Youth Unemployment: A Puzzle for Any Story

What’s wrong with AD-AS and organizational capital, and reservation wages.

So the story is AD shock causes demand for labor to shrink.

Employers are reluctant to let go of older workers for fear of losing organizational capital.

In the near term this means that the marginal product of new labor collapses. Not because of a technology change but simply because you are oversupplied with “pure labor” because you can’t separate it from “organizational capital”

Someone with no organizational capital is therefore worthless to you.

This also explains long term unemployment. Once you are out, you are out. You no longer have organizational capital to offer unless your networking contacts are transferable. Like in blogging or something.

So what do we get:

A drastic decline in the demand for new labor. A drastic decline in the number of quits, since no one wants to give up their organizational capital, long term unemployment and a bloody market for newcomers.

That seems to reflect the reality well.

Why I don’t buy the AD story:

Human demands are limitless. We all want Ferraris and filet mignon. There is no lack of demand for these things. However, the demand for these things competes with the demand for e.g. retirement savings, avoiding jail via IRS, health care savings, etc.

I could go out and blow every last dime of my paycheck on immediate demands. I don’t do this because to do so would be foolish, given my retirement expectations. Perhaps I will spot a business opportunity in the next 10 years that will require capital.

For our impotent directors to attempt to manipulate my desire for savings is beyond offensive.

I think it is hard to tell a sticky-wage story for new entrants to the labor market who do not have any wage history.

Oh really? You haven’t been reading the same stories about new college grads who can’t get the high-paying jobs they expected, and so are now unemployed?

It is the wages of the employed which are sticky, is it not?

Also, sticky prices. Here sticky prices are more relevant than usual because we are considering the labor force, not just unemployment.

I don’t have the data, but this strikes me as plausible:

Young workers are low-skill, non-specialist workers. That should mean they will be quicker than other workers to find new positions when the old ones are disrupted. So the high youth unemployment rate suggests that some mechanism other than PSST is dominant.

My favorite candidate is this: Changes in the regulatory environment are raising the cost of labor by a more or less fixed dollar amount regardless of wage rate. So high-wage, high-productivity workers are less affected than low-wage workers, and their unemployment rate has risen less.

Employers are hiring, but not in a way that reduces unemployment. Many are only replacing attrition, not opening new stores, lines, or whatever. I suspect that people with short or no prior job histories might be more less successful in getting hired into a position that pre-existed than into one that is new. That might be because the job requirements are more well established or measurable for a pre-existing position than for a new one. It might also be because new positions tend to be created by new companies, who might not be large enough (or whatever) to know what those requirements are. There might be some ways of testing this. One could try to correlate the employer’s years in the business with new hires’ years of employment (or age as a rough proxy).

Max

One of my colleagues, Christopher Smith, has a new working paper on this topic at: http://www.federalreserve.gov/pubs/feds/2011/201141/201141pap.pdf

For a quicker intro, here’s the HuffPost article: http://www.huffingtonpost.com/2011/10/18/video-games-study-federal-reserve_n_1018003.html which summarizes his findings:

…”important culprit for rising youth joblessness is increasing competition from grownups taking the low-wage jobs that teenagers typically do.”

@ Rick Hull

“Human demands are limitless. We all want Ferraris and filet mignon. There is no lack of demand for these things.”

Maybe I’m misunderstanding this, but it seems to me you’ve simply ignored reality. I’d agree that, at some point, its a question of competing interests, but simply noting that people would like to have more than they currently possess doesn’t demonstrate what I think your attempting to show: that AD doesn’t impact employment rates. Put another way, it appears you’ve conflated wishful thinking with actual purchasing / acquisition ability. For example, if I make $10 per hour, I might demand a Ferrari, but that won’t have any economic impact as I can’t possibly purchase or finance the same. So, if you used to have the ability to purchase or finance such an item, but now cannot b/c you make $10, it seems you’d have a drop in AD.

It also seems incorrect to argue that AD can’t play a role when you’ve increased the unemployment rate above recent norms by +4%. I don’t think you can argue with a straight face that that lost purchasing power wouldn’t impact overall demand. I also focus here on consumer demand b/c our economy is so dependent upon it.

@ John Bailey

“The minimum wage and regulatory environment are correct. Additionally, the legal and social (family) safety nets make it unnecessary to take jobs that are unpleasant or beneath people’s self-images.”

I’d like to see more data on this, but here is what I see as the central problem with this argument. There has never been in the last 100 years a decrease in the complexity and/or reach of regulation (in the aggregate). Yet clearly, we are better off than we were 100 years ago.

This claim is repeated frequently, but I never see anyone offer up concrete examples or other data to drive the theory. Basically, if you are going to repeat this claim, you should have some significant evidence to point to and given the amount of discussion devoted to it such evidence should be present and available in abundance.

Further, there does not appear to be a correlation between the min wage and economic activity. However, I’ve not reviewed the issue in depth, so I’m open to reviewing data you’d have to support that position.

I would agree that a social safety net can impact the current employment situation, but you simply ignore the positive impact this net has both in the sense of continued spending and otherwise. It also isn’t clear to me that the safety net is a net detractor on the overall economic and/or employment picture, b/c you don’t see people arguing that taking under-employment is a more efficient that utilizing the safety net to look for jobs that are pleasant or equal to people’s self-images.

You also appear to imply that the only other jobs available are those below an individual’s skill set, rather than say jobs that may require a different, but equally complex skill set. In the latter instance I don’t see how the safety net negatively impacts this situation.

Finally, for some reason you also don’t appear to recognize that evidence exists that contradicts this grant theory (see Claudia Sahm’s post, above).

Not even child labor can compete with third-world labor rates. It’s simple math: When you move jobs to Asia, you lose jobs at home. Taxes and tariffs have historically worked nicely in situations like these. The free trade free ride needs to come to an end or this will only get worse.

As the job market weakened individuals with years in the workforce began to compete with young people for entry-level jobs.

Who would you hire? A senior in high school or a 30 year old who knows how to show up for work every day and be productive.