Arnold Kling  

PSST and Long-term Unemployment

Government and the Financial S... Kids Are Normal Goods for Both...

From CBS news:

About 6.2 million Americans, 45.1 percent of all unemployed workers in this country, have been jobless for more than six months - a higher percentage than during the Great Depression.

I read this as saying that, relative to the Great Depression, a higher percentage of the unemployed have been out of work more than six months, as opposed to a higher percentage of total workers have been out of work for more than six months. Still, it is a telling statistic.

The argument most often used against the structural unemployment hypothesis is that unemployment is too widespread. How can unemployment be structural if jobs are being lost in so many sectors?

The argument against the aggregate demand hypothesis is that the jobs lost are not coming back. How can it be aggregate demand if workers have to find new jobs in new industries?

I can imagine that it was easier during the Great Depression for unemployment spells to be shorter than they are today. Back then, whatever jobs there were often required manual labor, and work could be given on a temporary basis. So, you might be unemployed for a few months, have a job for a few months, then be unemployed again, etc. Today, jobs require more skills and more on-the-job training. The fixed costs of hiring a worker are more significant. Therefore, fewer short-term jobs are being created. Unemployment is much more likely to be persistent than episodic.

On the long-term job structure, Mark Thoma found this chart. I am not sure that I find it so readable. But you can see that the big occupations used to be "farmer" and "farm laborer." The advent of the tractor lowered the price of agricultural produce to the point where tenant farming became uneconomical and the marginal farm laborer could not necessarily add enough value to feed himself. In my view, that is what made the Great Depression so severe. Up until that point, farm labor had always been an occupation of last resort. But in the 1930s, farm labor began to fit Tyler Cowen's Zero Marginal Product category. The Dust Bowl exacerbated that problem.

Back to the present, and somewhat related, Alex Tabarrok writes,

Median female income tracks real GDP per capita much more closely than does median male income. It's unclear which, if any, of the above explanations are consistent with this finding. Increasing inequality, for example, predicts an increasing divergence in real GDP per capita and female median income but we don't see this in the graph

To me, the explanation for the data in Alex's post is that the job structure has changed to diminish the relative importance of physical strength. This brought more women into the labor force, and it reduced wages and employment prospects for a significant proportion of the male population. This changed marriage, as Wolfers and Stevenson have pointed out, from something based on production complementarity (women do housework, men do factory or farm work) to consumption complementarity. This results in more assortive mating by income, creating lots of household inequality.

Comments and Sharing

COMMENTS (11 to date)
B.B. writes:

Why does no one talk about the huge rise in the federal minimum wage from mid-2007 to mid-2009?

Should we surprised that high and long term unemployment is concentrated in those will low education and who are young?

Many have been made permanently unemployable by the minimum wage hike. The hike was not why they lost their jobs, but it may explain why they cannot be hired in a new job.

Seth writes:

Arnold - A recent HBR Ideacast guest told a story about jobs that reminded me very much of PSST. The ideacast is titled Rebooting America's Job Engine. I'm looking forward to reading the guest's book.

steve writes:

so where are all the republicans and tea party activists and newt gingrinch and some on the fomc (reading through the minutes) who said the problem was the 99 weeks of unemployment insurance and that we needed to end this and then employment would come back. same group that wants to cut spending and slash the deficit today to get the economy back to prosperity. when oh when are people finally going to call out this politicization and polarization of economics? read the other day that lucas said the recovery is weak because of higher taxes on the wealthy? huh? what higher taxes? this nonsense should really stop, it is a misdirection of the highest order that is doing much more harm than good. all in the aim of recapturing the white house

Lewis writes:

These theories make me uncomfortable about arguments used against protectionism.

My friend says "if we allow more Chinese steel imports, what will happen to steel workers?" I say, "They'll produce something else, and after a lag our gains will outweigh their losses."

My line assumes people aren't of given types that can only do one thing. They're not like machines.

PSST seems to say people are like machines. Rather than becoming less necessary, they can become literally unusable--like a floppy disk.

I guess that's why I like aggregate demand theories. They make the market seem more compelling.

Colin K writes:

Speaking as a small business owner who has added headcount every year since 2006, I think we need a simpler and lower-risk mechanism for short term and probationary employment. My thought is that you should be able to hire anyone as a 1099 for up to a certain number of days and dollars, no questions asked. Likewise, the paperwork is a huge impediment to sole proprietors hiring their first employee. There's the IRS, the state revenue agency, and the state unemployment agency to deal with. If sole proprietors were allowed to hire one or two people as 1099s without condition, you'd get more speculative hires and probably bring no small amount of work out from under the table.

Some of this will turn into permanent W2 employment and a lot won't. All of it will be better than the dole

Of course, the PPACA has just done the opposite of all this.

Alex J. writes:

Possibly: Aggregate demand (or bad monetary policy) caused people to lose their jobs. Regime uncertainty (or marginal tax rates/long term unemployment) keeps them from getting new ones.

I think the PSST explanation needs to model shocks. For instance, Scott Sumner's position was that the recession induced by the housing fiasco (i.e. PSST) was mild in both magnitude and 1st derivative. The crash was caused by the market's sudden realization of the Fed's bad monetary policy. This: PSST-unemployment is just structural unemployment and not cyclical unemployment, is the conventional view, and seems to me to still be the best supported by the evidence.

jb writes:


I guess that's why I like aggregate demand theories. They make the market seem more compelling.

Umm, it sounds like what you're saying is 'I like theory X, because it fits with my preferences better'.

Human jobs are becoming more complex, overall. (Can anyone dispute that?) As jobs become more complex, it takes longer to become productive at performing them.

So it's not that people are like floppy disks - it's like they're made out of stiff clay, and need time to be molded into the shape for the new job.

I expect that this problem will only get worse over time.

Thucydides writes:

What's missing from the story is the effect of debt buildup on PSST.

Lewis writes:

Yes my post was self-conscious. I was explaining reasons why I feel reluctant to accept PSST, not a good reason it's untrue.

A question though:

Human jobs are becoming more complex, overall. (Can anyone dispute that?) As jobs become more complex, it takes longer to become productive at performing them.

Why does a growing number of complex jobs make people who can't do those specific jobs unemployable? Moving wages and prices should ensure they are employed at a simple job w/ small marginal product at a low wage, like housekeeping or dishwashing, not that they are unemployable. I can imagine a behavioral idea whereby workers consider themselves to be of a "type" and "worth" and hold out for that work/wage mistakenly, but I've not heard that theory that expressed explicitly as part of PSST. Maybe I missed that.

Charles_Atlanta writes:

I probably don't read your blog as much as I should because, honestly, sometimes you strike me as a libertarian ideologue.

But, posts likes this bring me back! I don't know if you are wrong or if you are right about aggregate demand not causing unemployment; but this is a thought provoking post.

Mark @ Israel writes:

I don't understand everything in your explanation about the higher unemployment rate now than it was during the Great Depression. But what I can understand is that unemployment is somehow affected by this country's poor economy brought about by the political decisions and actions of the Obama administration. This includes enabling people to have the skills to be employed in the occupations demanded most these days.

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