Strong U.S. labor market

February 7, 2020

According to data released today by the Bureau of Labor Statistics, the US economy added 225’000 new jobs in January. In December 2019, only 147’000 jobs were created. Wages have grown by 3.1 per cent from a year earlier. Overall, this report shows that the US economy is in a solid state. However, as mentioned previously, we cannot yet assess the economic consequences of the coronavirus.

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Labor and Capital in Times of the Knowledge Society

Wages in many economies are growing only moderately. In contrast, the profits of some large companies have risen sharply. Is there a struggle between labor and capital? A closer look suggests that such an interpretation would be too simplistic.

In recent decades, wage growth have been subdued in many developed economies. While in many countries in the 1970s employees received more than two thirds of the total income of an economy, this share has now dropped by five to ten percentage points in many countries. Over the same period, the profits of some large and productive companies have increased. Does this mean that we are experiencing a new struggle between labor and capital? Various research results suggest that this conclusion is probably too simplistic. While it is true that the profits of some companies have increased significantly, corporate savings have also risen. The global savings rate of firms has recently been around 13 percent, which is an increase of about five percentage points compared to the 1980s.

The crucial question is: Why do companies need these savings? For me, the most plausible explanation of scientific research is that many of the companies that drive these developments are strongly characterized by long-term and expensive research projects. As a result, the so-called “intangible capital” is becoming increasingly important. For example, intangible capital is built up through research and development, software, organizational capital or trademark rights. These typically long-term, expensive and uncertain investments can be financed less well by borrowing than tangible investments; they offer lenders less collateral that could be sold to others with little effort in the event of a loan default. Companies must therefore increasingly finance their intangible investments from their own funds and retain profits – in other words, save. At the same time, they are careful to generate high profits from the high intangible investments – for example, through patents or by strengthening their brands. A high return is actually achieved on this type of innovative capital. The yields on other forms of capital, such as bonds classified as safe, are significantly lower.

This reflects the characteristics of a new economy that is increasingly knowledge-intensive and characterized by long-term intangible investments. Corporate savings can therefore serve as an indicator of the innovative strength of an economy. But not all companies and employees participate equally in this development. So far, it appears that large, productive firms and well-trained employees are the main beneficiaries of the increasingly knowledge-intensive economy. However, these companies also manage with comparatively few employees. These developments are less noticeable in other sectors of the economy. Intangible forms of capital and well-educated workers seem to benefit, while tangible investments are less profitable and less well-educated workers tend to experience little wage increases. At least in some countries, therefore, the inequality in income and wealth has increased.

Switzerland is an exception to these developments. The share of retained earnings in gross domestic product has declined somewhat – but the level is still high compared to many other countries. Inequality also appears to have increased little, at least based on the data available. However, this should not only be interpreted positively. With the necessary caution, the decline in corporate savings can be interpreted as an indication of a subdued development in the innovative strength of Swiss companies.

It is difficult to predict whether these developments – in particular the trend towards more intangible capital – will continue. Groundbreaking developments – for example in the field of artificial intelligence – could further increase the importance of intangible forms of capital. However, it is also conceivable that research in these areas will become even more expensive and take longer. What is important is that technological change does not, as has too often been the case in recent years, primarily benefit a small number of companies and employees, but leads to good work and better-paid jobs on a broad scale.


Armenter, R. (2012). The Rise of Corporate Savings. Q3. Philadelphia Fed.

Bacchetta, P. und K. Benhima (2014). The role of corporate saving in global rebalancing. url:

Baldwin, R. (2019): “The Globotics Upheaval: Globalization, Robotics, and the Future of Work”, Oxford University Press.

Bloom, N., Jones, C., Van Reenen, J. and M. Webb (2017): “Are ideas getting harder to find?,” LSE Research Online Documents on Economics 86588, London School of Economics.

