Arnold Kling  

If They Had Asked Me

Tunisia: Tullock's Model Fits... Why Don't Big Firms Fire the S...

The New York Times asks various folks for their view of why jobs have not come back during this recovery.

I recommend taking a longer view of the process. I think that a major reconfiguration of the U.S. economy has been going on for at least ten years and might well go on for another ten. The employment-population ratio sagged the first three years of this decade, came back a little bit the following three years, then edged down for two years, then plummeted, and for the past year has been about flat. The cumulative decline is very large. That suggests something more than a mere cyclical downturn (or two).

Some hypotheses (all of which I have offered prevsiously):

1. There is no aggregate production function any more. For some firms, output and employment are linked, but in many cases they have been decoupled. Instead, in a Garett Jones economy, firms hire workers in order to create capabilities. It is an investment decision. We have been through a major disinvestment in overhead labor. Few firms are in a hurry to start making new investments in capabilities. Investment decisions are easily postponed--the option of waiting to invest has value, particularly in times of uncertainty.

2. Health insurance costs have more than doubled over the past ten years. Wages have not fallen far enough to offset this, in part because many workers do not value health insurance as much as it costs firms to provide it (even after taxes).

3. The ongoing trend to use less labor in the manufacturing sector has continued or even accelerated, even though there was not much labor left in that sector to begin with.

4. Two potential leading sectors--education and health care--are sclerotic because of credentialization.

5. Many people are operating at a different point on the labor-leisure trade-off than was the case in past recessions. For some fraction of the unemployed, a full-time job is a nice-to-have, but it is not a must-have. Those in this category will take a long time to search for jobs, and they will turn down (or rule out) jobs that they would take if full-time work were more of a necessity.

For all that, I think that my guess for the unemployment rate three years from now would be on the bullish side. I think that investment in Garett Jones workers will pick up, and I hope that entrepreneurs figure out a way to introduce some creative destruction in education and health care. Once things get moving, my guess is that we will see several months of record job growth, in which case the same economists who are whining about the lack of stimulus will be attributing the recovery to aggregate demand, resulting from wise fiscal and monetary policy.

Comments and Sharing

COMMENTS (15 to date)
volatility bounded writes:

Kling is leaving out the fact that firms use recessions to legally offshore jobs without running afoul of lawsuits or with reduced bad PR. During the recession, you can lay off in high wage countries due to economic pressure. And during the recovery, you can hire and expand production in low wage countries.

Firms did this during both recessions in the 2000's.

ColoComment writes:


How many of the currently unemployed or underemployed do you think are like me: I'll be 65 years old next May. In November my employment as a business/corporate paralegal was reduced to 20 hours/week from full-time. Unemployment will pay me roughly the equivalent of my now 20 hours/week, and I can spend more time with my grand kids. If a full-time opportunity appears in response to my UE-mandated job searching, I'll take it. But, truly, really, given the current job market, what do you think the opportunities will be for a paralegal with 25+ years experience, but who is within 2 years of social security?

Due to those circumstances, I fully anticipate spending the maximum time allowed on UE, and then applying for social security -- I don't anticipate ever returning to the work force.

Morgan writes:

ColoComment's comment is interesting, because there are strong differences in the change in labor force participation rate across age groups. Since December, 2000, labor force participation has actually increased for all 55+ age groups. It has decreased for all younger age groups. Here are the raw percentage changes by age group over the ten years (NSA):

Ages Dec-00 Dec-10 Diff
16-19.. 41.7.. 24.5.. -19.7
20-24.. 70.5.. 59.6.. -12.7
25-29.. 80.5.. 72.6.. -08.5
30-34.. 81.7.. 74.9.. -07.2
35-39.. 81.3.. 76.6.. -05.2
40-44.. 83.1.. 76.4.. -06.7
45-49.. 82.1.. 76.1.. -06.5
50-54.. 78.4.. 74.0.. -04.2
55-59.. 67.2.. 68.3.. +00.6
60-64.. 45.6.. 50.7.. +04.2
65-69.. 23.2.. 29.7.. +05.9
70-74.. 12.7.. 17.0.. +03.4
...75+.. 04.9.. 06.7.. +01.4

R Richard Schweitzer writes:

I think you have alluded to something that has been largely overlooked in the labor use area.

Generally labor costs were considered in terms of wages. Those wages were prices set in terms of money that fluctuated in value more or less in line with the overall economy.

Today we are dealing more with compensation in more aspects of labor uses, and that compensation has been affected by the uncertain variability of those segments which are not pure wages. They have been having increasing weight, particularly with the upper levels of skills.

ivan writes:

Typical libertarian response.
All possible answers seem to be found looking inward instead of outside of America, in a world were relevance is shifting and monetary policy in any case, is just counterproductive.

Just leave them be! and the magic of the marketplace will cure all our woes. Its like the limitless power of nature being left to do what it do best... to heal!, organic products! things in their natural state. If we can just have nature! And GOD...

