growth, retail and regulation

If cutting-edge sectors such as biotech and clean energy are unlikely to spark the next great economic boom, where are new jobs to be found? For wealthy countries the answer is services:

This, by the way, is a chart of the day candidate, as it shows that the richer a country becomes, the less manufacturing accounts for economic activity (India breaks this trend due to its labor laws which discourage large-scale manufacturing as well as Russia, which is distorted by the outsize role of its energy sector). This is useful in refuting trade skeptics who constantly warn the supposed erosion of U.S. manufacturing (which is true only in terms of employment, not output) will inevitably lead to economic ruin (although regular readers of the blog already knew this).

Retail, meanwhile, occupies a prominent place within the service sector and accounts for a significant amount of employment in the broader economy. Therefore, if politicians are truly interested in increasing economic performance they should seek to create the conditions which promote increased productivity (which is of course vitally important as production dictates consumption). These conditions, according to McKinsey, consist largely of minimal regulation and low taxation:

Left-wing political and economic theory, however, would seem to predict that relatively lax labor laws on the part of the U.S. must come at a significant detriment to workers, either through depressed wages (you can be easily replaced with someone cheaper) or employment (high productivity means fewer workers are needed to perform the same amount of work). Except, the opposite seems to hold true with U.S. workers experiencing high levels of productivity (generally a good proxy for pay, as more productive workers tend to be paid more) and employment (as measured by hours worked):

The benefits of economic liberalization in the retail sector accrue not only to the workers, but consumers as well. This is demonstrated by the results of Wal-Mart's entry into the Mexican retail market:

Here in the U.S., meanwhile, Wal-Mart is frequently demonized by politicians and the opening of its stores actively opposed.

Our leaders in government would do well to stop engaging in economic fantasy by encouraging green energy jobs perennially at the other end of the rainbow, and instead promote deregulation and liberalization which would benefit the economy as a whole. The former, however, involves granting them increased power while the latter involves stripping themselves of it, which explains where the momentum currently lies.

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