Structural Unemployment a Myth?
Paul Krugman says there's zero evidence for structural causes for unemployment. It's just a demand problem. How do we spark demand, then?
Paul Krugman argues that “there isn’t any” evidence that our high unemployment is caused by structural issues such as workers untrained for the current job market or not available to move to where the jobs are. Instead, “all the facts suggest that high unemployment in America is the result of inadequate demand — full stop.”
If structural unemployment were real, he continues, “there should be significant labor shortages somewhere in America — major industries that are trying to expand but are having trouble hiring, major classes of workers who find their skills in great demand, major parts of the country with low unemployment even as the rest of the nation suffers.” Instead, “Job openings have plunged in every major sector, while the number of workers forced into part-time employment in almost all industries has soared.” And “the percentage [of employers] citing problems with labor quality is now at an all-time low, reflecting the reality that these days even highly skilled workers are desperate for employment.”
From this, Annie Laurie draws stark conclusions:
There is no shortage of jobs that need doing in America, from repairing our crumbling infrastructure to digitizing millions of pages of public records to adding desperately needed hands in schools, hospitals, and nursing homes. Many unemployed and underemployed Americans already have the necessary skills, and many more are capable of acquiring those skills—if the people at the tip of the economic pyramid were as interested in preserving our shared community as they are in preserving every last scrap of their hoarded power and resources.
Jacob Davies independently comes to a similar conclusion:
Well, nobody’s hiring because times are a little tight, but there’s plenty to do – the streets are dirty and broken, the pipes are old and need replacing, the bridge should be torn down and a new one put up.
[…]
There’s work to be done and people who want to do it. Why don’t we put them to work?
If we’ve got infrastructure projects in the pipeline and skilled workers drawing unemployment, it probably makes sense to match them up. Indeed, it’s part of what the stimulus package was supposed to do — and the part that I supported.
But, generally speaking, trying to convert unemployed white collar workers into low skill drudge workers in the public sector makes little sense. Especially if the problem is one of stifled demand rather than structural mismatch in the economy.
Sure, hiring all those people to empty bedpans and paint hospitals and whatnot would create “demand.” But it would be artificial and come at the expense of the 91% of the economy that’s somehow managed to overcome the demand crisis.
Further, why did the demand dry up two years ago? Did the greedy slime atop the economic pyramid just suddenly realize that they could get by without workers? That seems implausible. What social dynamic caused that change?
We did have a global financial crisis and recession. It’s technically over in the United States but is still going strong in most of Europe. And the world’s governments are still trying to figure out what new rules and institutions to put into place to prevent this kind of meltdown from happening again.
Presumably, some people who might otherwise be thinking of hiring new workers are waiting to see how this will all shake out. (It’s happening on a microcosmic scale in the NFL, for example, as owners are reluctant to sign players to long term deals before a new labor deal is in place.) But one would think this is only a small part of the problem.
So, where’s the demand? What’s going to bring it back?
Certainly, the demand for jobs that have been shipped off to India is unlikely to return. But that would be a structural problem and there’s no evidence such exists.
This doesn’t seem to square with the fact that I’m seeing all my CS students with MS getting hired. I don’t know what is causing the discrepancy. There was a time during the worst of the recession when finding jobs was difficult for students, but not now.
I can’t find a link now, but I saw a pretty good numeric argument against structural unemployment early last week. By the end of the week it had become a political football.
That’s kind of sad, because if folks could make a case with numbers they should do so, rather than defend the type of unemployment complementary to their political views.
FWIW, I think the answer has to be “some of each.” Homebuilders are obviously in a cyclical downturn. Outsourced workers, or workers supplanted by imports, are facing something structural. That’s something we can observe directly.
The question of whether most unemployed, or most long-term unemployed, are more like the home builders or more like the outsourced is a harder question.
“technically over” has so little meaning that it’s hardly worth mentioning.
It literally means that the contraction in GDP is over, not that GDP (let alone jobs) are back on track.
Another thought:
The phrase “jobless recovery” popped into being for a reason, it was an observation of something new: a recovery of GDP growth without predicted recovery in employment. If you don’t call that “structural” or “cyclical” do you call it something else?
There is a multiplier effect to government spending, especially when it brings employment to people in lower income brackets, because they spend a higher percentage of their income. In what way do you think this spending would “come at the expense” of the rest of the economy? Where do you get the 91% figure and what do you mean by it?
You don’t specifically mention the collapse in house prices. Because of record foreclosures and the number of home mortgages that are underwater, people can’t sell their homes to move to find work without taking a huge hit to their credit (either in foreclosure or short sale). Even the ones who don’t sell are experiencing a negative “wealth effect”, so they’re not spending even though they’re employed.
As Krugman says, there are only three sources of demand: business investment, consumer spending, and government deficits. Business investment and consumer spending have fallen off a cliff together. We need to prime the pump and there is only one source of fuel. Fortunately, interest rates are at historic lows, so we can do this cheaply, but for the demagoguery about nation debt.
In related news, Robert Reich accuses John Boehner of channeling Herbert Hoover’s treasury secretary, Andrew Mellon:
“Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life.”
I’m not sure how fully anti-stimulus and fully pro-liquidation James is at this point, but it seems pretty obvious that the purge isn’t over yet:
Nationwide, bankruptcy filings rose 20 percent in the 12 month period ending June 30th.
Krugman’s basic premise is correct as it relates to the current employment situation. Otherwise as he says you would have imbalances betweeen states and occupations. God knows where Anon gets the idea that:
“There was a time during the worst of the recession when finding jobs was difficult for students, but not now.”