There are no diseases in nature!
genetically modified yields and chemical products
are destroying our health and the worlds population!
State intervention will interfere in the noblest interest of the Holy american interpreneurial spirit that is second to none and the reason of American Power.

Everybody knows this!

Two Things writes:

How can "education" ever be a "leading sector?" What does the "education sector" produce? Who buys those products? Why would they want more?

I can see four main answers to the question "what does the education sector produce?" All may be true to some extent.

{1} The education sector produces better workers, mainly for other sectors. A school is somewhat like an oil refinery. It takes in crude pupils (oil) and sells refined graduates (POL). Some of the product is retained for use in the plant. Other sectors need graduates, so employers pay (indirectly) for education, which is therefore always a following, not a leading sector.

{2} The education sector produces entertainment (for students) and babysitting (for parents). A school is somewhat like a variety theater with on-site daycare. Parents and pupils (and taxpayers, thanks to rent-seeking teachers and parents) pay for school just like they pay for opera houses. To amuse students the education sector can utilize any amount of resources but produces mostly ephemera, so it can be arbitrarily large but never a "leading" sector.

{3} The education sector produces credentials or "signals" which the students add to their "human capital". A school is like a beauty parlor. The graduates look prettier than the new matriculants so other people/employers like them better/pay them more. However, if too many people get a Harvard degree (Garren hairstyle) it won't be enviable/fashionable any more, so schools compete to build exclusive reputations. A coalition of students, parents, employers (indirectly, as with {1}), and taxpayers (thanks to rent-seeking) pays for schooling. As with other status markers, competition based on educational credentials is just an arms race, so resources put into the education sector are nearly all wasted. As with {2}, the education sector can grow to arbitrary size but can never "lead" anything.

{4} The education sector produces make-work jobs for teachers and educrats. Mandatory-attendance laws and credentialism {3} ensure the "education workers" have some pupils to lord it over, but the main bargain is between "education workers" and the government. Like the EU's farm sector, the American education sector has long since lost sight of its original function and now runs on a rent-seeker voting-bloc dynamic (graduates are like the EU's butter lake, produced regardless of end-user demand at the controlled price).

{5} One minor answer to the question is that the educational sector produces scientific research results. Scientific research makes up a small portion of both effort and output of the education sector so we can ignore it for now.

I don't think the education sector can ever be a "leading" sector of the economy, however many resources it consumes. The entertainment {2}, credential minting {3}, and educrat-subsidizing {4} functions of the sector are inherently irrelevant or wasteful so far as productivity in the real economy is concerned, and the "truly educational" function of the education sector {1} seems inherently limited by demand from other economic sectors.

I think something on the order of 60-80% of the resources currently expended in the education sector are wasted (or misclassified, see {2}).

The biggest entreprenurial opportunity in the "education sector" is to improve the productivity of {1} (actual education), which would reduce rather than enlarge that portion of the sector in standard terms of capital and labor inputs (since the supply of apt pupils is inherently limited).

Entreprenurial effort can't make credentialling or signalling {3} more productive because of the arms-race. Providing particular credentials cheaper or faster just devalues them. Entrepreneurs can compete to sell low-value credentials to more (ever less sophisticated) people, and indeed, that has occurred, along with a hell of a lot of rent-seeking. Selling dubious credentials to dubious people does not constitute "economic leadership." We can't all be perpetual students and non-tenure-track adjunct profs--someone has to bake our bread or pull our espressos.

The last 30 years of (spectacular) growth in the education sector have given us a lot of {2} and {3}, some {1}, a bit of {5}, and a truly astonishing increase in overhead {4} (some of which is between-institutions arms-race stuff, but most of which is unadulterated waste (teachers unions, diversity bureaucrats, 14th assistant deans for student patty-cake programs) enabled by gigantic government subventions...).

Considering how the current bloat in education depends on ill-advised government subsidies, entrepreneurs can only make the sector larger by ravaging the taxpayers even more brutally. I don't think that will do the overall economy any good.

steve writes:

1) Most basic research is doe at the university level.

2) How many professions could function having workers go straight from high school to work? Engineers, architects, economists, physicians, lawyers, accountants?


Noah Yetter writes:

1. There is no aggregate production function any more.
There never was.

Few firms are in a hurry to start making new investments in capabilities.
Mine is, but the workers just aren't out there. At least, not at the right price... (sticky wages story?)

2) How many professions could function having workers go straight from high school to work? Engineers, architects, economists, physicians, lawyers, accountants?
Software engineers. We've actually hired two directly out of high school.

Tom Dougherty writes:

"4. Two potential leading sectors--education and health care--are sclerotic because of credentialization."

In terms of employment, I don't see Education and Health being sclerotic. Total nonfarm employment has essentially zero change from Jan. 2000 to Dec. 2010. The supersector Education and Health over the same time period has increased 32%. This CES supersector only contains private education. Looking at government education, while not as impressive, still shows healthy employment growth compared to the Total nonfarm employment with State government educ. growing at 20% and Local government educ. growing at nearly 9% over the same time period.

