Arnold Kling  

Timothy Taylor on Long-term Unemployment

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Timothy Taylor writes,


We need a convincing theory of this third kind of unemployment--sluggish unemployment, tar-pit unemployment--and an associated sense of what policies are useful for addressing it. Firms as a group have high profits and strong cash reserves, but they are not seeing it as worthwhile to raise hiring substantially, preferring instead to focus on getting more productivity from the existing workforce. Are there ways to reduce the costs and risks that firms face when thinking about hiring? Many households are struggling with outsized debt burdens, including those who have mortgages that are larger than the value of their home. Are there policy levers to help them move past their debt burdens?

I strongly recommend reading the entire essay, although I do not see why "outsized debt burdens" are an issue for a jobless recovery. If they matter at all, presumably they matter because of aggregate demand.

The Scott Sumner answer would presumably be that monetary policy has been serially surprising the market with its tightness, so that the recession has been long and deep. It sounds like a good story when he tells it, but not when you stop and think about it. Or when you look at the decline in real unit labor costs.

The Tyler Cowen answer would presumably be ZMP, meaning that some workers now have zero marginal product. Or a marginal product that does not justify paying the minimum wage, in addition incurring the fixed costs of hiring, training, and supervising. I find this answer more plausible.

I also find plausible another answer that I could also trace back to Tyler but which I have pushed more extensively, and that is the PSST story. It takes a long time for entrepreneurs to grope their way to new patterns of sustainable specialization and trade once old patterns break up.


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COMMENTS (5 to date)
Hasdrubal writes:

What about regime uncertainty, where employers are reluctant to hire because they are unsure of what wages and overhead will be in a couple years after the health care and consumer protection/financial services legislation kick in? (With some added environmental rules via the EPA to boot.) And insecurity over future market conditions because Europe and China look to be teetering on the brink of some major financial problems. This certainly wouldn't explain everything, but it could be a contributing factor and exacerbate other problems.

J Storrs Hall writes:

Seems to me that PSST and ZMP have a synergy as an explanation. When we build a machine in general, early versions of it aren't terribly efficient; it's hard enough to get it to work at all. Then comes the learning curve, increasing efficiency, and so forth.

Same with a business, I would imagine. Firms with well-understood functions can mechanize and cater to workers so they have a more streamlined job -- a case in point is those monster cash registers at fast food joints with a button for each product, or indeed scanners at grocery stores.

A newly invented business doesn't have that well-developed automation to make use of the, let's call them, LMP workers.

BZ writes:

Robert Higgs knocked me over with this post yesterday. Makes me feel like the unemployment problem is small potatoes. I'd love to see some theories on this one:
http://blog.independent.org/2012/03/06/cessation-of-labor-force-growth-since-2008/

Jasbo writes:

I'm with Hasdrubal. I find it disturbing when we as economists discuss real business decisionmaking that we don't actually get down and dirty with real business psychology, especially in small businesses.

"Aggregate demand" doesn't hire a soul; individual business managers and owners do. Their perceptions of regime risk, limitations on their flexibility, employee quality and commitment, expectations of labor cost changes are rarely treated with the respect they warrant. A lacuna in macro, and insufficiently modelled in micro.

Chris Koresko writes:

@Arnold Kling: Fascinating post. The Higgs post BZ links to is good too.

Fiscal stimulus doesn't look like a promising approach to reducing unemployment. We've had 4 or 5 trillion dollars in deficit spending over the last few years. Another 1 trillion on top of that would seem unlikely to do much.

I'm not sure how much significance to attach to the "jobless recovery" behavior of the last three recessions. On Taylor's plot it looks like that effect is just a lag between the resumption of GDP growth and the growth in employment.

Taylor: Are there ways to reduce the costs and risks that firms face when thinking about hiring?

This strikes me as the key question. I have a few policy ideas, for whatever they're worth:

* Repeal ObamaCare. End the favorable tax treatment of employer-provided medical insurance. Use the authority under the Commerce Clause to break down state-level barriers to interstate trade in insurance. Establish medical malpractice courts with detailed recommendations for damage awards for various kinds of malpractice. Break down restrictions which keep nurse practitioners and other professionals from using their skills to their full extent. Break down restrictions on the supply of MDs.

* Make it harder for employees to sue their employers. Roll back recent changes that encourage suits for discrimination and other grievances that are difficult to assess. Adopt reasonable standards of proof.

* Pass right-to-work laws where they're not already in place. States with such laws tend to have lower unemployment, if memory serves. Disband the NLRB or, at a minimum, force it to return to its intended role as a non-partisan mediator.

* Stop extending unemployment benefits. Turn them into "wages" for job-hunting, and/or temporary salary subsidies for newly-employed workers.

* John Taylor showed that employment correlates very well with private (not government) investment. So reduce or eliminate tax provisions that discourage companies from bringing foreign profits to be invested in the U.S. Cut the top marginal tax rate (to make small business more profitable) and reduce or eliminate corporate taxes (to stimulate bigger businesses).

* Clean up and drastically shrink the EPA, DoA, DoE, and other regulatory agencies which are imposing large and mostly pointless burdens on US companies.

* Scale the FDA back to its original mission of monitoring the safety (not the efficacy) of drugs and medical treatments. Require it to authorize distribution and use of medicines which are approved by any two of its counterparts in countries with advanced medical systems.

* Scale down the FCC. Its original basic mission of avoiding signals interference in commercial radio is probably obsolete, and it is attempting to expand into new areas (notably the Internet) where it is likely to do a lot of harm. Define its mission restrictively.

* Open up oil reserves for drilling in the Gulf of Mexico, Alaska, etc. which are currently being explored and exploited at well below pre-recession levels. Expedite approval of energy infrastructure projects (pipelines, transmission lines, etc) and new energy projects (renewable and conventional power plants, etc.) Consolidate regulation into one or a few agencies which have the authority to issue a final 'go-ahead' which is not subject to being overridden by other agencies within the government, including (if possible under the Constitution) the courts.

* Streamline immigration laws to allow skilled foreigners to invest their talents and money in the U.S.

Note that any of the four Republican presidential candidates would probably push a lot of these and similar ideas. The incumbent would likely oppose all of them, since they run directly counter to the direction he as taken so far.

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