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07/07/2009

Jobless Recoveries and Structural Change, by Arnold Kling

The Economist's blogger (the magazine has a policy against signed articles, and they have stupidly decided that the same policy has to apply to their blog) writes,


there is every indication that recovery from this recession, when it arrives, will do little for many of the unemployed for years to come. Time to start thinking about why this is the case, and what can be done about it.

Thanks to Mark Thoma for the pointer.

I want to emphasize once again that the structure of the economy has changed over the last fifty years. We have gone from over two-thirds of the labor force having no more than a high-school education to over two-thirds having at least some college education.

Up through the early 1980's, many of the unemployed in a recession were low-skilled workers on temporary layoff, in many cases concentrated among large industrial firms. Once demand recovered, they were called back--end of story.

The Dotcom recession was different. The people who were laid off by Webvan and Pets.com and Worldcom were not going to be called back. The companies were not viable. From late 2000 onward, a lot of the labor force simply disappeared. There was a recovery in productivity, as firms slashed marginal workers. The unemployment rate did not get terribly high, in part because fewer people looked for work. The employment-to-population ratio never recovered. Maybe it's a Tyler Cowen story--leisure got cheaper because of the Internet, and so people consumed more of it. (Just kidding)

My thesis is that unemployment is more persistent when the layoffs come from structural change rather than from excess inventories. With excess inventories, once the excess has been absorbed you can go back to work at your exact same job. On the other hand, when firms and industries permanently shrink, you have to find a new job, and possibly even an entirely new occupation. It is rare for people to have the capacity to do that, and it takes quite a bit of time when they do.

Part of the problem is credentialism. The demand for health care workers is high, but if state regulations say that you need a doctorate to be a physical therapist (a real example, in my state of Maryland), then shifting into health care is not going to be easy.

Most of the structural adjustments in the labor force consist of a cohort of young workers joining and a cohort of older workers leaving. This changes the mix of skills and occupations.

No economist knows how to deal with structural unemployment on the scale that we are seeing nowadays. Fiscal stimulus is not a proven remedy, and it may not be a remedy at all. Worker retraining programs are a logical idea and an empirical failure.


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