Cesaroni, Tatiana, Riccardo De Bonis, and Luigi Infante (2017). On the determinants of firms’ financial surpluses and deficits. 43. Bank for International Settlements.

Chen, P., L. Karabarbounis, and B. Neiman (2017a). The global corporate saving glut: Long-term evidence. url:

Gruber, Joseph W. and Steven B. Kamin (2016). „The Corporate Saving Glut and Falloff of Investment Spending in OECD Economies“. In: IMF Economic Review 64.4, S. 777–799.

Haskel, J. and S. Westlake (2017): “The Intangible Economy”, Princeton University Press.

Karabarbounis, L. and B. Neiman (2014). The Global Decline of the Labor Share. NBER Working Paper w19136.

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Strong U.S. labor market

According to a report released today by the private ADP research institute, the private sector created 291’000 jobs in January 2020. In particular, medium-sized firms created many new jobs. This report shows that the U.S. economy is in a solid state. However, we do not yet know how the coronavirus will affect the U.S. economy. At the moment, it is too early to assess the economic consequences of the coronavirus. Obviously, economic growth may be considerably reduced under a serious scenario.

In another report released by the Bureau of Economic Analysis (BEA), the U.S. trade deficit fell in 2019 to $616.7bn.

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United States – solid economic growth in the last quarter of 2019

According to data released from the Bureau of Economic Analysis on January 30, the economy fared quite well in the fourth quarter of last year, with GDP growth at 2,1 % (annualized), the same rate as the 2,1% expansion registered in the third quarter.

Private consumption was still solid (+1,8 % annualized), but less strong than in previous quarters. In addition, the rebound in residential investment continued. Business fixed investment, however, contracted at a similar rate as in previous quarters. Economic growth was supported by government consumption that expanded at a faster rate than in the third quarter. The evolution of international trade was still subdued. Exports of goods and services did not really recover and only slightly expanded. The evolution of imports of goods and services even contracted.

For 2020, one may expect a similar growth rate as in the fourth quarter of 2019. The U.S. and China signed a first limited trade agreement in January. Tariffs on Chinese imports remain high overall with little signs that they will be either lowered or raised before the presidential elections in November. The Federal Reserve has signaled that it will keep its interest rates constant if the economy continues its solid expansion. The unemployment rate is low at 3,5 in December and job growth is still robust, although the improvements in the labor market are somewhat less dynamic than in previous years. My reading of the forecasts by economists implies is that most expect GDP growth to lie between 1,6 and 2,2 % in 2020. Personally, I project GDP to expand by 2,1% in 2020. Inflation remains below 2% and the unemployment rate will be at 3,4%. At the moment, it is too early to assess the economic consequences of the coronavirus. Obviously, economic growth may be considerably reduced under a serious scenario.

February 3, 2020

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A very brief overview on the causes of the US-China trade conflict

I think that there are three main causes for the current trade conflict between the United States and China (the so-called “Phase 1” agreement signed in January 2020 brought some relief, but I do not think that the trade conflict will end soon): political-economic motives, dissatisfaction with the World Trade Organization (WTO), and reasons of political power.

First, the political-economic perspective is primarily about the public perception that many jobs – especially in industry – have been relocated from the USA to China. Scientific studies show that a significant part of the fall in employment in the American industrial sector could actually be related to China’s accession to the WTO in 2001, which has led to increasing economic ties between the United States and China.(1) However, it is unclear whether, as a result of globalization, jobs would not have been transferred abroad even without the integration of China into the world economy, for example to Mexico or countries in Southeast Asia. Many of the US regions affected by this job loss are located in states that belong to the so-called “swing states” and play a crucial role in presidential elections. Thus, the current trade conflict could give voters in these regions the feeling that something is being done for them. In contrast, the economic benefits of globalization – such as low prices on many consumer goods or newly created jobs in other sectors – play a minor role in the public debate. Part of the political-economic perspective is also the high trade deficit that the United States has against China. While this deficit plays a major role politically, it is only of limited economic significance from an economic point of view – especially if the trade deficit is derived from gross trade and not from added value. Since trade in intermediate goods has increased significantly over time, the bilateral trade balances are typically overestimated; in the case of trade between the United States and China potentially by over 20%.

