Arnold Kling  

Thoughts on Unemployment

David Ignatius, Court Reporter... Idea Rents...

Alex Tabarrok writes,

The first puzzle about unemployment when thought about from within the search-matching framework is that unemployment rates are highest among the least skilled, i.e. among those worker/jobs with the easiest matches. It's hard to believe that it takes a year to match a construction worker to a job.

the second puzzle is that uncertainty should matter most when hiring and firing costs are high and once again these costs are lowest for those workers with the greatest unemployment rates.

Read the whole post. The overall puzzle is why the unemployment rate is highest for low-skilled workers. I will get to that puzzle shortly.

I recommend looking at employment from a ten-year perspective. In December of 1999, total nonfarm payroll employment was 130.5 million. To keep up with population growth, employment should have increased by about 15 percent from then until now, to about 149 million. Instead, total payroll employment today is a tiny bit lower than it was in December of 1999. So there is an "employment shortfall" of 18 or 19 million.

If you limit yourself to the periods that the NBER calls "recessions," they only account for about 2/3 of the shortfall. Another 1/3 took place during "recoveries." For example, even though population has increased since the recession officially ended in June of 2009, total payroll employment is slightly less today.

At this point, I am not sure how much of the decline in the employment/population ratio is cyclical and how much is secular. To put it another way, when the economic cycle reaches its next peak, it is hard to predict how much lower the employment/population ratio will be relative to the glory days of 1999.

With that in mind, let us turn to Alex's puzzle that the unemployment rate is highest among low-skilled workers. Here are some possible explanations:

1. Health insurance costs. When the employer provides health insurance, this cost represents a "wedge" between the take-home pay of workers and the compensation costs incurred by employers. The size of this wedge has increased over the past ten years. If your output is worth $30,000 a year, and your health insurance costs $15,000 a year, then you have to agree to accept $15,000 a year as your nominal pay, which is about $7.50 an hour. I suppose that if workers valued their health insurance at $15,000 a year and were flexible about taking wage cuts, this could happen. But it doesn't, and instead we get unemployment.

2. The story of skill-biased technological change and globalization would say that low-skilled workers face more downward pressure on wages than high-skilled workers. If there is the same resistance to wage cuts at all skill levels, there will be more unemployment among the low-skilled.

3. What we call "highly skilled workers" may be people who are better at self-deception. The superfluous high-school educated worker admits to being unemployed. The superfluous college-educated worker shows up as "enrolled in law school." This leads to a misleading difference in measured unemployment by skill level, at least if we measure skill level as education.

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CATEGORIES: Labor Market

COMMENTS (21 to date)
Ironman writes:

Arnold writes:

2. The story of skill-biased technological change and globalization would say that low-skilled workers face more downward pressure on wages than high-skilled workers. If there is the same resistance to wage cuts at all skill levels, there will be more unemployment among the low-skilled.

Let's remember that the stickiest wage of all is the minimum wage. If a low-skilled worker isn't capable of generating the level of productivity they need to deliver to overcome their employer's full cost of employing them, they're not going to be employed, especially if they are prevented by law from being able to offer to work at wages below some arbitrarily-mandated minimum level to get to the point where an employer might be able to afford hiring them.

(P.S. The link above will take you to a tool that considers many of the things that affect the employers' cost wedge mentioned in Arnold's first point.)

josh writes:

1. What exactly do you think highly skilled workers do in this country and how closely do you think it is tied to the market?

2. Smart/responsible people are always better hires than dumb people.

3. Immigration, stupid.

david writes:

1) I expect search costs have a significant fixed component (both from the perspective of the prospective employee and employer), making search relatively more expensive for the least skilled jobs;

2) geographic mobility is likely to be reduced for least skilled jobs;

3) minimum wage/unions;

4) due to above, training new workers or adding capital may be a better option that hiring an already skilled unemployed worker.

fundamentalist writes:

Before Keynes, it was widely acknowledged that the largest unemployment took place among workers in the capital goods industries, which is why business cycle theory looked for the cause of depressions in the cause of business failure in capital goods producing industries. And if you look today, you'll find that the largest segment of unemployed today is among those who worked in capital goods production. Why do economists ignore this fact that has been known for two centuries? I'm guessing it's because if they acknowledged it they would have to disaggregate capital in their models and they refuse to do that.

fundamentalist writes:

And why did economists fixate on search costs exclusively when there are so many other good or better explanations?

Ted writes:

Though I'm sure all of those things are relevant, but you can actually generate the result that the unemployed are usually low-skill with a relatively simple twist on the Diamond-Mortensen-Pissarides framework. If you assume heterogeneous firms and workers and introduce both search frictions (as in the DMP framework) and "screening frictions" (i.e. the costs associated with assessing worker ability) you can get the result that low-skill workers will typically have the highest unemployment (see: Helpman, Itskhoki, and Redding "Wages, Unemployment, and Inequality with Heterogeneous Firms and Workers).

