What’s the actual problem in the labor market?

by on August 11, 2010 at 12:30 am in Economics | Permalink

David Leonhardt has a very good piece which presents some relevant facts about unemployment.  Felix Salmon summarizes one part of the piece as follows:

In 2008, only 13.2% of the labor force was unemployed at some point. That compares to 18.1% in 1980, and 22% in 1982.

Real wages, which normally fall during recessions, have risen in this one. Even nominal wages are up.

Also from Felix:

The overriding impression is of most Americans actually doing OK, with an unemployable underclass bearing the brunt of the recession.

To those observations I would add that corporate profits are doing fairly well.

Those facts, in a nutshell, are why I am not AD-obsessed when it comes to explaining the current economy. 

Furthermore, I don't buy the idea that so many of the unemployed are stupidly and stubbornly holding out for a higher wage than they can get, while at the same time they can be reemployed by a mere bit of money illusion.  There are so many blog posts written to the Fed, to Bernanke, etc. "Hey guys, goose up the money supply!  Bernanke, read your old writings!" 

Yet I have seen not one such post to the unemployed: "Hey guys, lower your wage demands!  It's good for you!  You'll get a job and avoid the soul-sucking ravages of idleness.  It's good for the country!  It's good for Bernanke, you'll get those regional Fed presidents off his back!  Why not?  The best you can hope for is to get tricked by money illusion anyway!  Show up those elites and get to that equilibrium on your own!  Take control!" and so on.  If such posts would seem patently absurd, we should ask what that implies for our underlying theory of current unemployment.

I sooner think of these unemployed individuals as having gone down economic corridors which are no longer promising and not facing any easy adjustment to set things right again.  Furthermore I consider that portrait of their troubles to be more consistent with the general tenor of liberal, left-wing, and progressive thought, not to mention plain common sense.

Elsewhere, Matt Yglesias has an interesting post on the recalculation argument and its relation to political ideology.  He claims that promoting the argument will make people like capitalism less and that may well be true.  I would add:

1. The Industrial Revolution also was a tough slog for quite a few decades.  Yet it was both worthwhile and it gave capitalism a bad name for a long time.

2. Alexander Field argues that the Great Depression brought greater productivity improvements than any other decade in U.S. history.

3. If one wishes to consider state intervention, in light of recalculation, one is pointed in the direction of direct employment of the struggling workers; the recalculation argument does not rule out intervention per se.  This advice could potentially be useful and I don't see why even libertarians should consider it necessarily worse than $800 billion of fiscal stimulus.

4. Like Matt and many others, I favor a more expansionary monetary policy.  But the last stimulus was oversold and there is no reason to oversell this one.  We really don't know how well it will work (and I'm not referring to liquidity traps).  But if the Fed tries more monetary expansion, we'll see how much of the current employment is cyclical and AD-related in the traditional sense.

5. By its very nature, a recalculation argument ought to be somewhat agnostic as to how much (and what kind) of recalculation is actually required.  See #4.

Addendum: Bryan Caplan comments, non-ironically.

Frank August 11, 2010 at 1:04 am

The minimum wage has not often played a big role in US macro economic conditions, but the last rise may be significant.

Jonathan Finegold Catalán August 11, 2010 at 1:31 am

Prof. Cowen,

As an above comment highlights, minimum wage has actually not had a significant impact as far as the present unemployed go (insofar as to the reason why they are unemployed). Most unemployed were making well above minimum wage. I wonder if wage-stickyness has more to do with government-inflated costs to break labor contracts, more so than anything else.

mulp August 11, 2010 at 3:16 am

I personally would strongly prefer direct employment of struggling workers to stimulus aimed at making sure that unionized public employees (including the politically popular teachers, police, and fire fighters) don’t have to forgo raises.

Sounds like you want to promote mortgage defaults and foreclosures to drive down real estate prices so tax revenues will fall and force wage cuts and more foreclosures….

Or do you think that the government should force payment reductions for workers who have their wages reduced?

Andrew August 11, 2010 at 3:48 am

Mulp,

If you are a firefighter and you look to your left and their is a doctor, and you look to your right and there is a lawyer, you overbought. And it’s not the employed that generally lose their homes anyway. IIRC It’s the combination of being underwater and then losing a job. So, I think John Thacker’s approach addresses your concern moreso than propping up the wages of the employed.

