Arnold Kling  

The Employment Recovery

PRINT
Textbook Macro, Sumner's Macro... Hyperinflation...

Tyler Cowen asks,


Why does it take so long? This isn't one of those West European scenarios where, due to benefits, being unemployed is permanently somewhat attractive alternative for some subset of the work force. Nor is the United States a country where employers cannot fire recalcitrant workers.

I once joked that we were not going to get below 7 percent unemployment before January of 2013, when President Palin takes office. It now appears that the trajectory is even slower.

I continue to take an optimistic view. My guess is that at some point we will see employment expanding rapidly, at a pace of 400,000 jobs a month or more. I think that this will start to happen before the end of President Obama's first term, not that he will deserve credit for it.

But part of me worries that the the much-vaunted flexibility of the U.S. labor market is a thing of the past. Robert Fogel tells us that the three long-term superior goods are leisure, health care, and education. Obviously, an increase in leisure does not increase employment, although it certainly creates opportunities in complementary goods and services.

But health care and education in the U.S. are arguably the most cartelized labor markets in the world. How many entrepreneurial ideas in those fields are rendered implausible by credentialing issues? If you want your innovative school to draw customers, you have to get accredited--not to mention dealing with the fact that your competition gets public funds and you do not. Your innovative health care delivery process will run afoul of medical license and practice laws.

We probably could be retraining lots of unemployed workers to serve the education and health care industries in productive ways. But the credentials bottleneck is very restrictive.


Comments and Sharing


CATEGORIES: Macroeconomics



COMMENTS (22 to date)
Hyena writes:

The credentialing system is 100% privatized for most jobs. The demand for accredited college degrees is not the result of government mandate, it is the result of prestige issues on the part of firms. The actuarial industry, for example, credentials based on examinations and there are few reasons other industries couldn't do the same.

Competition in education is not the issue, a lack of competition by employers is. Of course, there is always the distressing possibility that you're just looking largely at a shortage of skilled labor potential.

david writes:

Kling is a Masonomist; he (in theory, at least) accepts that markets can fail and buy into signaling and credentialised 'bad' equilibria.

Kevin Driscoll writes:

I debate the idea that the benefits aren't large enough to encourage long term unemployment. For relatively low wage earners who were barely surviving before being laid off, then of course benefits will be too small, but for some middle income workers they might take the benefits and cut some of their excess costs to make up the difference.

For instance, imagine an engineer who makes $60,000 a yeah salary. That is $5,000 per month. In a state with high state income tax, she is likely taking home only about $2,500 after taxes (25% federal income tax, 9% state income tax in California, 7.65% FICA, possible additional taxes). On unemployment she might receive $400 a week after taxes. That's about $1700 per month. If this individual has $800 per month in discretionary spending (child care, excess driving, luxury items, etc.) then she could afford to cut it and stay home instead of work. Not to mention temporarily qualifying for gov't health programs. With congress continually extending jobless benefits (until now) who could blame her?

Floccina writes:

Hyena, I consider employers to be consumers of school credentials and generally people will consume more of a subsidized good.

BTW employers are also potential educators and credentialers but they will do less while the government is subsidizing schools.

8 writes:

Tax healthcare benefits and allow workers not to buy health insurance. Wages will increase and cost to the employer will drop.

Ironman writes:

Arnold wrote:

Your innovative health care delivery process will run afoul of medical license and practice laws.

Not to mention the federal government bureaucracy's interest in expanding its control over the sector. Case in point....

Curt writes:

President Palin? Really?

Doc Merlin writes:

'This isn't one of those West European scenarios where, due to benefits, being unemployed is permanently somewhat attractive alternative for some subset of the work force.'

Um, didn't benefits get extended to 99 weeks?

Rebecca Burlingame writes:

Here is a simple way of looking at the problem with healthcare:
Suppose you were in training for a factory job. But instead of just training for specific tasks, you were expected to learn every aspect of the entire factory before you even started your first day of work. Not only is your training going to be very expensive and time consuming, but the compensation you receive therefore needs to pay for your personal sacrifice.

