Sentences to Ponder
By Arnold Kling
We’ve spent the last seventy years increasing the hidden overhead and downside risks associated with hiring a worker — which meant the minimum revenue-per-employee threshold below which hiring doesn’t make sense has crept up and up and up, gradually. This effect was partly masked by credit and asset bubbles, but those have now popped. Increasingly it’s not just the classic hard-core unemployables (alcoholics, criminal deviants, crazies) that can’t pull enough weight to justify a paycheck; it’s the marginal ones, the mediocre, and the mildly dysfunctional.
Actually, health insurance costs could be a huge factor here (and don’t tell me that justifies single-payer health care, because that would simply shift the employer’s cost from the health benefits line item to the tax line item). Also, I suspect that as work gets more sophisticated, training and orientation costs increase. Garett Jones’ organizational capital builders take longer to get up to speed in the company than old-fashioned assembly-line operators.
[UPDATE: Obama Aims to Use Federal Contracts as a Way to Lift Wages – NYTimes, pointer from Mark Thoma]
Whatever the cause, higher labor costs could in theory be offset by lower wage rates. At best, the hypothesis that non-wage labor costs have risen is a partial explanation for high unemployment.
The more I think about it, the less confident I am that we understand the nature of cyclical changes in the level of economic activity. Let me repeat that I find it useful to think of economic activity as outsourcing. If we eat at each other’s restaurants, the labor of the chefs will be measured as economic activity. If we eat at home, our cooking labor will not be so counted.
In general, counting non-market labor as economic activity makes sense. Cooking is one of the few examples in which I can substitute for market labor reasonably well. If I had to build my own car or write my own computer operating system, or–to use a classic example–make my own pencil, my productivity in doing that would be effectively zero. Nobody knows how to make a pencil, and yet the market gives us pencils.
The productivity gain from outsourcing rather than doing everything yourself is huge. That justifies counting market labor as economic activity while discounting non-market labor. Incidentally, it also is why buying local on principle is so stupid–it is somewhere in between the intelligence of using the most efficient process and the stupidity of trying to make everything that you consume by yourself from scratch–and probably closer to the latter.
So how does an economy get to a point where there are people who are unemployed–no one is outsourcing any work to them? How can someone who is marginally dysfunctional be employable one month and unemployable next month? Why do so many people wind up unemployed at the same time? Please don’t use the comments to reiterate the traditional answers–the Keynesian answer, the Austrian answer, and the monetarist answer. We know what those are. And you all know about the recalculation story. I am open to new answers.