Second, the United States is unhappy with the WTO’s policies because, according to U.S. perceptions, the Chinese state is giving unfair advantages to domestic companies to succeed in international competition.(2) The focus of criticism is the Chinese economic model, in which state and private companies are often closely intertwined with the state. This system makes it difficult to identify subsidies and other state aids and to check whether they are compatible with WTO rules. The US government also accuses China of forcing foreign investors to hand over corporate technology. These demands are often disguised, which makes it difficult to identify impermissible practices. In the United States’ view, the WTO’s rules and dispute settlement bodies are unsuitable for identifying any illegal measures taken by China and for enforcing their termination. The special tariffs that have been imposed since 2018 are a sign that the United States now wants to resolve issues with China through bilateral negotiations.

Third, there are also political reasons for the current trade conflict. China has become a serious competitor to the United States in important knowledge-intensive areas, such as artificial intelligence.(3) This is exemplified by the rise of the technology group Huawei. However, the balance of power might continue to change: China wants to take on technological leadership in the field of artificial intelligence, but also in other technologies, by 2030. This is not only economically significant. Advances in knowledge-intensive technologies are also important for military purposes. China’s development in important technologies is to be slowed down according to the will of the US government.

As I tried to briefly summarize, the causes of the current trade conflict between the United States and China are complex and have accumulated in recent years. The previous American governments had primarily pursued the approach of concluding multilateral free trade agreements without the involvement of China – such as in particular the Transpacific Partnership Agreement (TPP) – to set new rules, for example in the areas of state aid and investment protection, which were aimed at serving as a model for other free trade agreements and should, through the further development of multilateral regulations, bring China to a gradual change in its policies.

This approach has not been pursued since Donald Trump’s election as the new President of the United States – so far there has been no accession to the TPP. The areas of conflict are now discussed through bilateral negotiations between the United States and China. The current American government does not consider multilateral negotiations or dispute settlement procedures, for example within the framework of the WTO, to be suitable for a successful outcome of the conflict from the US perspective.

The nature of the dispute has now become much more confrontational. This is not only due to the negotiating style of the American president, but is also largely determined by the type of conflict, which goes beyond trade policy issues and is increasingly linked to security and power policy considerations. The progress so far suggests that there are two camps with different goals within the US government and advisory bodies.(4) One group is likely to see the special tariffs collected as a way to exert high pressure on the Chinese government and to persuade the Chinese government to make extensive concessions on issues such as investment protection or state aid. Another camp is pursuing the goal of decoupling the American economy from the Chinese economy, since China is seen as an economic and political rival. The American president does not yet seem to have clearly defined himself – at least in public – on the position of a camp. While, mainly in August 2019, some statements by the American president surrounding the escalation of the trade conflict could be interpreted as aiming to largely unbundle the two economies, other statements made since then are less confrontational. The so-called “Phase 1” agreement made in January 2020 also suggests that the US government has not yet given up on a negotiated settlement, although the scope of the agreement is limited.

(1) See, for instance: Acemoglu, D., D. Autor, D. Dorn, G. Hanson and B. Price (2016), “Import Competition and the Great US Employment Sag of the 2000s”, Journal of Labor Economics 34(S1): S. 141-S198; Autor, D., D. Dorn and G. Hanson (2016), “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” Annual Review of Economics 2016(8): 205-240; Pierce, J. and P. Schott (2016), “The Surprisingly Swift Decline of U.S. Manufacturing Employment,” American Economic Review 106(7): 1632-1662; Feenstra, R., H. Ma and Y. Xu (2017), “US Exports and Employment”, NBER Working Paper No. 24056; Feenstra, R. and A. Sasahara (2017), “The ‘China Shock’, Exports and U.S. Employment: A Global Input-Output Analysis”, NBER Working Paper No. 24022.