As a result, the once reasonable factory prices now reflect this added burden, and what comes out of the factory is no longer directly affordable by the consumer. I told this story to a friend recently and she got it immediately. "My cousin", she told me, "in his training to become an opthamologist, had to learn everything about being a doctor first, including a stint in the ER."

Why should this be a problem? In healthcare, we do not just pay for the individual to learn everything about everything one time. We pay for it over and over again. It is like going out and buying a product which - had the inputs (education, time, money) reflected the task at hand - the product would have been affordable, and not just for you and me. The product would have been affordable by businesses and most importantly, governments. But because it was not, and may not be in the foreseeable future, everyone waits for the next bubble, hoping they too will get a piece of the bubble so that they may be able to pay for healthcare in their old age. And governments cross their fingers while hoping they can take a larger share of the economy without bankrupting their own.

Chris writes:

Kevin Driscoll writes:

For instance, imagine an engineer who makes $60,000 a yeah salary. That is $5,000 per month. In a state with high state income tax, she is likely taking home only about $2,500 after taxes (25% federal income tax, 9% state income tax in California, 7.65% FICA, possible additional taxes).

Total taxes (using a flat rate of 9% for CA) on a $60,000 gross income would be just under 32%, not 50%. That rate assumes no itemization of deductions, no deduction for a 401(k) contribution, etc. It also assumes that a flat rate of 9% for CA taxes is not as inflated as a flat rate of 25% for federal taxes. If we assume that the flat rate of 9% in CA is as inflated as the 25% flat rate for federal taxes, the total rate is just under 29%, a far cry from 50%.

Most projections assume growth will continue steadily (and increasingly)... but only an idiot would assume this.

Once tax rates jack up in 2011 (especially on corporations, investments, and dividends) and recently passed-regulations on healthcare, energy, and everything else kick in, it'll be a double-dip recession. All gains made in the past year or two (if any) will be wiped out, plus more, setting us farther back.

Obama was dealt a bad hand, and played go fish, and now he's holding a fish, a stapler, a pencil and a coffe mug, and he's bluffing big in giant game of poker. Poor America.

Morgan Warstler writes:

Actually the most cartelized labor force is Public Employees.

And if we simply made Productivity Gains in government (GOV2.0) at the Local, State, and Federal level - say 3% a year over next 7 years, - through technology automation, online self service, and privatization...

We'd be saving close to $400B annually. That's 400 BILLION. Minus stimulus, that's about our deficit for as long as memory serves.

I can't prove it, but my gut says that if government generally matched productivity gains since 1994, we'd not even have a crisis.

That $400B means about $100B annually in technology and services revenue, so the 2000 crash would have metered down much easier, and Greenspan wouldn't have been as desperate to give everyone a house.

Lord writes:

A big problem with education and healthcare is so much of it is government funded and as it has already made clear it won't let costs escalate without bound, there will be much less growth in it in the future. There are already unemployed nurses.
We need employment in industries that pay taxes, not absorb them.

TA writes:

Let's take Tyler's question: "Why does it take so long?" I think the answer is, nobody knows. I don't think economists really know very much about how the economy gets itself from one state to another.
I take Arnold's position to be that he doesn't know either, but he doesn't buy the standard answers, and he has some ideas about better directions in which to inquire.

Elvin writes:

I think it's a culmination of a lot of little and some big things.
- Increase in the minimum wage
- Lack of any expansion of free trade. Low fruit free trade treaties that cost the government nothing languish.
- Uncertainty for businesses, especially small firms, about health care and taxes
- Tighter immigration since the mid-2000s
- Tighter credit, again especially for smaller businesses
- Longer unemployment benefits
- Lower growth outside the US, especialy Europe
- Two big sectoral adjustments in housing construction and finance
- Poorly implemented tax policies (tax credits which did not improve marginal rates or just shifted the timing of expenditures)
- Poorly implemented government projects (too many census workers, ethanol, unwillingness to loosen Davis-Bacon hiring rules, etc.)
- Demographic trends of baby-boomers entering lower productivity years

Those are just off the top of my head. What's surprising is how many items on this list that the government could do something about. My guess is that better policy could have had the unemployment rate 1% to 1.5% less and a more optimistic business environment.

