Arnold Kling  

More Thoughts on the Great Recalculation

Will the United States Default... Why oh Why Can't We Have a Bet...

In a comment on an earlier post, Hal Varian writes,

The recalculation model is appealing, but is there any empirical evidence for it? I don't think that the 1930s would provide useful evidence since the production patterns after the Great Depression were obviously different than before due to WW II. But will employment patterns be dramatically different in 2011 than in 2007 as compared, say, to changes during a 4-year period without a recession? I would guess "no", but I could be wrong. If private savings and exports increase, and imports decrease, we should see some shifts in employment patterns but would it be noticeable?

Let me start by saying that I think it's hard to teach an old dog new tricks. That is, I suspect that relatively few workers completely retrain themselves and shift to entire new industries. My guess is that a lot of the change in employment patterns comes from who enters and exits the labor force. I am willing to be wrong about this.

During "normal" times, young people and immigrant workers enter the labor force, and older workers retire. This produces a slow and steady turnover in the skill composition of those who are employed. For the umpteenth time, I will point out that we now have over 2/3 or the labor force with some college, whereas it was only 1/3 forty years ago.

During a recalculation, immigration slows (my guess is that if you include illegal immigrants, it has gone into reverse). Young people cannot find jobs. At the same time, the exit rate for older workers accelerates.

This leads to some empirical predictions for the recalculation theory. As Varian suggests, if you compare labor force changes during periods of normal times with labor force changes over periods that start with a recalculation you should see more changes with the latter. I believe that we will see that. I predict that the proportion of the labor force aged 50 and over will fall more rapidly from 2007 - 2013 than it did from 2001 - 2007 or from 1994 - 2000. (Note that right now, young people are having a devil of a time finding jobs, and a lot of them are going back to school. And the over-fifties are less motivated to retire, because their retirement savings have been wiped out. Those short run trends work against my prediction.) I think it is likely that the gender composition of the labor force will shift more rapidly as well. Finally, I think that the composition of the labor force by country of birth will show very different trends.

Overall, if you were to extrapolate the trend in labor force composition from 1995 through 2007 out to 2013, my guess is that you will over-predict older workers, male workers, and Hispanic workers. You will under-predict workers aged 25 - 35, females, and non-Hispanics.

My guess is that the greatest unexpected growth will come in entertainment industries that I have not yet heard of or which are yet to emerge. Education and health care will continue to grow, but not particularly far above recent trends.

On a somewhat related issue, I disagree with Ed Leamer and Brad DeLong, each of whom seems keen on re-invigorating home ownership. If Leamer is right (and I am not convinced that he is) that our housing stock has not grown fast enough, then rents will go up and that will stimulate developers to build apartments. I think it is downright loony to try to suggest that what we need is more government subsidies for home ownership. Rent may be a four-letter word, but it really is no obscenity.

In the case of housing, I am willing to let the market do the recalculating, thank you very much. The last thing I want to see is more government fixes in that industry. Let's let regular old supply and demand mess up on its own for now.

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CATEGORIES: Macroeconomics

COMMENTS (8 to date)
Alex writes:

Hal: if the government had not intervened in the banking industry in 2008, do you think a lot more of those banks would have gone bust than did? Do you think all of those unemployed investment bankers would have found work again, many perhaps in another industry? If so, would you have considered this an empirical example of the kind of recalculation Arnold is talking about? I'd be curious to see statistics on what former employees of, say, Leman Bros. are up to right now.

Shayne Cook writes:

Your "recalculation" thesis is very compelling. And I'm not at all convinced by Varian's critique.

A significant influence on both the actual recalculation-based employment shift and/or the ability to measure/observe it is the government's willingness/ability to "cover the spread" between bid and asked prices - both for individual classes of products and for the labor required to produce them. "Cash for Clunkers" is a case in point, and the October 2008 "Bailout Bill" is another, and past/current/ongoing government influences on the housing market is a third. Recent government actions are effective only in preluding or attenuating a "recalculation", rather than enabling or encouraging it.

Joey Donuts writes:

I have only a small quibble. The 50-65 age cohort in the US will get smaller over the next 10 years. The post WWII baby boom birth rate peaked in 1958. So one would expect that we will see a decline in the number of people turning 50 and an increase in the number of people turning 65 in the next 10 years.

Forecasting a declining share of the workforce for people over 50 without taking these population trends into account may lead to a false conclusion about the effects of the "Great Recalculation". Taking the decline of the age cohort into account by measuring a decline in the share of the 50-65 age cohort in the labor force would offer much stronger evidence of the "recalculation".

I also wonder, since you're making predictions, if you would offer a wager. Caplan must not have awakened yet. I'm sure once he sees this post that he will suggest you make a wager.

Joe writes:

The other side of the recalculation argument is that EMPLOYERS do not want to hie people without a specific skill set, or those they think will leave once they find a better opportunity in the field they just came from.

I know a number of Ex Lehman folks. The smart ones had enough money they do not really "need" to work, but most of them have dispersed into smaller boutique firms, or have started boutique firms with their old wealth

The Cupboard Is Bare writes:

"I suspect that relatively few workers completely retrain themselves and shift to entire new industries. My guess is that a lot of the change in employment patterns comes from who enters and exits the labor force. I am willing to be wrong about this."

I agree. I am in my 50's, and along the way I have found many of my generation to be resistant to new technologies.

Let's consider the basics. In many instances they don't even want to learn the new features of software that they are already using. They continue to fax completed forms rather than e-mail PDF's. Some refuse to do their own typing. They are unable to save files to anything but the default directory and can't do a simple search to find a file they have misplaced (which frequently happens). Directories are littered with New Folder's (if you are familiar with PC's, you know what I mean). They don't know the difference between a print job and a printer driver, and will delete the driver instead of the print job.

It would appear that many of them thought that they were going to coast with a limited set of skills until retirement. Suggestions that they should upgrade their skills or take a course at college or Adult Ed are met with all sorts of excuses and at times hostility.

Having said that, I doubt very much that someone who is resistant to even the most basic of everyday technologies, is going to be willing or able to make the transition to an entirely new industry.

Michael M writes:

I'm going to have go with Joey on this one. While an empirically check-able prediction is a good thing, it isn't a simple thing. It'd be necessary to control for retirements that would have happened regardless of the recalculation, which would be a very difficult and complex thing to do. Perhaps changing the prediction to specifically a decrease in the 50-60 age range, to cut out the majority of retirees who would have been reaching the age that social security benefits are available at?

Jim Chappelow writes:

Two problems with this idea.

1) Even in normal times prices and quantities are constantly being recalculated through the market process. Nearly universally, during times of recession we see significant increase in government intervention intentionally designed to retard recalculation through bailouts and stimulus. This means that we might actually observe slower rates of market adjustment of the structure of production in recessionary times relative to normal times.

2) I don't think we can assume normal times are in fact normal. A good fraction of the adjustments that we see during "normal" years are in response to distortions of the market driven by fiscal, regulatory, and monetary policy. The boom years are just as abnormal as the recession years. Why would the adjustment through the boom years occur any more rapidly than the adjustments during the recalculation?

Bob Murphy writes:

Arnold, as you noted in your original post on this, your "recalculation" approach is very similar to the Austrian view of recessions. In that vein, you might be interested in this piece where I showed that, contrary to a (badly posed) calculation by Paul Krugman, the unemployment and housing data in the 50 states were pretty consistent with the "recalculation" idea.

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