(2) Office of the United States Trade Representative (2018): Section 301 Report into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation. Bown, C. (2019): “The 2018 US-China Trade Conflict After 40 Years of Special Protection”, Working Paper 19-7, Peterson Institute for International Economics.

(3)  Fischer, S.-C. (2018): Künstliche Intelligenz: Chinas Hightech-Ambitionen, CSS Analysen zur Sicherheitspolitik Nr. 20, Center for Security Studies (CSS), ETH Zürich.

(4) See, for instance: Zoellick, R. (2019): “Donald Trump’s impulsive approach to China makes US vulnerable”, Financial Times, 26. June 2019.

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Higher productivity growth for better and more sustainable economic development after the Covid-19 crisis

The outbreak of the coronavirus epidemic has led to a slump in economic output in many countries around the world. We do not yet know how long this pandemic and its health, social and economic consequences will last. In order to at least overcome the economic crisis, productivity gains – especially in service sectors – are important. This means that productivity should not be increased through more intensive work and more stress, but through technological, organizational or other means.

Over the past thirty years, labor productivity growth has slowed in many developed and other economies. Up until the 1980s, annual growth in many places was 3 or more percent. After that, productivity gains have steadily decreased. A similar development is observed in other countries in Europe and in North America. Labor productivity has been particularly weak since the onset of the financial crisis.

These small increases in labor productivity are paradoxical. Because at the same time there is an accelerated technological change that influences our everyday life and that should make our work more productive. Innovations are extremely important. One problem, however, is that innovations are currently only slowly penetrating the economy. Knowledge-intensive service and industrial sectors (such as the pharmaceutical industry or industries in the field of information and communication technology) have recorded high productivity growth. Other sectors have significantly lower productivity gains. In recent years there has been little diffusion of technological progress from highly innovative companies to the rest of the economy. Various research papers show that the productivity gap has opened between top companies in knowledge-intensive industries and the rest of the companies. Innovations are always more expensive and penetrate the economy more slowly.

Why does the rapid technological change currently not lead to higher productivity growth? One possible explanation is that new technologies are associated with significant changes for society and the economy. For example, the increasing use of artificial intelligence in the labor market is causing both winners and losers and has probably increased inequality in recent years. A society needs time to find out how new technologies can be used in such a way that they improve well-being and economic development and minimize any negative effects and risks. However, this also means that the possibilities of new technologies are initially being implemented only slowly or are being used for activities that prove to be of little use for society or the economy as a whole. This applies in particular to socially and economically crucial service sectors such as the finance, education and health sectors. In these important sectors, productivity development has mostly been slow in recent years. These sectors fulfill important social functions and are central to the sustainable development of society. Widespread access to health services, the education system and financial services promote equal opportunities and reduce inequality. These sectors are also responsible for a large proportion of the overall economic value added. They also perform catalytic functions: good educational, financial and health systems can improve development in all economic sectors, since almost all people and companies use the services of these sectors. Higher productivity growth would mean less work and improve the quality of these services.

It is often emphasized that people have to adapt increasingly to technological progress. Keywords include lifelong learning, creativity or digital skills. Investments in education and training are extremely important, but not a panacea. A lot has been invested in education and training in recent years. Nevertheless, productivity advances on a broad level have failed to materialize. In addition, the time we use for training and further education cannot be extended indefinitely. Productivity advances on a broad level should therefore only occur if new technologies – be it software, 3D printers or other innovations – complement existing professional skills better and simplify work even more. This applies in particular to services.

