The speed of labor market adjustment

by on July 16, 2010 at 1:23 pm in Economics | Permalink

Ezra Klein reports:

Notice that adding new jobs at a rate of 200,000 a month would take us 150 months — or 12.5 years — to get back to normalcy. So far, only April has seen more than 200,000 in non-census jobs growth — and even then, just barely.

This in my view is a puzzle for all theories of labor market adjustment.  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.

If monetary velocity fell by eleven percent, is it the view of the Keynesians that the required nominal wage adjustment takes so many years?  Hysteresis means that unemployment gets "baked in" to some extent, but if anything you might expect that to speed up shorter-term adjustment in the work force, to avoid such a fate.

Does the required "recalculation" take so long?  I find myself coming back to the view that many previously employed workers simply have a current marginal product pretty close to zero.

Addendum: Arnold Kling comments.

1 john July 16, 2010 at 1:33 pm

We hear a lot about differences between “fresh water economists” and “salt water economists” but there are other views. How about some “water on alternate days economics”?

They are out there and it turns out some alternate theories line up with the evidence pretty well. We’ve been hearing that the bond markets are going to attack our government debt any second now for 40 years: hmmm, maybe something really did change 40 years ago when Nixon took us off gold.

2 Bill July 16, 2010 at 1:46 pm

Klein’s analysis assumes that all labor is fungible, whereas persons have training and backgrounds, which, until their market recovers, is unemployable, eg, carpenters, real estate agents, mortgage brokers, etc., that have been tied to the construction and home building market, and those industries that have lived off of new home formation.

I’m more interested in the composition of the labor market, the segments that have been out the longest, and the ones that are likely to be out longer.

Retraining anyone? Diversifying skill levels anyone?

3 Mattyoung July 16, 2010 at 2:26 pm

Deeply fundamental, powerful and cheap technology is being deployed across all economic sectors. The stuff is made of sand and the software is reusable.

4 Keith July 16, 2010 at 2:35 pm

“I find myself coming back to the view that many previously employed workers simply have a current marginal product pretty close to zero.”

Quick, somebody apply the O-Ring Theory of Production to explain labor market rigidities!

5 Joshua Holmes July 16, 2010 at 2:39 pm

This is the post-credit era. There is a new normal, because debt-fueled growth cannot continue. 2005 will never be here again.

6 DPR July 16, 2010 at 2:47 pm

The problem with so much of the analysis and the proposed policy prescriptions is this warped notion of “normalcy.” What does that mean?

Are people measuring the recovery by when we return to the prior peak? If I recall correctly we were in a BUBBLE at that time and resources (including labor) were over-allocated to production. Why would we ever consider a disequilibrium “normal?”

If “normal” is the long run trend of employment growth, why should we believe there hasn’t been a structural break?

All the current policies are “hair of the dog” with the intention of calming the DTs of the decline from massive misallocation of resources funded by DEBT, both government and private. And that is why all of them are wrong. Government needs to stop picking at the scab and let it heal.

7 Dick Pimple July 16, 2010 at 3:11 pm

Is an O-Ring anything like a cock-ring?

8 E. Barandiaran July 16, 2010 at 3:33 pm

Tyler, thanks for acknowledging that labor markets are in a disequilibrium as well as that we cannot explain adjustment with equilibrium models. We can say a lot of things to explain lags and adjustments but we cannot deny that we don’t know what is going on when markets are in disequilibrium. Question: how much has disequilibrium macroeconomics progressed since the second edition of Patinkin’s great book on money was published?

9 babar July 16, 2010 at 3:37 pm

> I find myself coming back to the view that many previously employed workers simply have a current marginal product pretty close to zero.

don’t you think that at the very least, some of the unemployed people could be administering services for other unemployed people, and that this would be a net improvement, if some of them just had _more money_?

10 jb July 16, 2010 at 3:50 pm

Elaborating on Matt – I blame Information Technology, at least in part – we software guys are steadily and systematically eradicating low-skill jobs and replacing them with software, robots and networks. Training can only do so much – no training in the world will make me a good salesperson, or make a salesperson a good software developer.

