Arnold Kling  

Labor Market Puzzle

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Blaming Health Care Producers... Paul Samuelson...

Tyler Cowen lists ten possible explanations for the weak labor market in this recovery. He concludes


But I would sooner call the whole thing a continuing mystery. Note that most of these hypotheses imply that the economy can still become quite a bit better yet. Either Bush or Kerry will get credit for this, without deserving the plaudits.

He left out my favorite hypothesis, which is that unemployment is becoming increasingly structural rather than cyclical.

In the first few decades after World War II, a recession meant that auto workers were laid off until excess inventories could be sold. When recovery came, workers returned to their jobs quickly. That is cyclical unemployment.

Our more recent recessions have featured structural unemployment. When today's manufacturing workers are laid off, it is because their jobs are never coming back. It takes time to find new jobs. When the Dotcom bubble popped, webmasters and "business-development" executives lost jobs that were not going to come back. They needed to search for new employers and/or re-tool themselves.

What we saw a generation ago was inventory recessions, with quick employment recoveries. What we are seeing now is what I call Progress and Displacement, which takes a lot more adjustment.

For Discussion. If the hypothesis of structural unemployment is correct, what does it imply about the efficacy of Keynesian fiscal and monetary policy?


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CATEGORIES: Labor Market



COMMENTS (10 to date)
Gary writes:

The Wachovia Economist explains it here. Basically, Bush is proposing a Keynesian policy targeted at such programs like 'Community-based Job Training', 'Reading First' and 'Headstart'. Sounds rather paternalistic tho. Why even have a Dept. of Education? Bush is going the wrong way on this IMO. It's not the government's responsibility to keep the unemployment rate low. Same goes with the Fed's goal of 'full employment'.

Paul N writes:

AK proposes that "it takes time to find new jobs": this is fine for explaining the supply of labor or a stubbornly high unemployment rate. But the unemployment rate isn't a particularly good indicator of economic growth.

Job opportunities and corporate hiring have also been surprisingly weak - and given the recent strong fiscal stimulus, the relevant question is: why aren't more jobs being created? (Tyler Cowen's hypotheses address this better than the "structural unemployment" theory.)

Mats Lind writes:

Arnold, I really miss a reference to the Groshen and Potter paper you actually quoted already a year ago here. Isn't that still highly relevant in this discussion?

Dave Schuler writes:

But isn't there a fundamental problem so long as credentialing, licensing, and other comparable forms of rent-seeking increasingly restrict entry into good-paying jobs? The solutions would seem to be:

1) Remove the credentialing and licensing requirements which is politically and, possibly, practically impossible and possibly undesireable.

2) Tax the rent-seekers to subsidize the re-tooling of those who need it which is politically impossible.

3) Protect all of the jobs which is economically undesireable but which is pretty close to what teh EU is doing.

Is is reasonable to ask a 50-year old to spend 10 years "re-tooling"?

ADAMS writes:

Re: Tyler Cowen's 10 points:
1. "Employers don't hire because productivity is high...." Isn't this a bit of a tautology? Is it as valid to say that productivity is high (in part) because employers are getting as much output with fewer workers? The real question is, why is productivity ahistorically high.

2. "Health care costs are high, but they've been high for some time...." The problem is that HC costs are increasingly high. This is a very significant factor in hiring decisions.

And, finally, the shrill response:
3. Hello, Tyler, you're going to blow off Paul Samuelson because dithering Dan says he's "not convinced," although Dan's "not an economist," and he "hasn't seen the essay," and Samuelson is "way...way smarter" than Dan? It seems to me there's a certain "stickiness" to academic economists' thinking about outsourcing's impact. Thanks for not giving it a 0!!!

Lawrance George Lux writes:
If the hypothesis of structural unemployment is correct, what does it imply about the efficacy of Keynesian fiscal and monetary policy?

The hypothesis of structural unemployment is correct, but it does not affect the efficacy of Keynesian policy: this said with my statement that Keynesian fiscal and monetary policy has always be a failure and damaging to actual promotion of the economy. It has never been right, even in the depth of the Great Depression. It introduces economic anomilties into the marketplace, which produce ongoing damage for as long as they are kept in place.

The change in unemplyment from cyclical to structural is a very worrisome fact, and should be fought. Half of the Labor force will fail at any individual technological upgrade at all times. To discard profitable production activities for foreign production of cheaper cost, disenfranchizes great elements of the Labor force, forcing reduced Incomes for this segment. Increase in Incomes for those who made the technological transition may or may not make up for the loss of Income. It is not really the point.

Economic performance demands consistent Consumer Demand, dependent upon Consumer ability to pay. This insists there are sufficient numbers of Consumers, who have the ability to pay. Outsourcing seriously depletes the above number of Consumers. It becomes expecially torturous when there is actually Ricardian Comparative Disadvantage in Trade. Long-term economic performace becomes lost, in the interest of Short-term Business profit-taking. lgl

muckdog writes:

The unemployment rate is 5.4% as of last week. Historically, a number around 5% has been considered "full employment." I think the tech bubble of the late 90's created a lot of "make believe" jobs in "make believe" companies that no longer exist today. Back in the 90's there were tons of companies going online just for the sake of going online, and demanding huge amounts of equipment and people power. This is no longer the case. We're having much more stable economic growth today.

William Woodruff writes:

All,

I believe we are in the midst of a structural adjustment of employment.

In part because of the stage of development of the United States (and the rest of the world), shifts in demographics and the unpredictable march and influence of technology. A previous contributor mentioned Ricardo, I wholeheartedly agree, because comparative advantage is blind.

Interesting, how "developed" countries have lamented the lack of reform, and accountability of "under-developed" countries, then, whence their labour pools become competitors, cry foul.

William

William

The Post Keynesian (John E. King,Stiglitz, et al) through the 'Efficiency Wage Theory' do not believe there ever existed a market clearing "Free Market" of labour.

Tom Kaminski writes:

In all the discussions of the labor market that I’ve read, no one has mentioned the time factor. At the risk of sounding like an Austrian (i.e., von Mises, not Schwarzenegger), I would suggest that the brief duration of the two most recent recessions may cause us to ask the wrong questions about the labor market. If, as the Austrians would argue, it takes time for recessionary forces to work their way through the economy, and if the recession lasted only 3 quarters, some industries and firms will not yet have felt the full force of the recessionary pressures by the time the episode is technically over. So a downturn is probably continuing in large segments of the economy, with firms trying to shed costs by lowering employment, even after the recession has supposedly ended. The technical end of the recession may then be a false indicator of how the economic forces are acting in many areas. So we expect fast job growth because “the recession has come to an end”; but that is more of a statistical artifact than an economic reality. The really interesting question is, why have recent recessions been so short and so shallow?

John Thacker writes:

If the hypothesis of structural unemployment is correct, what does it imply about the efficacy of Keynesian fiscal and monetary policy?

Well, the natural response I assume would be that governmental stimulus should not be located so much on demand-side stimulus of giving lower income workers more money to spend, but instead on job-retraining programs for workers.

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