In a comment on an earlier post, Hal Varian writes,

The recalculation model is appealing, but is there any empirical evidence for it? I don’t think that the 1930s would provide useful evidence since the production patterns after the Great Depression were obviously different than before due to WW II. But will employment patterns be dramatically different in 2011 than in 2007 as compared, say, to changes during a 4-year period without a recession? I would guess “no”, but I could be wrong. If private savings and exports increase, and imports decrease, we should see some shifts in employment patterns but would it be noticeable?

Let me start by saying that I think it’s hard to teach an old dog new tricks. That is, I suspect that relatively few workers completely retrain themselves and shift to entire new industries. My guess is that a lot of the change in employment patterns comes from who enters and exits the labor force. I am willing to be wrong about this.

During “normal” times, young people and immigrant workers enter the labor force, and older workers retire. This produces a slow and steady turnover in the skill composition of those who are employed. For the umpteenth time, I will point out that we now have over 2/3 or the labor force with some college, whereas it was only 1/3 forty years ago.

During a recalculation, immigration slows (my guess is that if you include illegal immigrants, it has gone into reverse). Young people cannot find jobs. At the same time, the exit rate for older workers accelerates.

This leads to some empirical predictions for the recalculation theory. As Varian suggests, if you compare labor force changes during periods of normal times with labor force changes over periods that start with a recalculation you should see more changes with the latter. I believe that we will see that. I predict that the proportion of the labor force aged 50 and over will fall more rapidly from 2007 – 2013 than it did from 2001 – 2007 or from 1994 – 2000. (Note that right now, young people are having a devil of a time finding jobs, and a lot of them are going back to school. And the over-fifties are less motivated to retire, because their retirement savings have been wiped out. Those short run trends work against my prediction.) I think it is likely that the gender composition of the labor force will shift more rapidly as well. Finally, I think that the composition of the labor force by country of birth will show very different trends.

Overall, if you were to extrapolate the trend in labor force composition from 1995 through 2007 out to 2013, my guess is that you will over-predict older workers, male workers, and Hispanic workers. You will under-predict workers aged 25 – 35, females, and non-Hispanics.

My guess is that the greatest unexpected growth will come in entertainment industries that I have not yet heard of or which are yet to emerge. Education and health care will continue to grow, but not particularly far above recent trends.

On a somewhat related issue, I disagree with Ed Leamer and Brad DeLong, each of whom seems keen on re-invigorating home ownership. If Leamer is right (and I am not convinced that he is) that our housing stock has not grown fast enough, then rents will go up and that will stimulate developers to build apartments. I think it is downright loony to try to suggest that what we need is more government subsidies for home ownership. Rent may be a four-letter word, but it really is no obscenity.

In the case of housing, I am willing to let the market do the recalculating, thank you very much. The last thing I want to see is more government fixes in that industry. Let’s let regular old supply and demand mess up on its own for now.