Robert Johnson writes:

The way you started this post I thought you were going to tell us why Alex is wrong in trying to pull the carpet out from under the search-matching framework as an explanation for high unemployment in the current economy. I guess I was wrong.

dismal writes:

Don't the least skilled also have the least incentive to get a job/least benefit from getting a job?

RPLong writes:

This looks like textbook empirical evidence for ABCT malinvestment to me.

Jean writes:

Who would want to hire a low skilled worker? Low-skilled workers' only chance is to upgrade its skills to compete in the market.

Steve Sailer writes:

The surest way to cut unemployment among low skilled American workers is to encourage low skilled foreign workers to go home.

Gary Rogers writes:

I would also emphasize the greater number of possible job matches available to a highly skilled job seekers. This can make a huge difference, especially in a changing job market. I personally had to find a new position last December and was simultaneously exploring computer, engineering, teaching and sales positions. At 61 years old, I can't imagine what I would have to go through without a good set of marketable skills.

agnostic writes:

' The superfluous college-educated worker shows up as "enrolled in law school." '

Awesome line. It is much easier for such people to get phoney-baloney jobs that aren't really doing anything. Back in the first half of the 17th C. in England, there was a similar over-production of elites (measured by enrollments at Oxford), and then it was the church that they tried to get into for an unproductive but paying job.

And that's if you can even track the superfluous college-educated person -- maybe they're spending the year "finding themselves in Europe," while the low-skilled guy is at home all day playing Halo with his old high school buddies.

Tariq Scherer writes:

On that last point about 'self-deception' is this perhaps something that we should actually try to encourage more?
I realise that it's not great to get misleading statistic but having a workforce that is willing to get further training during harsh times sounds like a good option for the economy as a whole to me.

Tariq Scherer

Troy Camplin writes:

How about a network theory explanation. Low skilled workers have fewer social connections, especially weak bond, which makes it more difficult for them to get jobs through such networks. Thus, it will take longer for them to get a job, since they will have to look for jobs literally outside their networks. More skilled and educated people have larger networks -- particularly among people doing the kind of work they do -- and thus are more likely to hear about jobs, and have jobs hear about them. The latter, in particular, is bound to have a significant effect.

MernaMoose writes:

Seems to me the obvious has been missed entirely, both here and in the link Arnold gives.

Unemployment should be highest in those job categories whose end product is in the least demand.

What do "unskilled workers" produce? Survey says, things that people at large are not interested in buying right now.

The question isn't why "unskilled workers" have the highest unemployment. The question is, why are the things they produce in such low demand?

I'm just an engineer so take this as a flying WAG: "it's the housing market, stupid" combined with the fact that much of what low skilled workers produce today, falls in the category of luxury items that can be done without in a pinch.

People higher up the economic ladder are feeling much poorer than they used to, most often because of the housing price slump and sometimes due to outright unemployment themselves. There's the "pinch" that causes the forgoing of luxury items.

The Market is ever and always a Nervous Jerk. I suspect that right now, the market has over reacted and housing prices will come up above current levels in the long run. But it could be a really long run. Long enough for people to a) pay their mortgages down enough that they at least aren't under water, or b) they finally give up the ghost, take the loss, and start trying to move on.

I'm unable to shake the sense that most people are not yet ready to give up this ghost.

The resistance of course, comes from the fact that probably, housing prices will rise again -- but nobody can tell by how much or when.

There is also the very real possibility that unemployment among the rest of the population isn't yet as high as it should be (along the same lines as "housing prices are not yet as low as they should be").

Companies would not long keep under-utilized workers who produce things that they don't believe are going to come back into demand, sometime reasonably soon. Maybe, companies are still over-optimistic about what lies ahead? And one of these days when reality sinks in, they're going to have to lay off even more people, this time moving up the skill chain.

In the big picture, companies have a strong incentive to right-size themselves.

If my WAGs are right, then it paints an interesting picture. It means the middle class (semi-skilled?) and on up, could get along fine even if a significant swath of the unskilled workers were removed from the market.

But, carrying this out, the opposite is not true and the unskilled cannot live without the skilled tiers above them.

This somehow makes more sense than most of what I read. But then I'm an engineer, and everybody knows that engineers are weird and should not be trusted outside (and sometimes even within) engineering.

Colin K writes:

As an employer, I think #4 should be that people at the bottom have the least unique organizational capital. The opportunity cost of firing five entry-level customer service reps is lower than one programmer or salesperson.

