Saturday, November 9, 2013

Who pays for structural unemployment?

Just where are people supposed to get work-related skills?

Another conservative meme of the moment is that current unemployment is "structural", rather than something we can address through government action. Problem solved! And thankfully, by this theory unemployment is all the fault of the unemployed themselves, who didn't have the foresight to train themselves for the entrepreneurial info-tech jobs of today.

Economists typically divide unemployment into three classes- cyclical, frictional, and structural. The frictional component is what even the best job market would show ... the inescapable lag between losing one job and gaining another, which becomes a constant low rate of unemployment at any one time. Nothing the government can do here. Cyclical unemployment is attributable to weak business conditions, such as classically where auto sales are low, some workers are laid off, but are immediately rehired when business picks up again. Here, the government could do something, if you adhere to Keynsian theories, but conservatives regard such meddling as not only distasteful, but ultimately self-defeating since the market always knows best the most efficient level of activity and employment.

Last is structural unemployment, where the worker in question can not find work because she is unskilled in any work that is on offer. Plenty of jobs may go begging, but the nothing offered matches this worker's skills.

A good deal of work has shown that, inconveniently for conservatives, the current job market is not beset with a high degree of structural unemployment. Firstly, it is inconceivable that just as Lehman collapsed, tens of millions of workers let their skills lapse and can not be gainfully employed by anyone in the US. Nor is the job market beset with wild imbalances of very high pay being offered for specialized jobs, due to uneven labor demand, as employers suddenly changed their technologies and practices in the wake of the global financial crisis. No, the problem is classically one of low demand, caused by financial panic and its ensuing destruction of economic activity, with a longer-term component of deleveraging from a vast overhang of debt, with an even longer-term component of income inequality that smothers broad consumer demand and impairs the consistency of that demand.

But even if the structural story were true, what should we do then? There is always some mismatch between skills needed and skills on offer. Currently, employers put out absurdly detailed lists of what they want, to fend off excess applicants, and probably to maintain negotiating leverage against any that dare to apply. That is if they are serious about the ad and don't already have someone lined up for the job. So advertised skill sets are not realistic benchmarks for gauging structural mismatches.

Pay is a better benchmark. Are employers willing to pay substantial premiums for specific skills? Again, the current job market and income data are telling us, no, this is not common. But at some point, given a large pay differential, it becomes more economical for employers to train an employee missing particular skills rather than expect them to walk in from the street, even if that street is the entire internet.

This is one more element that is being lost in our abysmal job market. Not only are employers happy about not having to give employees raises and pay them decently, they can be so selective in hiring (if they hire at all) that training is an afterthought. It used to be that sending an employee to school was not unheard of, even for advanced degrees. Now it is entirely on the worker to get the skills needed, often through schools and training programs that leave them drowning in debt.

And the frictional employment picture is likewise closely related to the general job market. Friction is going to be dramatically different in good versus bad job markets. In good times, any warm body will do, and will be trained to do the work. In bad times, friction can extend out endlessly, to the point that a worker leaves the workforce entirely, as droves have done doing during this crisis. So these classes of unemployment are far, far less distinct than commonly thought, and all relate strongly back to the underlying strength of the job market and its driver, aggregate demand.

Thus it is doubly, even triply, important for the government to restore economic activity in slack times, so that the labor market isn't destroying workers and their families, and letting skills through the population rot. Such wastage is surely going to affect future economic prosperity and particularly our real capacity to care for the elderly and maintain other common services.


  • Is false hope better than no hope? And is reality hopeless? And the religious bias towards indoctrination ... why is this OK?
  • A small environmental success- getting the lead out.
  • Does GDP growth serve us, or do we serve GDP growth?
  • The median wage is down.
  • Bank lending is still anemic, especially in terms of productive investments. Monetary policy is clearly insufficient. And if you add this to declining public investment, and we are headed downhill.
  • A different cognitive style, or just not that bright?
  • Stephanie Kelton on why federal deficits are good.
  • Ditto from Paul Krugman. Who really serves future generations?
  • Why not deploy stop-and-frisk on the suits?
  • And tax them too.
  • Economic passage of the week:
"According to the Harvard study, most people believe that the top 20 percent of the country owns about half the nation’s wealth, and that the lower 60 percent combined, including the 20 percent in the middle, have only about 20 percent of the wealth.  A whopping 92 percent of Americans think this is out of whack; in the ideal distribution, they said, the lower 60 percent would have about half of the wealth, with the middle 20 percent of the people owning 20 percent of the wealth.What’s astonishing about this is how wrong Americans are about reality.  In fact, the bottom 80 percent owns only 7 percent of the nation’s wealth, and the top 1 percent hold more of the country’s wealth – 40 percent – than 9 out of 10 people think the top 20 percent should have.  The top 10 percent of earners take home half the income of the country; in 2012, the top 1 percent earned more than a fifth of U.S. income – the highest share since the government began collecting the data a century ago."

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