Arnold Kling  

Thoughts on the Employment Situation

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Bloomberg reports,

Factory payrolls fell 85,000 after decreasing 104,000 in October. The return of 27,000 striking machinists at Boeing Co. last month helped limit the drop, economists said...

Payrolls at builders dropped 82,000 after decreasing 64,000. Financial firms decreased payrolls by 32,000, after a loss of 31,000 jobs the prior month.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 370,000 workers after declining 153,000 in the previous month.

Overall, the decline in payroll employment in November was 533,000.

In December of 1974, the decline in payroll employment was 602,000, of which the decline in manufacturing payrolls was 384,000 and the decline in service employment was 132,000. Construction employment was almost unchanged.

Decomposing the change in employment, in December 1974, the drop was almost 2/3 concentrated in manufacturing, and less than 1/4 services. In November 2008, the drop was less than 1/6 in manufacturing, and more than 2/3 in services.

I bring this up because it raises a question about whether this is cyclical or structural unemployment. See my Lectures on Macroeconomics, No. 3. For example, if people are losing jobs in securities trading, then that may be a case of permanent structural change, not temporary cyclical weakness.

I have my doubts about Keynesian remedies for structural unemployment. As I wrote in Lectures on Macroeconomics, No. 6

My tentative judgment is that the Keynesian remedies are less appropriate to the post-industrial economy. Fiscal and monetary policy may be good for kick-starting the durable goods sectors, but the Dotcom crash required more complex adjustments, involving a more educated labor force.

From 2002 through 2007, the economy fell short of providing the employment opportunities for highly-educated workers that the Internet bubble was able to generate. Meanwhile, we overheated the traditional housing and consumer durables sectors. Some of the demand for consumer durables was met by foreign producers, as our imports shot up. One could argue that the demand for housing also was met partly by foreign labor, in the form of illegal immigrants.

Another sector that overheated in this period was the financial sector. The mortgage origination, securities-trading, and risk-disguising industries ballooned. These excess financial services employees now need to find other lines of work. I cannot see how a Keynesian policy of creating inflation to reduce real wages can help with that.

As far as I know, macroeconomics does not have a proven remedy for structural unemployment in the services industry.

Comments and Sharing

COMMENTS (9 to date)
Brian writes:

The #1 Reason of manufacture job loss

Take a tour at your local Wal-Mart.Find 50 items Made in America! Or grocery stores, Apple Juice, Apples from Germany,China and others.
We should mandate retailers to sell at least 75% of goods be made in America, This would create jobs!!

johnleemk writes:

I can't decide whether Brian's comment is meant to be taken seriously or as satire - it so perfectly encapsulates the kind of irrational beliefs voters hold as described in Bryan's book.

If the amount of American goods sold in stores is insufficient to keep Americans employed, how can enough Americans afford to buy these imports, without any source of income? The story Brian is telling suggests that the status quo is extremely far from an equilibrium where supply equals demand - that there is a massive glut of imports which Americans can't buy. Now, we're probably not in equilibrium at the moment, since as Arnold observes, we are probably in a restructuring phase, but that in itself isn't evidence that the way to return to equilibrium is to erect massive barriers to trade.

As for the make-work fallacy, we can make lots of jobs by hiring Americans to dig holes in the ground and fill them up again. That doesn't contribute anything to the real economy, but people will be employed, by golly! We're really much better off just paying people not to work if this is the case.

fundamentalist writes:

"...macroeconomics does not have a proven remedy for structural unemployment in the services industry."

It never had one for manufacturing, either.

comsense08 writes:

Brian, Well there you go again with government sticking it's nose where it doesn't belong. You can go ahead an mandate it, and then this market will end up just like the automotive industry. Besides you would scream bloody murder if you had to pay the price for something of quality built here in American when you also mandate high pay for workers, paid vacations, 401(k) w/company match, pension, and medical coverage. Not to mention all the taxes American companies are expected to pay as well and environmental restrictions, state and local regulations. By the time you add all that up, a CD player built here in America would probably cost $300 as compared to one from Japan for $30. So, how do you spend your money? It is already up to you, you know! And most of you chose the $30 player. So why do you think America no longer makes CD Players? Simple economics, and government intervention. Get off of business's backs and they just might be able to make something competitively priced.

guthrie writes:

Brian's comment reflects a basic misunderstanding of economics that I can relate to. I didn't understand the concepts of 'division of labor' and 'comparative advantage' until I started researching them (on this site actually!). One could make the argument that unions have helped unemployment along by arbitrailiy fixing wages above the market competition. Anyhoo, I'm still trying to digest the difference between 'structural' and 'cyclical' unemployment.

shanson writes:

Thought: will increased labor education requirements result in slower adjustment of the labor force to structural imbalance?

Lord writes:

Surely unemployment doesn't exist does it? Aren't all these people just finding extra time to spend time with their families during the holidays? (Sarcastically)

Babinich writes:

If "we" create more jobs (manufacturing, food processing, etc...) in this country who takes those jobs?

What training is necessary for these jobs?

If training is necessary, who pays for this training?

What is the pay scale for these jobs?

Do these new jobs inhibit productivity or increase productivity?

How do these newly created goods "compete" with other goods in a world market?

Arnie writes:

Government meddled in housing finance and created a ton of finance-related jobs that, once policy changes, aren't needed.

Where is the libertarian foundation of savings? Gone, that's where. Sure, it would further slow spending so.....

How about a huge corporate tax cut to spur investment combined with massive tax change on personal savings. Let individuals do the bailing out. If I could save tax-free a ton of my income (say, $100,000 per annum) the banks would begin to fill up with all sorts of capital that could then, (to please the other side) be lent out!

As it is now, I haven't a clue what to do with my meager extra. The Mattress!

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