And if I did get a sudden surge in demand, pretty much anyone in the company, including the salespeople and programmers, can take a few helpdesk calls to tide us over.

Jacob Oost writes:

Sometimes I think what cripples some economists when it comes to thinking about certain "puzzles" is that they went straight from college to a cushy job in industry or academia, and don't have a lot of street-level experience as one of the low-skill workers they talk about and thus have such a hard time forming opinions. No offense to anybody here.

I am a high-school drop-out and I later dropped out of college and was a low-skill nobody for the past eight years or so. It's not hard for me to see why so many low-skill workers are unemployed. In the first place, a great many low-skilled workers (especially those who are chronically unemployed) may have the physical capabilities to fry burgers or sort packages on an assembly line, but lack many of the basic job skills necessary just to be ranked as adequate hirees.

People skills, respect for authority and rules, punctuality, mannerisms during job interviews (do they come across as shifty or "trashy"?), hygiene (do they smell or have stuff in their teeth?), even mode of dress and speech (are you covered with tattoos, weird radical hair styles, piercings, do you wear your pants below butt level, do you speak proper English or do you just speak some weird "ebonics" or "rednecky" dialect?). These are important. You can put two different people in front of the same grill and they might both fry burgers and chicken the same way. And to some researchers, they might be "low-skilled workers," when to actual employers and to their co-workers the difference between them might be night and day. And yes, that includes actual output even if skills are the same. Two people can have the same skills but one might actually utilize them while the other only brings them out when the boss is looking.

A problem in any country with a minimum wage is that you aren't even allowed to begin climbing the job ladder until your productivity is already at a certain level. If you come from a background where you were not taught the relevant job skills and life skills, where proper English was not spoken in the house (not foreign languages, people don't have the same bias against a foreign language that they have against a bad rendering of English), where the value of work was not instilled, where maybe you grew up learning that the world was out to get you and you shouldn't even try, or that all of your bosses will just hate you so it's best to do the bare minimum to get by, or where maybe you weren't taught courtesy and people skills, or maybe your parents went easy on you with your chores so you never learned to dedicate yourself to your work, etc., then you automatically start with a below-the-minimum-productivity handicap, or BMPH, a term I just coined and which will appear in all the academic journals I'm sure.

Obviously, in the absence of a minimum wage, all people will be able to start on the job ladder and sink or swim, the way I did (I was not a good low-skill worker when I started, my handicap was that my parents went easy on me chore-wise so I expected similar leniency from my bosses).

Anyway, I haven't even mentioned the things like a prison record. Think of all the people who not only have many of the handicaps I listed above, but also a prison record. Even the lowest-level crap job will do background checks these days. It seems only public schools skip that step.

Hyena writes:

Why not the obvious answer that low-skilled workers are easily replaced by higher-skill workers who also bring better work habits on average?

Those people become unemployed as well and even low skill jobs often pay more than available unemployment benefits. Since most of these positions will have low hire/fire costs and many businesses expect recession lite to continue for some time, it would make sense to hire more skilled workers because their longevity is less a concern.

The real matching problem might simply be matching products to consumers now that purchasing behavior is altered. I tend to think that we're still struggling with the failure of the New Economy; we never did discover effective ways to capture more of the surplus created by the Internet and reward investors or just small teams.

Nathan Smith writes:

Hyena is right. "Unemployment" among higher-skill people takes the form of accepting lower-skill jobs.

jgo writes:

I mostly agree with Hyena. But it depends on the definition of "highly skilled". A highly skilled software architect may be a lousy carpenter or brick-mason, though all 3 have very specific skills.

In the 1980s, the pundits that the "low skill" manufacturing work was being replaced with higher skill manufacturing work and work designing, repairing, maintaining, and programming robots/manufacturing cells. As it worked out, much manufacturing was moved off-shore where even less capital was applied. (Not all, of course, we also shipped out capital goods to manufacture, e.g. computer chips, which were quickly followed by the jobs of chip designers.)

When confronted with the reality of the software architect, software engineer, hardware engineer, and science positions being moved off-shore, Greenspan remarked that they'd be replaced with something requiring more intellectual savvy, but he, of course, would not and could not say what; so he added that unemployed Americans should all flock to jucos, where former software architects could take courses in how to use a spread-sheet.

Which leads to a final observance: When a software engineer or biophysicist turns to raking leaves, pet-sitting, or serving coffee, sending off batches of resumes and continuing to study software engineering or biophysics in his off-time, the BLS considers him to be a fully-employed leaf-raker, pet-sitter, or coffee server, rather than the under-employed software engineer or biophysicist he actually is.

Oh, and as to those employment/population ratios, durations of unemployment, labor force participation rates and such:

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