Even comparing Total nonfarm to Education and Health since the beginning of the last recession in December 2007 to December 2010 it is still hard to see how you could say that Education and Health have been sclerotic given that total nonfarm decreased by -5.3% while Education and Health increased by 6.5%. In addition, State and Local government education have been essentially flat since the recession began, which is still better than Total Nonfarm.

Don writes:

One of the most impressive aspects of the analysis of the recent recession, to me, is that commentators have been slow to properly identify the fact that we are simply reaping the fruits of our march toward globalization. Global trade couldn't only mean cheap goods and the rise of a global middle class without any cost -- there is no free lunch. Millions of jobs have been shifted from the West to the East, and those jobs will not come back, unless there is some major change in the West's view of trade.

To the extent that Asia is becoming the great new market, they are also producing the goods they desire in their market. What difference does it make to the West if Chinese consumers see increasing wealth and are able to buy Xboxes and Ipods? They produce Xboxes and Ipods. Apple could sell a billion Ipods in China, and while that would be good for investors in Apple, it will not create new American jobs. Global trade, as has been obvious to some of us for a long time, may be a net gain for the world, but when viewed from a purely Western perspective, globalization is a loser.

The good news: Past performance is not indicative of future results. Asia will suffer setbacks in the future, they will have their own recessions and depressions. The greatest threat to Asia at this time is mercantilism in the West that develops to rival its own. Protectionist policies will become main stream throughout the West, and the free flow of production capability will first slow, then reverse, as Westerners realize that they are committing economic suicide by flooding Asia with our money and jobs. Academics will wring their hands, and Asia will rattle sabers, but in the end it is by this process of the West acting in its own interest that we will again produce jobs and broad wealth.

Leroy Dumonde writes:

Arnold we're going through the Mother-of-all-cyclical-downturns-2.0. On your five points my immediate reactions are:

1. There is too still an aggregate production function. It's a model. As long as there's a modeler the model still exists.

2. Morgan's table debunks this:

Ages Dec-00 Dec-10 Diff
16-19.. 41.7.. 24.5.. -19.7
20-24.. 70.5.. 59.6.. -12.7

This group has never valued health insurance very highly. Young healthy people never do until it's too late...

3. This just doesn't add up! Manufacturing has been too small for many years to cause that big of a drop in employment.

4. Education and health care are (if I'm not mistaken) two rare sectors that are holding up relatively well. And look at Oregon where they've decided any ol' hillbilly can teaches some learnin' to the kids. Has education employment shot up there? I think not.

5. Again, Morgan's table shows this is bogus. Do you really think the kids are alright? That we've just entered the big slackoff?

Laura Tyson is right: it's an aggregate demand problem. Full stop.

Lord writes:

It is fairly clear that the mass of US workers are not competitive at current exchange rates. The reason education and healthcare have held up as well as they have is that they are nontradable to a large extent. Construction did well for the same reason as long as people believed prices only went up. Other sources of nontradable jobs are few and far between, so where will those jobs be created?

The equivalent of work leisure tradeoffs is market satiation, a lack of sufficiently desirable new products to be demanded. Really want to go with that one, especially when lack of demand seems so much more natural?

Mike writes:

I can assure you that the education sector is sclerotic with credentialism.

The other points dovetail nicely with my experience too.

Tom Grey writes:

#6 The jobs HAVE come back. In other countries, with similar office work skills and much, much lower wages.

Are companies hiring?
Mine is, but the workers just aren't out there. At least, not at the right price...

That wage price is now, like a Wal-Mart consumer price, based on globalization.

Only hard to export job sectors will be growing. Health, education, possibly some infrastructure construction... and gov't. The latter is full of very overpaid folk, especially gold-plated retirement.

Morgan writes:

To emphasize the magnitude of the differnces across age groups, I've replaced the raw difference in participation rate between Dec-10 and Dec-00 with the log ratios, which produces a nearly monotonic increase with age.

Ages Dec-00 Dec-10 ln(Dec-10/Dec-00)
16-19.. 41.7.. 24.5.. -0.53
20-24.. 70.5.. 59.6.. -0.17
25-29.. 80.5.. 72.6.. -0.10
30-34.. 81.7.. 74.9.. -0.09
35-39.. 81.3.. 76.6.. -0.06
40-44.. 83.1.. 76.4.. -0.08
45-49.. 82.1.. 76.1.. -0.08
50-54.. 78.4.. 74.0.. -0.06
55-59.. 67.2.. 68.3.. +0.02
60-64.. 45.6.. 50.7.. +0.11
65-69.. 23.2.. 29.7.. +0.25
70-74.. 12.7.. 17.0.. +0.29
...75+. 04.9.. 06.7.. +0.31

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