The economy certainly has long term structural competitiveness problems but they are not what underlies the current weak demand for labor. As Krugman points out at bottom “It’s the demand…stupid.”
john personna says:
Monday, September 27, 2010 at 09:58
.
“technically over” has so little meaning that it’s hardly worth mentioning.”
Er no
“It literally means that the contraction in GDP is over, not that GDP (let alone jobs) are back on track.”
It’s amazing how long you can deny reality. GDP has expanded at an average of around 3% over the last four quarters so it’s definitely back on track. It may not be expanding at rate you’d like but to suggest it’s flat is self evidently incorrect. BTW how that double dip recession working out for you?
You are a weird guy, Joe. You say wrong things, forcefully, and think because you don’t use bad language you are a gem.
“8:30 AM: Q2 GDP (third estimate). The consensus is for no change from the previous report (1.6% real annualized GDP growth in Q2).”
http://www.calculatedriskblog.com/2010/09/weekly-schedule-for-september-26th.html
I certainly don’t think 1.6% real growth is back on track.
Or:
“Although there will be plenty of economic data between now and the two day meeting on November 2nd and 3rd, the two key releases are the September employment report (to be released on October 8th) and the Q3 GDP advance estimate (to be released on October 29th). Barring a significant upside surprise in one or both of those reports, it appears QE2 might arrive as early as November.”
http://www.calculatedriskblog.com/2010/09/weekly-schedule-for-september-26th.html
On the double dip, I’ve commented that the Consumer Metrics Institute is still signalling it, very strongly:
http://www.consumerindexes.com/
The only shoe left to drop is whether they continue their trend as forward indicator of GDP, or if something shifts, making their consumer-durables based measure less accurate.
Here’s why an average of 3 quarters hides more than it reveals:
qtr, percent change in constant 2005 dollars:
2007q1 0.9
2007q2 3.2
2007q3 2.3
2007q4 2.9
2008q1 -0.7
2008q2 0.6
2008q3 -4.0
2008q4 -6.8
2009q1 -4.9
2009q2 -0.7
2009q3 1.6
2009q4 5.0
2010q1 3.7
2010q2 1.6
“So, where’s the demand? What’s going to bring it back?”
Savings rates were historically low before the crash. And what savings that people did have took a severe hit. My guess is that once everyone’s 401ks and the like, climb back to the levels they once had, then people will be inclined to do a bit more spending.
You know, we talked over the last year about consumer credit, and how it was falling. The initial answer was consumer deleveraging. The thought was that people had pulled back in spending to pay down debt, increase savings in the face of uncertainty. Newer data is that people with credit have continued to use it, and that the net decline in outstanding credit has come completely from credit write-offs. Thus, while people with money or still with credit might have pulled in their horns a bit, the big decline has been from a bad-risk segment cut off.
The question might be how dependent on bad-risk credit the economy had become. Does GM need to sell cars to people who can’t afford them, or can they get by with those who can?
john personna says:
Monday, September 27, 2010 at 13:35
I’m familiar with all these numbers and the market’s up 9% from the start of September largely because it perceives the risk of a double dip has substantially receded whatever a load of tendentious blogs say. But as I always you’re welcome to believe them and stick to your Joab like version of events. It’s just not accurate.
Don’t shift to the market quite yet. Let’s stick with GDP for a moment. The last 4 quarters look like this:
1.6, 5.0, 3.7, 1.6
When I said we were not back on track, you gave us an average. Sure the average of that curve, that hump, is 3, but did you seriously mean that because the average was 3 we had nothing to worry about in the shape of the thing?
It looks “falling” and if CMI holds as a forward indicator, it will fall. Possibly it will stay positive but small, but possibly it will go negative.
Now, markets? Are you seriously suggesting that equities are a reliable forward indicator? Of what?
I don’t know why the spam filter is firing, no links in the body. 3 tries in the queue.
(thank you)
john personna says:
Tuesday, September 28, 2010 at 09:59
“Don’t shift to the market quite yet. Let’s stick with GDP for a moment. The last 4 quarters look like this:”
After all it’s well known the market pays no attention to data.
” Now, markets? Are you seriously suggesting that equities are a reliable forward indicator? Of what?”
Yep they’re certainly one indicator although not a perfect one anymore than the reams of speculation you invariably link to as proof positive of your theories about double dip recessions etc. At least with the market people are putting their money where their mouth is. Your problem is that you’re trying awfully hard to prove something that doesn’t seem likely to happen. I”m not enslaved by the same desperate desire for vindication. If it starts to go south I’d be the first to say so and jump ship.
I think you are taking refuge in muddle there, Joe.
I was talking about GDP in my top post, and I followed that through all the way. I didn’t run to hide in a new indicator at the last minute.
BTW, I’m obviously not trying to “prove” when I say things like:
“The only shoe left to drop is whether they continue their trend as forward indicator of GDP, or if something shifts, making their consumer-durables based measure less accurate.”
I’m talking about indications.
It’s weird how you in a way are more forceful about the future than I.
It’s like I say there is a 70% chance of a double dip, and you say there is 100% chance I’m wrong.
That’s crazy.
Oh, I love this. I may have to paste it in more than once:
Suck it, Joe.
@john personna: While I share his sentiment — the bottom of the trough seems like an odd way to measure “recovery” — Buffett’s alternative is absurd. By definition, a bubble means that things were overvalued. So, the old levels should in fact not return, absent another bubble or massive inflation.