I don’t see a good outcome here for employment – over time software and robots will perform virtually all low-intellect work. Diamond Age, anyone?

11 Anthony July 16, 2010 at 3:51 pm

In my house-buying experience, the majority of realtors had a negative value-add to the sale. Retraining them to add value for their future employers may not be easy.

12 Andrew July 16, 2010 at 4:10 pm

I’m having a garage built. The contractor took two weeks off in the middle to go on vacation. This is a guy who is building a garage for 1/3 the cost that I had another guy quote me for about two years ago.

As you all know, my Mexican quit showing up to mow my lawn. That’s after he had already quit showing up over the previous Winter and I called him up to see what was up. He came back a couple times and we made plans for him to plant some shrubs. It’s not like he got deported (Steve), he lives 5 doors down.

13 Scoop July 16, 2010 at 4:33 pm

I think Tyler overestimates the ease of firing people. (Has he ever worked at an actual private company?) In theory, companies can fire for cause pretty much immediately and “cause” is defined pretty broadly. In practice, most companies are terrified of firing anyone who cannot be documented as wildly incompetent and physically violent (preferably both) for years on end — because juries tend to view “cause” incredibly narrowly.

Also, most companies really, really hate to fire people because it’s really, really hard. You feel terrible doing it. It demoralizes the entire office, not just for a day or two, but indefinitely. (Who knows when more people will be fired?) So you just don’t hire people unless you’re pretty certain that you’ll be able to keep them for years and years to come.

I’m not suggesting there’s nothing to his ideas about the low value of most people who are currently unemployed, but while it’s clearly much easier to fire folks in (most of) the U.S. than it is in Europe, it simply isn’t that easy.

14 Jesse July 16, 2010 at 4:57 pm

The crisis gave firms a politically feasible way of offloading expensive labour. Many of those displaced jobs have been filled by workers overseas.

15 Robert July 16, 2010 at 5:34 pm

Apparently Cowen lacks “keenness of intellect”. He said, “…many previously employed workers simply have a current marginal product pretty close to zero”. Christopher Bliss wrote:

“All optima imply marginal conditions in some form. These conditions are part of an overall solution. Neither they nor the quantities involved in them are prior to the overall solution. It reflects badly on economists and their keenness of intellect that this was not always obvious to everyone.”

16 Bill July 16, 2010 at 5:56 pm

Agree with Brynjolfsson above.

The next frontier of restructuring is healthcare, government service, and higher education.

17 Rahul July 16, 2010 at 6:28 pm

I agree there is a restructuring but feel that Erik Brynjolfsson is overstating IT’s relevance in the immediate phenomenon. How can IT be directly attributed to the lack of rehiring, say, in sectors like restaurants, equipment manufacturing and many others? Of course, outsourcing, or mechanization etc. can be the culprits but that’s hardly IT?

Did IT really have that big a role in this current lack of re-hiring? I fail to see the link. I’m not denying that IT has had a huge impact over the last 15 years but can’t see anything huge in the immediate phenomenon.

18 E. Barandiaran July 16, 2010 at 7:42 pm

Tyler, I see that your post on disequilibrium macroeconomics has become an invitation for an open thread. I’m sure you are missing the disciplinary power of a good theory.

19 E. Barandiaran July 16, 2010 at 8:01 pm

Tyler, it’s like being at 7 am in a sunny day in a square in Changchun, China, surrounded by retired workers from Mao’s old Truck Factory No. 1, each one struggling to tell me a story about why the factory should be expanded rather than closed, while their wives practice tai chi. Ah, the good days in which I was paid to enjoy an open conversation.

20 mgunn July 16, 2010 at 10:06 pm

Any way to measure jobs in the black market? Is drug usage up?

21 capitalistimperialistpig July 17, 2010 at 12:38 am

TC – …many previously employed workers simply have a current marginal product pretty close to zero.

Yes, and very likely to continue as deflation makes money more valuable under the mattress than buying goods or sevices. It is convenenient for the oligarchy though – the less income everyone else has the cheaper it is for them to buy power and luxury.