Innovations undoubtedly have the potential not only to make our lives more pleasant and sustainable, but also to increase the productivity of our work. If you believe the futurologists, new technologies such as robotics, nanotechnology, 3D printers or the Internet of Things will merge more and more. It is important that new technologies complement people’s existing skills better and that productivity not only increases in innovative sectors and regions. These aspects must play a greater role in the public debate. Sustained productivity increases across the board can ensure social cohesion and secure our prosperity.

This is an updated version of an article published in January 2020.

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Foreign Direct Investment is a Key Factor in Fostering Economic Growth and Risk-sharing in the Euro Area

First published November 2014

Cross-border ownership of businesses is a key characteristic of a truly integrated economic area. In the euro area, however, foreign direct investments have been badly hit in recent years. In particular, there was a sharp drop in investment flows from the northern member countries to the southern periphery from already low levels before the crisis.[1] This disintegration of bilateral foreign direct investments can be seen as a symptom of the structural weaknesses and the meager economic performance in many countries. At the same time, however, FDI can be a catalyst for productivity and economic growth. Hence, low FDI can also be a potential cause for disappointing economic developments. In addition, cross-border corporate ownership enhances macroeconomic risk-sharing because gains and losses that arise in one country are shared across borders. This characteristic is all the more important when considering that other potential risk-sharing mechanisms cannot be expected to play their role in the near future. Labor markets will remain fragmented because of language and cultural barriers. In addition, no large-scale fiscal transfer mechanisms can be expected to be implemented. Governments should therefore set incentives for higher bilateral FDIs. An important measure would be to enhance a common market for services – a policy measure opposed by many interest groups – but that should be especially appealing to European policy-makers because it does not require an increase in public spending.

Policy measures to foster intra-European FDI become even more important when we consider how dramatic the decrease in FDI flows has been. Since the beginning of the crisis, foreign direct investment flows to the crisis countries in the European periphery have decreased from more than 40 billion euros in 2008 to less than one billion euros. Moreover, in relation to economic output, the stock of foreign direct investment was already persistently lower before the crisis in the southern peripheral countries than in the rest of the monetary union. The low FDI inflows reflected the relatively high barriers to FDI and the absence of significant investment opportunities. Moreover, because of the outbreak of the crisis, political and economic uncertainties have discouraged international investors.

Instead of FDI, capital flows to the European periphery have often taken the form of debt, thereby financing the past current account deficits. In this way, the euro area has suffered from what turned out to be a fatal financial integration characterized by debt. Bonds or bank loans usually pay fixed interest rates, which implies that international creditors do not instantly bear any losses in times of stress. In contrast, equity capital tends to yield high returns in booms and losses in downturns, thereby allowing for macroeconomic risk sharing across countries through market-based mechanisms. Therefore, it is crucial to promote financial integration characterized by cross-border ownership of businesses. At the same time, FDI can considerably increase productivity because it is an important vehicle for the transfer of technology and managerial skills. Obviously, one should bear in mind that FDI is no panacea and there are no automatic gains from it. However, it has the potential to contribute to innovation convergence and a higher investment rate in equipment and structures, which has fallen by approximately three percentage points in the euro area since the beginning of the crisis.

Obviously, one may ask how policy can foster economic growth and intra-European FDI, if at all. For example, public investment funds have been proposed. However, another measure can foster FDI without leading to significant costs for governments. This measure involves the integration of national services markets. Currently, services are still highly regulated in many countries, which deters cross-border acquisitions and mergers in services across countries. Moreover, these obstacles probably cause the low productivity growth rates in services that can be observed in many European countries. So far, the EU’s Services Directive has not sufficiently succeeded in opening up services markets.

Because services account for approximately 70 percent of output in most countries, productivity growth in services must be at the heart of any growth strategy for the euro area. A genuine common market for services has the potential to foster cross-border acquisitions and investments, thereby promoting economic growth and macroeconomic risk sharing across countries. Such reforms are often associated with considerable political obstacles, but in times of budgetary pressures, such costless reforms would almost be a free lunch for the economy as a whole. Why not implement them sooner rather than later?

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