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Musings on Unemployment

July 9, 2012

The #1 problem in our economy is not the growth of real output, but the unemployment rate. The economy’s ostensible purpose is to satisfy as many of the nearly limitless human desires with the scarce resources available in the world. Human effort is one of those scarce resources. It should be a good thing when human effort is used efficiently, but long term unemployment is a symptom of an unhealthy economy, because it means that markets aren’t clearing. As I wrote in my article “The Future of Jobs“, “…employment seems to have a profound impact on happiness, even beyond the income it provides.” Jobs provide a sense of belonging, a source of flow, and a sense of self worth.

As I mentioned in “Theories of Fed Misbehavior“, the Fed has been NGDP targeting, it’s just that they’ve been rate targeting instead of level targeting. Both real and nominal GDP are higher than they were in 2008. Four years seems like time enough for price adjustment. What the heck is going wrong?

Stylized Facts
Unemployment is highest among young, low educated, minorities, although even some college graduates have high unemployment rates.

Blue (top line) – High School dropout
Green – High School graduate
Yellow – some college
Red – College educated

Real GDP has Recovered

The Unemployment Rate is High and Falling Slowly…

… but the Percentage of the Population with Jobs has not Increased

Unemployment changes are correlated with GDP

The average spread between the change in GDP and the change in the employment-population ratio from 1/1/1985 to 1/1/2012 is 5.2%, meaning, if the growth rate of GDP was higher than 5.2%, you’d expect to see positive employment/population growth and if it was lower, you’d expect to see negative growth. Now, since 1/1/2009, GDP growth has averaged 2.1%. It is not surprising, given the historic trend, that employment growth has been negative. In fact, employment growth is better than the simple historic relationship would suggest by 1.9%, meaning the economy has weathered the low nominal growth better than the historic average.

Minimum Wage

When markets don’t clear, economists’ prime suspect is that prices are too high. Normally, lower prices attract more quantity demanded, and discourage suppliers. In the case of labor, supply is pretty close to perfectly inelastic, so lower wages work exclusively on the demand side. Faced with low wages, firms hire workers instead of using more capital. But wages have been stagnant for years, and for low education workers, real wages have been stagnant for decades. Firms face growing health care costs, which eat into potential wages. Some people have suggested a higher regulatory burden also shares some of the blame, but I don’t know enough about the history of the regulatory burden to comment. Another potential explanation is that technology has adversely affected the least skilled workers by increasing the productivity of capital which could replace them (and increasing the productivity of the higher skilled workers who create such capital).

Even Average wages have not yet adjusted to the lower levels of NGDP


I’m not such which of these explanations is the best, and even if all of them taken together explain the full degree of unemployment. In 2009, I was strongly on the side of “nominal shocks”. Now, I’m not so sure, as I think it should have been long enough for most wages, debt and other contracts to adjust to the lower price level. On a longer trend, it’s clear to me that technology must be playing some role, as low skilled workers have had stagnant wages for so long there must be real force behind it. Markets are not so inefficient that they would underprice a commodity for several decades. And if low skill workers really were underpriced, why are firms so hesitant to hire them? Shouldn’t firms be on their doorsteps begging them to work? Sadly, high unemployment suggests those workers are overpriced, not underpriced. I just hope we don’t move to the two tier labor market like Europe, with massive unemployment (or low wages and temporary work) for vast swathes of the population and highly paid, legally protected jobs for the elites.

Further Reading
Temps hired 10 times more than permanent workers – Regime uncertainty? Health care cost avoidance?
Why I can’t hire you.

3 Comments leave one →
  1. July 9, 2012 8:39 pm

    Do you have an opinion on the high number of supposedly open positions that firms have that they claim they can’t fill?

    Perhaps this counts as the technology problem that you proposed?

    • July 10, 2012 6:45 am

      They’re a bunch of whiners. All goods are in shortage when you’re not willing to pay the going rate. I’d perhaps be more sympathetic if they said they raised the asking wage to $200,000 and still couldn’t find workers, but if that was the case, why are firms so hesitant to train new workers? According to my link above, civil engineers have an unemployment rate of 12.7%. They’ve proven themselves to be smart and good at math. If you need someone to do some obscure skill that literally no one in the job market has, train them! Anyway, I agree with the post you link to.

      • July 11, 2012 9:12 am

        The best explanation I’ve heard is that when firms complain that they can’t find workers, what they’re really saying is “we’d like to hire more immigrants”. Since U.S. law requires firms to try to hire a U.S. citizen before hiring an immigrant, they set the hiring requirements unrealistically high, and when immigrants apply, they simply don’t hold them to the same standards.

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