22 Dan H. July 17, 2010 at 3:33 am

If the slow rate of employment growth is due to general trends like the Internet, or automation, or difficulty in firing, then you’d expect job creation trends to be that low all over the developed world. But they’re not. Canada, for example, is creating jobs at almost ten times the rate per capita of the U.S’s rate. I think Canada has even beaten the U.S. in absolute number of jobs created, despite having an economy 1/10 the size. Australia created 45,900 jobs in June, three times what economists forecast. Canada’s rate was five times what economists had forecast.

It would be worthwhile to think about whether America’s jobs problem is somewhat unique to the American situation. Personally, I think there’s just too much risk and uncertainty priced into the market right now, and it’s keeping all the money on the sidelines. The relationship between business and government in the U.S. is changing rapidly, and no one’s quite sure how to plan for it.

23 Mr. E July 17, 2010 at 7:48 am

We haven’t had a full 2 years of employment growth above 250,000 in a decade. I don’t know what you guys are talking about, but our economy hasn’t created jobs for a long, long time, despite the lowest taxes on capital formation in a generation.

We should invert the taxes on employment and capital gains. We don’t really have a problem right now forming capital, but employment has sucked for a full decade. Look at the labor force participation numbers and income gains for everyone but the top 5%.

A marginal productivity of zero. Is is possible for a post to have negative value? This one might.

24 Jon July 17, 2010 at 11:31 am

Re: I find myself coming back to the view that many previously employed workers simply have a current marginal product pretty close to zero.

How is that possible? Marginal product worth less than it was– yes. But zero? Come on, it’s not like we’ve had some massive technological revolution in the last couple years that have made whole classes of skills outmoded in the way that buggy-whips and butter-churns and spinning wheels are.

25 Denver July 17, 2010 at 4:50 pm

All I can tell you for fact is; I’m going to be unable to pay rent or eat come August 1st. My benefits ran out 6 weeks ago. Only States with unemployment above (8.5%?) have 99 weeks of benefits. I think I received about 50 weeks over 2 years of unemployment, what with the delays and approvals and not qualifying for but $700 out of the first 26 weeks (due to leaving one job voluntarily and not being at my last job more than 5 calender quarters).

401k? Gone. House? Gone. Car? On Craigslist.

My last job was as a software conformance Release Manager for [fortune 50 company] where I made $125,000/yr. Prior to that I was a Video surveillance engineer for [federal agency] at 105,000/yr. I’ve been in IT since 1977. After the 9/11 economic slowdown, I bagged groceries for two years before landing the [federal agency] job. No one bags groceries in Denver.

Running out of benefits hasn’t made finding a job any easier for this 55 year old. I am told I am over-qualified, under-qualified and unqualified. Which, I suppose, is better than telling me I’m too old. Though I was asked by a Human Resources person if I had any problems working with “young people”.

So, no benefits. 55 years old. Savings gone. Soon to be homeless. Soon to be hungry. Which is better, me homeless or receiving emergency (and if this ain’t an emergency . . .) unemployment compensation? I would happily participate in the WPA or CCC right as well. Anything.

Is breaking bad worse than slow starvation, living in a shelter, and eating at a soup kitchen? I’m just asking, but dang it, I am about at the end of my particular rope and there are few options left.

Well, even as a homeless bum, I’ll still vote Republican.

26 John July 17, 2010 at 5:16 pm

I’m a financial advisor (recovering mortgage broker) and my job is to talk to people all day long about their financial situation.

To a man, any person who tells me they are unemployed goes on to say that they have no intention of looking for work until their unemployment insurance runs out. The only exception to that is where that person is the sole breadwinner in the household.

Everyone else has decided to just cut back on discretionary spending and take a 2 year vacation. Some even say that they like being at home and doing domestic stuff so much, they are contemplating never going back to work.

Which leads to the shocking conclusion that if you pay people to stay at home and tend their children and their hobbies, that is exactly what they’ll do.

