Why are so many people still out of work?: the roots of structural unemployment

Here is my latest New York Times column, on structural unemployment.  I think of this piece as considering how aggregate demand, sectoral shift, and structural theories may all be interacting to produce ongoing employment problems.  “Automation” can be throwing some people out of work, even in a world where the theory of comparative advantage holds (more or less), but still this account will be partially parasitic on other accounts of labor market dysfunction.  For reasons related to education, skills, credentialism, and the law, it is harder for some categories of displaced workers to be reabsorbed by labor markets today.

Here are the two paragraphs which interest me the most:

Many of these labor market problems were brought on by the financial crisis and the collapse of market demand. But it would be a mistake to place all the blame on the business cycle. Before the crisis, for example, business executives and owners didn’t always know who their worst workers were, or didn’t want to engage in the disruptive act of rooting out and firing them. So long as sales were brisk, it was easier to let matters lie. But when money ran out, many businesses had to make the tough decisions — and the axes fell. The financial crisis thus accelerated what would have been a much slower process.

Subsequently, some would-be employers seem to have discriminated against workers who were laid off in the crash. These judgments weren’t always fair, but that stigma isn’t easily overcome, because a lot of employers in fact had reason to identify and fire their less productive workers.

Under one alternative view, the inability of the long-term unemployed to find new jobs is still a matter of sticky nominal wages.  With nominal gdp well above its pre-crash peak, I find that implausible for circa 2014.  Besides, these people are unemployed, they don’t have wages to be “sticky” in the first place.

Under a second view, the process of being unemployed has made these individuals less productive.  Under a third view (“ZMP”), these individuals were not very productive to begin with, and the liquidity crisis of the crash led to this information being revealed and then communicated more broadly to labor markets.  I see a combination of the second and third forces as now being in play.  Here is another paragraph from the piece:

A new paper by Alan B. Krueger, Judd Cramer and David Cho of Princeton has documented that the nation now appears to have a permanent class of long-term unemployed, who probably can’t be helped much by monetary and fiscal policy. It’s not right to describe these people as “thrown out of work by machines,” because the causes involve complex interactions of technology, education and market demand. Still, many people are finding this new world of work harder to navigate.

Tim Harford suggests the long-term unemployed may be no different from anybody else.  Krugman claims the same.  (Also in this piece he considers weak versions of the theories he is criticizing, does not consider AD-structural interaction, and ignores the evidence presented in pieces such as Krueger’s.)  I think attributing all of this labor market misfortune to luck is unlikely, and it violates standard economic theories of discrimination or for that matter profit maximization.  I do not see many (any?) employers rushing to seek out these workers and build coalitions with them.

There were two classes of workers fired in the great liquidity shortage of 2008-2010.  The first were those revealed to be not very productive or bad for firm morale.  They skew male rather than female, and young rather than old.  The second affected class were workers who simply happened to be doing the wrong thing for shrinking firms: “sorry Joe, we’re not going to be starting a new advertising campaign this year.  We’re letting you go.”

The two groups have ended up lumped together and indeed a superficial glance at their resumes may suggest — for reemployment purposes — that they are observationally equivalent.  This discriminatory outcome is unfair, and it is also inefficient, because some perfectly good workers cannot find suitable jobs.  Still, this form of discrimination gets imposed on the second class of workers only because there really are a large number of workers who fall into the first category.

Here is John Cassidy on the composition of current unemployment.  Here is Glenn Hubbard with some policy ideas.


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