What’s Really Holding Back America

There continues to be much speculation over when the Federal Reserve will begin to reduce its asset purchase program and lower the level of monetary stimulus. The biggest concern for both the Federal Reserve and the nation is the level of job creation. 

Last week, the Bureau of Labor Statistics (BLS) released its monthly report on the level of non-farm job creation, which was as expected: neither too hot nor too cold, with a total of 175,000 new jobs created for the month of May. (Source: Bureau of Labor Statistics, June 7, 2013.) 

With the unemployment rate at 7.6%, this level of job creation is still not good enough for the Federal Reserve to begin aggressively reducing its level of monetary stimulus. The truth is that gross domestic product (GDP) growth needs to be stronger for job creation to increase. The underlying fundamentals of the economy are much different than the headlines. 

What will surprise many to learn is that one of the biggest drags on the economy is the lack of skilled workers. There are constant reports from companies that they simply can’t find enough skilled workers. 

This matches up with the data, as the BLS reports that for those people with a bachelor’s degree or higher—approximately 50 million citizens in the labor force—the participation rate is almost 76%, with the unemployment rate at just 3.8%. Essentially, this part of the economy is at full employment. 

Job creation has been extremely strong for those workers with a higher education. If you don’t believe government statistics, simply look at what companies are doing. This year alone, H1B visa applications, which are limited to 65,000 per year, filled up in five days. (Source: “The Visa System Not Working,” The Economist, April 6, 2013.) 

Even during the depths of the recession, every year since 2003, the demand for business visas has been higher than the government-restricted ceiling. This means that demand for skilled workers is so high that companies are looking to other nations to try and fill this shortage. 

While the Federal Reserve has done what it can to try and improve the economy, job creation ultimately stems from new companies being formed and existing firms expanding. The current restrictions on skilled workers is holding back our nation’s economy, slowing the level of job creation. 

Many people have the misconception that America is an untouchable island, but in fact, we are competing with many nations around the world. Just north of us, Canada has embarked on an ambitious program to provide a visa to any foreigner with an investment of CDN$75,000 in starting a new business. This is the type of aggressive program that will lead to job creation and economic growth. 

In addition, the Federal Reserve can do nothing about improving the education for many Americans. 

Those who have dropped out of high school total just over 11 million in the civilian labor force, and have an unemployment rate of 11.1%, with a participation rate of just 45%. High school graduates with no college education total 36 million, with a participation rate of 58.9%, and an unemployment rate of 7.4%. 

It is clear that the economy could operate at a much higher level if we had more people with higher skills and education. The Federal Reserve cannot run the education system, which is an extremely weak link that is leading to the current lack of job creation. 

In addition, we should open the doors to anyone who wants to start businesses in America. If we don’t open those doors, other nations will. Not only are countries like Canada offering attractive incentives to start businesses, which ultimately results in job creation, but their taxes are far lower as well, with corporate taxes at just 15%. 

We have major structural issues to fix, and the responsibility to fix these issues rests not on the Federal Reserve but on the politicians in Washington. 

~ by Sasha Cekerevac, BA

This article What’s Really Holding Back America was originally published at Investment Contrarians