Maybe houses need to come with put options to claw back from speculators, but that doesn’t exist. There is no free lunch getting out of the housing bubble.

Jacqueline August 11, 2010 at 4:59 am

“I sooner think of these unemployed individuals as having gone down economic corridors which are no longer promising…”

Or they’re just the wrong age.

TomG August 11, 2010 at 5:54 am

From the article you just referred to in the onion: “The fact is, right now, today, approximately a third of the country’s manufacturing positions are vacant. Auto plants across the country, especially in Detroit, are sitting there just waiting for people to come in and build cars.” Can’t stop chuckling, thanks!

dearieme August 11, 2010 at 6:12 am

Kill two birds with one stone. Employ the unemployed to round up the illegal immigrants and drive them in buses back to Mexico.

thehova August 11, 2010 at 7:36 am

A few years ago I temped in the front office of a struggling factory. I would often talk to the workers. Their situation looked bleak. Most not only didn’t have a college education, but many also dropped out of high school. They appeared to lack the basic writing and thinking skills and “polish” that better educated workers gained from furthering their education.

It’s in fashion these days to claim that too many people go to college. I couldn’t disagree more. Of course, you don’t need a college education to work in a factory, but it does give you more of an ability to adapt to a changing environment.

AC August 11, 2010 at 8:11 am

Yglesias says recalculation “implies radical underlying flaws in the capitalist economic model.” Only if you compare it to utopia.

Michael Foody August 11, 2010 at 8:19 am

The obvious rebuttal to your “hey unemployed” analogy is that there are a lot of unemployed people but very few people sitting on the fed. The fed is far more likely to listen than a broad demographic of millions.

ian August 11, 2010 at 9:11 am

The unemployed aren’t the problem. Their lack of employment is a problem but it is not a problem of their making. The problem is with the folks who have money but no recognition of the fact that with money comes power and with power comes responsibility.

wlu2009 August 11, 2010 at 9:26 am

Anon, capital projects are capitalized, not expensed so decreasing capital expenditures will not artificially inflate profits. Second, if expenses are down less than revenues, that means margins are up, meaning companies are being more productive. Increasing productivity is most certainly a good thing for the long run.

Cliff August 11, 2010 at 9:34 am

Matt, what are you talking about? The transition from feudalism and slavery to capitalism was marked by an increase in government force? I doubt it. Does anyone really have to be forced to work at a wage they freely agree upon?

not_scottbot, there are no similarities between feudal lords and capitalists because feudal lords employed slaves and capitalists have a “volunteer” work force.

Thomas August 11, 2010 at 10:07 am

My take on the recession has always been to compare the offered explanations to the offered explanations of the Great Depression, mostly to see if we’d learned anything. I can’t help but read this as an implicit argument that the Great Depression was a “recalculation” depression, and that monetary policy was largely irrelevant. Which may be right of course, but wouldn’t have been considered a likely explanation two years ago. Have we grown wiser since?

Thomas August 11, 2010 at 10:41 am

I should say, I would in fact give the advice, just as Caplan would. But the effects of a change in monetary policy would be expected be broader than just a change in the desired wage level for the currently unemployed.

Doc Merlin August 11, 2010 at 11:54 am

The stylized facts almost perfectly fit the story of price floors on wages.

Blunt Instrument August 11, 2010 at 1:09 pm

Illustrative anecdote: recently unemployed, experienced and graduate-degreed engineer gets an offer for a rather specialized technical position. Offer is over 20% below market and will expire in 2 hours. When engineer tries to bargain for more time, the offer is pulled.
Some companies are feeling their oats and starting to utilize their considerable advantage in bargaining power. This is about to get interesting.

Tom Grey August 11, 2010 at 1:31 pm

When one says “capitalist”, does one always mean “entrepreneur”? Private, Peaceful jobs are offered by entrepreneurs (not gov’t), not necessarily capitalists (investors in entrepreneurs / making money).

Mike S was best:
In some cases it means that a lot of companies and knowledge about how to serve customers becomes meaningless, because the money has been transferred to other parties. And new companies need to spring up to serve those companies, etc. The problem is not just wage rigidities from this view point.

