Cyclical vs. Technological Unemployment
Tyler Cowen writes about the hospitality sector of the economy,
In terms of absolute levels, business is above where it was before the crisis. At first glance, that should seem enough to support the nominal wage levels of 2007. You also can see that the initial downward dip really doesn’t last for long (two months?) before the older absolute level of business activity is restored.
He refers to interesting posts by Karl Smith and Stephen Williamson.
Smith says that in the hospitality sector, we see employment falling relative to output in terms of levels but not in terms of trend. You can call this an aggregate demand problem, in the sense that aggregate demand grows by less than trend. But then, why would you lay workers off just because demand is growing below trend?
One answer is that there is ongoing productivity improvement in the hospitality sector, raising consumers’ real incomes relative to hospitality services. If consumer demand is elastic, the sector will expand and employment will be maintained or even increase. However, if the elasticity of demand is not high enough, there will be technological unemployment in that sector.
There are some awkward questions to be raised about the relationship between cyclical and technological unemployment. It would seem that productivity is increasing all the time. Why does the unemployment rate vary by so much across time?
There seems to be some degree of “clumping” of layoffs. I remember during the first oil crisis of 1973-74. It seemed like one minute, every gas station used attendants to pump gas, and the next minute every gas station was self-serve (except in a few states that outlawed self-serve). This behavior does not fit any model that I can think of. There was no technological innovation involved (later, there came pumps that took credit cards. But all that was needed in 1974 was to change the custom so that you pumped your own gas and then paid for it.) If it was more profitable for a gas station to have consumers pump their own gas in 1974, then that was probably the case in 1972.
Do we want to explain recessions in terms of arbitrary “clumping” of layoffs? That is an unappealing model.
Another point about technological unemployment is that the jobs that are lost are not necessarily mourned for long. The excellent book by Amy Sue Bix, which I alluded to in a previous post, gives examples of occupations that were decimated by mechanization during the Great Depression: cotton picking, cigar rolling, glass blowing (of bottles and light bulbs). Would anybody want those jobs if they became available now?
The nice thing about the AS-AD paradigm is that you can skate around these sorts of issues. The flaw in the AS-AD paradigm is that you probably should not just skate around these sorts of issues.
May 9 2011 at 11:36am
“This behavior does not fit any model that I can think of. ”
Do you mean besides your own of PSST?
May 9 2011 at 12:45pm
“Do we want to explain recessions in terms of arbitrary “clumping” of layoffs? That is an unappealing model.”
It’s not arbitrary, though. Think about your gas pumping example. The story I would tell is that the job losses among gas station attendants were initially cyclical, in that they were prompted by a decline in business. But that in turn triggered a change in social custom. That change need not be thought of as some arbitrary un-model-able sociological observation. Rather it was a major revelation of information. Until self-serve became necessary, no one knew it was viable. Once it was commonly recognized that people were willing to pump their own gas for the same price, the change stuck and those jobs never returned. The integration of that information into the market transformed the unemployment of gas station attendants from cyclical to structural.
In the last 10 years or so we’ve seen a similar fate befall grocery baggers, as self-checkout aisles have gained in popularity. The main difference being that was seemingly prompted by advances in the technology rather than employment cutbacks. But the informational component is still key: until someone tried the self-checkout concept and it succeeded, “we” didn’t know that consumers were willing to scan and bag their own groceries while paying the same prices.
May 9 2011 at 2:22pm
If you look at Karl Smith’s first trend graph, the slope of the trend line from 2010 to present is actually virtually the same as the slope from 2001 to 2008. What has happened in the graph is that 08-09 was flat to slightly down, knocking the trend to the right.
Also, a look at the sales / employment graphs shows a lot of similarity, which indicates that, in this particular industry, there is a lot of elasticity and the mix of sales simply changes toward a lower-labor product in recessions, whereas in better times, people may go to restaurants with more service. A relatively efficient market.
Which supports an AD story. But in other sectors, you may see something different.
Also, these data support a totally different hypothesis: Food Service is a consumer discretionary business and from 08 to 09 people had to repair their balance sheets and restricted discretionary outlays to do so, but by 2010 they could consume more. The observed “difference from trend” simply reflects the non-consumption by those have not yet repaired their balance sheets. Which says that you need to pay attention to balance sheets and it will be of little value to run up any more debt to fund consumption because you have no guarantee all the stimulus reaches those who have not repaired their balance sheets.
May 9 2011 at 4:44pm
I could be wrong but isn’t the entire point behind having adequate demand to drive corporate profitability to a level where they are willing to hire? After all, if we had high demand and low profits I wouldn’t expect much hiring. Seems to me what economists are really trying to say is “raise corporate profitability.”
However, we now have record corporate profitability without much hiring. So if you can’t count on profits to drive hiring, why focus on demand at all? The translation mechanism is apparently broken. Clearly there is much more at work.
May 9 2011 at 9:18pm
Every time I see a reference to “cyclical vs (some other kind of) unemployment” it reads as though someone takes it as given that this cycle is some extra real thing. Why assume that?
Once you account for technological change, structural change, demographic change, supply shocks, productivity shocks, and every other alternative to cyclical unemployment, does this other cyclical unemployment have anything left to explain?
May 9 2011 at 11:42pm
“If it was more profitable for a gas station to have consumers pump their own gas in 1974, then that was probably the case in 1972.”
No, price controls would have made employing gas station attendants unprofitable as the cost could not be passed on to consumers. Once motorists had been forced to learn to pump their own gas the disutility of doing so fell, hence attendants were not re-employed once price controls were lifted.
May 11 2011 at 5:30am
Gasoline attendents were an amenity, not a necessity. The oil embargo in 74 pushed gas prices higher very quickly, which angered consumers. The attendents got laid off because (a) they were dispensible and (b) it was one of the few cost saving measures open to station operators.
A peripheral point: cars of say 1950 need to get oil about three times as often as modern cars; their tires lasted about 20% as long as on modeern cars, the air in those tires needed checking more frequently, things like throttles and cables needed adjustments by hand that now are controlled by electronics. Etc. So there was work for service station attendents to do at some point before 1974, but once we became accustomed to self-service, it was clear to all that gas stations needed fewer people.
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