If They Had Asked Me
By Arnold Kling
The New York Times asks various folks for their view of why jobs have not come back during this recovery.
I recommend taking a longer view of the process. I think that a major reconfiguration of the U.S. economy has been going on for at least ten years and might well go on for another ten. The employment-population ratio sagged the first three years of this decade, came back a little bit the following three years, then edged down for two years, then plummeted, and for the past year has been about flat. The cumulative decline is very large. That suggests something more than a mere cyclical downturn (or two).
Some hypotheses (all of which I have offered prevsiously):
1. There is no aggregate production function any more. For some firms, output and employment are linked, but in many cases they have been decoupled. Instead, in a Garett Jones economy, firms hire workers in order to create capabilities. It is an investment decision. We have been through a major disinvestment in overhead labor. Few firms are in a hurry to start making new investments in capabilities. Investment decisions are easily postponed–the option of waiting to invest has value, particularly in times of uncertainty.
2. Health insurance costs have more than doubled over the past ten years. Wages have not fallen far enough to offset this, in part because many workers do not value health insurance as much as it costs firms to provide it (even after taxes).
3. The ongoing trend to use less labor in the manufacturing sector has continued or even accelerated, even though there was not much labor left in that sector to begin with.
4. Two potential leading sectors–education and health care–are sclerotic because of credentialization.
5. Many people are operating at a different point on the labor-leisure trade-off than was the case in past recessions. For some fraction of the unemployed, a full-time job is a nice-to-have, but it is not a must-have. Those in this category will take a long time to search for jobs, and they will turn down (or rule out) jobs that they would take if full-time work were more of a necessity.
For all that, I think that my guess for the unemployment rate three years from now would be on the bullish side. I think that investment in Garett Jones workers will pick up, and I hope that entrepreneurs figure out a way to introduce some creative destruction in education and health care. Once things get moving, my guess is that we will see several months of record job growth, in which case the same economists who are whining about the lack of stimulus will be attributing the recovery to aggregate demand, resulting from wise fiscal and monetary policy.