27 Doug July 17, 2010 at 6:02 pm

Jon, your comment gives me a springboard to make an observation. The 1930’s depression followed the explosion of 1920’s technical innovations — radio, movies, cheap trucks and automobiles, airplanes — if you think about it the list just goes on and on. These new technologies made the old pattern of doing business obsolete. Consider how many businesses, for example, depended on horses to be profitable. Not just buggy whips, but wagon makers, farmers who grew the grain the horses ate, extra trains to take the grain to the cities and distribute it — few businesses perhaps depended wholly on horses, but all those whose “horse” fraction exceeded their profit margin would obviously go bust. And horses were just one of the big changes forced on the economy. Cheap cars and trucks means living in suburbs — there goes all the tenement real-estate, losing its value because no body needs to or wants to live in the city near the factories any more — which means of course that the old factories lose value and have to be moved as more and more goods move by truck instead of train. The thing is, before the economy shakes out and discovers the best way to use all these shatteringly new technologies, most people haven’t the slightest idea what needs to disappear, and if the government’s answer is basically to subsidize the old economic structures, it’s just holding back the needed change. We have over the last 15 years experienced a similar growth of shatteringly new technologies — internet, widespread computing power, cell phones — and like in the 1930’s no one knows yet what the new and successful economic patterns will be. Until people figure out what the new economic patterns are, no one can know how to use all those unemployed people put out of work by the collapse of the old. Hence there is little demand for the potential labor of unemployed workers, and Tyler Cowen is correct saying that their labor — now, in our state of ignorance — has little marginal value. Similarly businesses have little clue how to invest their hoards of cash; they don’t know what the new patterns are yet either. Changing tax rates here and there could, maybe, increase labor’s marginal value, but the old economic patterns used to support these old sorts of tax rates. That these tax rates can no longer be sustained is just another symptom of the transition to the new, whatever it may turn out to be…

28 Doc Merlin July 17, 2010 at 11:40 pm

‘Maybe the companies you’ve worked for have been happy to say that. Engineers seem to work under brutal conditions. ‘

Engineers are also usually very conservative so maybe less likely to sue? Its also easy to organize engineers in such a way as you can lay off a project at a time, and then rehire them for other projects. In fact, one of my engineering friends was joking that half the people laid off at his work, got new jobs with the same company at an increase in pay.

29 Slocum July 18, 2010 at 7:36 am

How is that possible? Marginal product worth less than it was– yes. But zero?

You have to pay at any new employees at least minimum wage and also cover the other overhead costs–employer’s share of FICA, state unemployment insurance contributions and, on the horizon, either health benefits or a payment for not providing them. And then, of course, a new employee generally has to be trained and has low (or often negative) productivity during that time as the new worker is prone to mistakes, produces little, and takes the time of other employees who are showing them the ropes.

And, if the business conditions deteriorate or the new employee doesn’t work out, laying people off is really NOT easy. It definitely hurts morale of other workers, very much including the manager having to do the layoffs (telling somebody they’re fired in–especially in a bad economy–is about as pleasant a task as telling somebody they have cancer. Yes it’s much worse to hear either of those things, but giving out that news still seriously sucks).

And then there’s the ‘overqualified’ problem, which is non-trivial. If you have a low-paying position, do you really want to hire somebody with an employment history of positions paying much more? You know they’ll be gone as soon as an opportunity matching their old skill set and salary reappears, and there’s no way they can (or should) credibly commit to not leaving. Which means any investment you made in training that person is gone. And so on. It’s really not at all hard for an employee’s marginal productivity (what they produce for your business above and beyond the various costs of employing them) to be zero or negative.

30 Jon July 18, 2010 at 8:29 pm

Re: So, no benefits. 55 years old. Savings gone. Soon to be homeless. Soon to be hungry

Where is your family and your friends? Seriously, I do not understand how anyone ends up homeless unless they are mentally ill, violent, larcenous or adicted– and as such have no one willing to take them in during an emergency.

Re: Well, even as a homeless bum, I’ll still vote Republican.

No you won’t. You need an address to have a valid voter’s registration.

Re: Given the efforts of our current ruling class in Washington to outlaw any labor that isn’t Nx minimum wage, with N an ever-increasing positive integer, why would you be surprised that many workers are finding themselves not worth hiring?

The poster immediately above you was making many times the minimum wage, and not because the government mandated it. Blaming the minimum wage for this mess doesn’t cut it at all.

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