What is the multiplier of just passing the free trade treaties?

Troy Camplin writes:

While there is a need in health care, the only need in education is to remove the barriers to entry that are currently in place. I have a Ph.D. in the humanities, a M.A. in English, and a B.A. in biology and chemistry -- and I cannot get a job teaching any of those things in high school because I don't have a teaching certificate! I shouldn't have to get a teaching certificate to teach high school.

Kevin Driscoll writes:

Chris, thanks for the correction. I don't know anything about how taxes actually work, I thought you just added them up and subtracted from the Gross amount. I've never filed my own tax return.

So, my numbers are bad but I still want to contend that some workers decide to remain unemployed because their new financial situation is just as manageable as their previous one. I know there is anecdotal evidence of this, statistical evidence may or may not follow.

Jeff Boyd writes:

Great post Mr. Kling.

Chris Koresko writes:

My gut says Elvin is right to conclude that many or most of the factors keeping unemployment high are dependent on government policy. So it's kind of like the latter half of the Great Depression. That makes sense, since Obama seems to draw a lot of his inspiration from FDR.

Lots of good posts on this topic. I liked Rebecca Burlingame's especially.

The Cupboard Is Bare writes:

@Rebecca Burlingame:

"Suppose you were in training for a factory job. But instead of just training for specific tasks, you were expected to learn every aspect of the entire factory before you even started your first day of work. Not only is your training going to be very expensive and time consuming, but the compensation you receive therefore needs to pay for your personal sacrifice."

Most manufacturers are small- to medium-sized facilities that need employees whose skillsets permit them to work in a variety of situations. It's called cross training, and it enables the company to continue to function when an employee is out sick or on vacation or quits or is terminated.

"My cousin", she told me, "in his training to become an opthamologist, had to learn everything about being a doctor first, including a stint in the ER."

To suggest that an opthamologist should learn only those things related to the eye is to suggest matters of the eye are not related in any way to the rest of the body. There are many medical conditions and medications that affect the eyes; i.e. diabetes, and these conditions must be taken into consideration when treating patients with opthalmic problems...particularly if the doctor plans to do surgery.

The preliminary instruction a student receives in his/her first four years of medical school provides sufficient training to qualify them as a General Practitioner. Working in an ER provides them with the experience of working under pressure. If there's a car accident and, in addition to a lot of other serious injuries, someone's eye is hanging out of its socket, the opthamologist must have a thorough understanding of human anatomy and must be able to work in concert with other specialists under pressure cooker conditions.

The Cupboard Is Bare writes:

@Kevin Driscoll:

You must also take into account that one must pay taxes on unemployment benefits (this is not the case with disability benefits). Additionally, if you own a home, receiving benefits from government programs; i.e. Medicaid, can result in a lien being placed upon your home. This lien must be satisfied prior to the sale of said home.

Anyone who owns property, would try very hard to avoid putting that property at risk.

Jeremy, Alabama writes:

I don't see this as a benefits-pulled jobless crisis, but employer-pushed.

Obama touts corporate profits as "good news". But who here believes these are expansionary profits that will lead to hiring, rather than businesses desperately recognizing revenue,cost-cutting, laying off and hunkering down for a taxes-lead downturn in 2011?

Benefits may slightly increase the "attractiveness" of being unemployed, but since it adds to the deficit it does far greater damage by increasing debt, therefore starving out corporate loans, increasing taxes, and starving job creation. We are very close indeed to having painted ourselves into a corner with a permanent deficit requiring permanent tax levels that permanently reduce jobs.

Comments for this entry have been closed
Return to top