Labor Market Puzzle
By Arnold Kling
Tyler Cowen lists ten possible explanations for the weak labor market in this recovery. He concludes
But I would sooner call the whole thing a continuing mystery. Note that most of these hypotheses imply that the economy can still become quite a bit better yet. Either Bush or Kerry will get credit for this, without deserving the plaudits.
He left out my favorite hypothesis, which is that unemployment is becoming increasingly structural rather than cyclical.
In the first few decades after World War II, a recession meant that auto workers were laid off until excess inventories could be sold. When recovery came, workers returned to their jobs quickly. That is cyclical unemployment.
Our more recent recessions have featured structural unemployment. When today’s manufacturing workers are laid off, it is because their jobs are never coming back. It takes time to find new jobs. When the Dotcom bubble popped, webmasters and “business-development” executives lost jobs that were not going to come back. They needed to search for new employers and/or re-tool themselves.
What we saw a generation ago was inventory recessions, with quick employment recoveries. What we are seeing now is what I call Progress and Displacement, which takes a lot more adjustment.
For Discussion. If the hypothesis of structural unemployment is correct, what does it imply about the efficacy of Keynesian fiscal and monetary policy?