In this lecture, I get to the punch line and offer my explanation of unemployment. Markets are constantly in adjustment, with the number of people in different occupations changing. Usually, the task of adjustment and adaptation goes remarkably smoothly. Occasionally, however, markets are overwhelmed by the amount of adjustment required within a relatively short period of time. When the adjustment mechanism is overwhelmed, we have a recession.
Thank you for your time
Oh, you've been so much more than kind
You can keep the dime
Jim Croce's classic song conveyed the pathos of coming to terms with a broken relationship. Forty years later, it also conveys the pathos of the end of a bygone era.
The protagonist in the song is evidently in a phone booth, and the lyrics are the words that he speaks to the telephone operator. There are still telephone booths, but when was the last time that you used one? There may still be human operators who can connect calls, but when was the last time that you spoke with one?
It is safe to conjecture that, compared with forty years ago, we need fewer people to install and maintain telephone booths and fewer people to act as telephone operators. Instead of phone booths, we need cell phones and cell phone towers. Instead of operators, we have computerized systems for connecting calls and automated voice-response systems for looking up phone numbers. (To be sure, even by 1972 most calls were automatically connected without an operator.)
A dynamic economy requires constant adjustments in the labor force. New types of jobs emerge--consider that none of the job titles associated with web site development could have existed prior to 1994. Other jobs disappear.
Usually, these adjustments take place remarkably smoothly. In 2003, I wrote an essay called Manufacturing a Crisis, in which I presented the following data:
Total Nonfarm Employment
Manufacturing Production Workers
For 2007, the figures are 137.6 million for total employment and 10.0 million for manufacturing production workers, respectively.
It should be noted that over this long history of falling employment, total U.S. manufacturing output was rising. Productivity increases have been larger then the declines in employment.
The fact that there are 3.5 million fewer manufacturing production workers today than in 1972 does not mean that there are 3.5 million former manufacturing production workers now standing around idle or in need of government retraining. It seems safe to presume that more than 3.5 million manufacturing production workers in 1972 have reached retirement age since then. Many of the retirees have not been replaced. However, there are many people, perhaps millions, working as manufacturing production workers who were not doing so in 1972.
Economists who notice job displacement tend to leap to the conclusion that we need government retraining programs. They forget that the natural process of retirement and new entry into the labor force tends to take care of the marginal adjustments in occupational choice. No, not every manufacturing production worker can retire at once, but they do not all have to. Many of them have to change firms or change industries, but the overall process of adjustment among occupations is reasonably gradual.
When workers are unemployed because of job displacement, economists call this structural unemployment. This is one of three types of unemployment described in traditional macro textbooks.
Another type is frictional unemployment, presumably named for the natural "friction" that exists as people leave jobs to seek new jobs. Someone might quit because they are fed up or want to move to a new city. Or someone might be laid off by one firm in a market where jobs are readily available at other firms, but it takes time to find a suitable opening and make a choice.
Finally, there is cyclical unemployment. For example, when the U.S. economy was more heavily dominated by manufacturing, the big auto companies and steel companies would occasionally find themselves with excess inventory. They would put workers on temporary layoff until supply and demand are in better balance. Because these industries were so large relative to the overall economy, the layoffs of their workers caused demand to fall in other sectors, so that employment also fell elsewhere. Eventually, however, the inventory correction would be over, manufacturers would recall their workers, and the economic decline would reverse. Alan Blinder, among others, has observed that most of the recessions in the U.S. economy between the end of World War II and 1980 could be described as "inventory recessions."
One way to think about cyclical unemployment is that it represents a system overload in the adjustment mechanism in labor markets. There is too much adjustment required in too little time, resulting in excess unemployment. This excess unemployment tends to amplify because of multiplier effects--workers out of a job are going to spend less, and this will reduce labor demand elsewhere.
Ordinarily, the need for adjustment is sufficiently gradual that lateral movements (workers changing jobs but not changing careers), retirements, and new entry into the labor force can meet the needs of a dynamic economy and maintain full employment. A recession takes place when the adjustments required are large and the economy is sluggish about making them.
With an inventory recession, the market is saying that we need less heavy manufacturing output and more of something else. However, workers laid off by manufacturers to not go to work producing something else, because they instead wait to be recalled by their old jobs. In a typical inventory cycle, most workers in fact do get recalled.
Sometimes, however, major shifts in employment are called for. For example, the development of automobiles, trucks, and paved roads in the 1920's brought about a restructuring of production. Farm produce could travel farther, which took away the economic advantages of dense urban areas surrounded by farms. Eventually, we would see in the 1950's the configuration of suburban housing, shopping malls, fast-food restaurants, major grocery stores stocked by out-of-town produce, and other familiar features of the mobility-driven economy.
However, in the 1930's, the adjustment process got stuck. The jobs that were added in the 1920's in boom industries such as electrification were cut back when the stock market crashed. Bank failures, monetary contraction, and deflation made matters worse, in ways that will be explained in a subsequent lecture. The financial turmoil caused further job cuts. In addition, the turmoil meant that industries that otherwise would have been expanding were instead struggling. The workers displaced by the transportation revolution and by layoffs in the boom-bust segment of the economy could not find work elsewhere. They reduced their spending, and multiplier effects kicked in.
Between 1925 and 1955, the U.S. economy achieved a massive transition. Suburbs replaced close-in rural communities. Farm labor contracted and service employment expanded. Unfortunately, this transition was not smooth. The veterans of World War II built a new economy, because the one that their parents had known in the 1920's stopped functioning during the Great Depression.
The nature of labor has changed since the 1930's. A much larger proportion of our labor force has specialized skills, and a smaller proportion are general laborers. The increased levels of specialization and training will have mixed effects. On the plus side, not everyone is tied to key manufacturing industries. An inventory correction in automobiles does not affect nearly as large a percentage of the work force as it did fifty years ago.
On the other hand, major adjustments may be more painful for highly trained individuals. If we need more health care management personnel and fewer mortgage securities traders, that adjustment process may not be as simple as moving a farm laborer into a factory.
I suspect that the modern labor force poses different problems for policy during a recession. With an inventory recession, a generic fiscal stimulus might serve to shorten the duration of the downturn. However, when the economy is in the process of expanding some sectors and contracting others, and when the expansions and contractions involve workers with different skill sets, generic stimulus may not be able to affect the dynamics of the process very much. I intend to talk more about policy issues in the next lecture.
Further reading: Much of the transition from landline to cellular telephones took place between 1990 and 2004, as recounted by Christopher C. Carbone in a n article published by the Bureau of Labor Statistics. A few data points from the article:
--from January 1990 to August 1993, total employment in telecommunications fell by 43,000, even though wireless communications firms added 25,000 workers over that period.
--From the beginning of 1996 to March of 2001, total employment in telecom increased by 352,000 jobs, as landline telecom services built capacity to market Internet services and to handle the increased data load, while cell phone services continued to expand.
--From March of 2001 through the end of 2004, total employment in telecom fell by 300,000. It turned out that the capacity build-out had gone too far, too quickly. Some of this was the Internet bubble, but much of it reflected the failure to take into account reduced demand for landline phone calls with the growth of cellular.