As we move to an info society, one gains detailed knowledge thru multi-years experience in one firm. Most of that high-value knowledge has little value to other firms, even competitors — because it’s of a “how we do it here” variety.
At VP / director level, where it’s ppt decks and Excel / OLAP spreadsheets of numbers, choosing the right metric to watch and driving improvement — less needs to be known so upper-mid manager skills transfer better. But computer productivity flattens orgs and leaves fewer spots like this.
Front line managers, who actually have to know details about the org runs, have detailed knowledge that is (mostly) of little value to others (the detailed info collection and validation for the director’s reports).

If one assumes that the avg US private sector worker is overpaid, and the average gov’t (force-funded) worker is grossly overpaid (unsustainably so?) — there is no obvious good policy towards renewed long term US growth.

But hiring the unemployed at low wages to replace gov’t workers who leave would get my support. Especially if there was first a freeze on gov’t wages; then a 2% decrease per quarter, per department and per division, until at least 10% have left (excluding retirement) — and all replacements would be from at least 1 year unemployed, at lowest starting wages, with internal folk getting promotions (but little or no raises; perhaps excluded from cuts for a year).

B G Shelton August 11, 2010 at 5:00 pm

Professor Cowen–“I sooner think of these unemployed individuals as having gone down economic corridors which are no longer promising”

The auto industry was one of the hardest hit by the current recession. Your theory says that some kind of bubble [low interest rates?] pumped up new car sales to unsustainable levels; and now they’ve fallen back.

Unfortunately, the facts contradict your theory. There was no bubble in the auto market: new vehicle sales ran steadily at 16 – 17 million p.a. over the decade 1999-2008.

Yet the auto industry was one of the hardest hit by the recession … unit sales dropped to 10 million vehicles in 2009 (down 40%).

Surely, the problem isn’t that people suddenly lost interest in autos and shifted their spending to lawn furniture or whatever. Rather, demand shrank drastically in the auto industry, and lots of others.

Sounds to me like a shortfall in aggregate demand.

Anand August 12, 2010 at 2:20 am

How many decent corridors do they have left though? I work in engineering and have been part of a few outsourcing and automation discussions. Anecdotally, it seems the only significant comparative advantage low-skill workers in the US have at the moment is location. Language can be another. Not much else though.

James M. Martin August 13, 2010 at 1:54 am

I believe the main problem — right now — is the failure of the administration to attempt something along the lines of the Civil Works Administration, only this time concentrating on the areas of infrastructural remediation. It does not take a long time to train a person to shovel gravel into potholes or, for that matter, pour concrete into forms for bridges, or any of the things the government hired civil employees to do during the New Deal. Now before our brethren of the right protest that this would add to the deficit, we could accomplish a pay-down of the deficit even as we reemploy the work force for the infrastructural rejuvenations by dedicating part of monies from expiration of the tax break for the super-rich (estimated to be 1% if you are a Democrat and 4 or 5% if Republican), cease policing the world for oil supplies, develop new sources of energy, put some money into research into the alternate sources and methods of adaption, and put people to work rebuilding the country in a War to truly end all wars, the War on Unemployment.

Tomasz Wegrzanowski August 15, 2010 at 2:15 am

> Alexander Field argues that the Great Depression brought greater productivity improvements than any other decade in U.S. history.

How solid is this result? Numbers in Field’s paper don’t hold if you average all the way from 1929 to 1948 – growth will be lower than 1920s, 1950s, and 1960s.

So it all depends on his assumption about how much of 1929-1948 productivity growth can be assigned to 1930s and how much to 1940s.

If you accept Field’s arguments that 40s’ growth was very low, then indeed 30s’ growth was very high and recalculation story makes sense. With even slightly higher estimate of 40s’ productivity growth estimate 30s don’t look that good any more and the entire recalculation story collapses.

Or a very quick alternative story: Let’s assume productivity growth depends mostly on technology, which comes from research investment with a decade or so lag (or anything else with lag – childhood nutrition, education etc.). Then 30s’ good productivity growth comes from 20s’ high investment – and 40s’ disastrous productivity growth comes from 30s’ low investment. If this was true, it would have implications exactly opposite of recalculation story.

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