21st Century Structural Unemployment

Will the recovery, whenever it comes, be a jobless one? What will that mean?

Derek Thompson takes a look at it and thinks it will have to do with poor productivity growth among the non-government sector. The Economist offers the following reasons: “One is that wages can’t fall low enough to clear markets…Another is that the prevailing wage rate is below the prevailing reservation wage for most workers…And another option might be the effect of structural change in the economy. If workers are highly uncertain about where new jobs will appear, they may delay training or relocation until they have a better idea where job opportunities will be.”

I want to use that third point as a lead-in to quote at length from this fantastic interview by Minneapolis Fed with Kevin Murphy:


Region: In 1997, you wrote with Robert Topel that “the unemployment rate has become progressively less informative about the state of the labor market,” because of the rising number of American men who have dropped out of the labor force, stopped looking for work; “nonemployment” was your term. Do you think that an employment/population ratio would be a more useful indicator of economic well-being, rather than the unemployment rate as currently defined?

Murphy: It’s difficult to look at, for example, the very low unemployment rates we saw in the early 2000s and say that represented an economy in which everyone was working. Unemployment rates were at roughly the same level that they were in the late 1960s, but if you look at prime-age males, the fraction actually working who were, say, 30 to 40 years old was quite a bit lower in 2001 because there was a big increase in the number who were out of the labor force in that age category.

It wasn’t a random selection of people who were out of the labor force. It was primarily low-skilled workers who had withdrawn from the labor market as two things happened. One, the opportunities in the labor market for low-skilled workers had deteriorated quite a bit with the rise in demand for skill and fall in demand for low-skilled workers; and second, other things like the growth in disability benefits had allowed some of those individuals to withdraw from the labor market. We saw mostly a demand shift that caused people to move out of the labor market at the low end.

What that meant was, from a pure labor market perspective, the unemployment rate really wasn’t indicative of what the economy was like. Unemployment in an economic sense wasn’t as low as unemployment in a measured sense.

I think that remains true today—our traditional measures of unemployment are not the best measures that we could have. We should have something that would take into account the number of people out of the labor force…

But when lots of 30- and 40-year-old males are not working, there’s something going on there. That’s an indicator that labor market conditions are not very conducive to having them employed. So I think if you’re going to go to a more employment-to-population ratio type of analysis, you definitely have to restrict the age range and maybe even weight it in various ways, and also allow for gender.

I’m curious as to how demand for labor is going to change in the 21st century. Specifically – Will this broadly unemployed sector of the labor force that has resided in the low-skill market expand over the next several years into informational and higher-end service workers? What could be mechanisms beside sector demand that would precipitate this?

A few hours after reading that interview, I came across this trend piece at the Wall Street Journal, Only the Employed Need Apply:

Nonetheless, many employers consider the employed more valuable and worth the extra effort. Health-care management-consulting firm Beacon Partners Inc., Weymouth, Mass., has openings for 10 technology-consulting and senior project-management positions. Chief Executive Ralph Fargnoli is looking first for people who are still working. “If they’re still employed that means they have some significant value,” Mr. Fargnoli says.

There’s a kind of Fordist logic to the market-clearing mechanisms we associate with the labor market. Labor is another input into the front end of a factory, like electricity and oil. If the market isn’t clearing, it is like the market not clearing for any commodity – there’s some market mechanism blockage like price floors or geography. Note that there is a fungibility among labor; if you are missing one, you go to the market and grab another, just like a tire for your car. There may be long skilling processes underlining, refining labor into a more precious commodity, but the effect is still the same.

How does that reconcile with an “we’ll sit on a vacancy because we hire only the employed” mindset – one in which signals related to the specific quality of a piece of labor are highly monitored, regimented and processed? Deleuze was on this back in the 1990s, the move from a factory, where labor and capital held in other in check, to a corporate gas, where internal competition and differentiation within labor is the motivating force. The firm not as a factory, but as a reality game show where every week someone else is out the door. If it does happen, how much more will this drive inequality during the rebound instead of alleviate it? There’s a lot of talk about demand for skill, but how distinguishable is it from non-demand for no-skills, as could the no-skill category expand greatly over the next several years? Lots of questions to watch out for.

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4 Responses to 21st Century Structural Unemployment

  1. gappy says:

    I don’t quite agree with the reasoning. The concept of labor as interchangeable, divisible, transaction-cost-less factor would have sat well with Leonief and his I/O models, Solow with his toy growth models, and of course Marxists (the concept of people being “handled” as good recurs from Marsx to Cohen). But labor is not just another factor. It has non-negligible set-up costs: search costs, training costs, time needed to be productive, etc. These costs grow with specialization and skill. There is really little Fordist logic to the job market, or at least, many economists seem to believe so. In this respect though, I would not go to the other extreme. I don’t consider the WSJ anecdotal article to be carrying any validity. Sure, being employed may be a signal of quality. So is having an MBA. So is asking an outrageous salary, or a bonus-driven compensation. But these signals are not meaningful to all employers. To extrapolate and assume that the labor market is like a reality show where once you’re out you don’t get back in just because of an article, seems a bit wild, esp. if one doesn’t watch television.

  2. Mike says:

    Just thinking outloud in this entry. Not reading too much into the WSJ entry, but a lot into the Kevin Murphy quotes. To make the argument cleaner in terms of economics, I wonder if the signal mechanism in education/previous-labor/human capital is going to become insanely dominant in the hiring mechanism. Perhaps because of too much information, perhaps because of a shift in the modes of production from goods to services. And that, to econo the Society of Control part, that human capital will be even more positional, more game-theoretical, and very strictly competitive within labor itself.

    • gappy says:

      Mike, I agree. I think it will be very interesting to see how signaling in the job market will evolve. Academic accreditation (e.g., a Stanford MBA) has been the canonical way to signal skills, but it can only take us that far. There are a few emerging alternatives, but they concern only niche markets. We’ll see.

      Incidentally, all Kevin Murphy’s papers are great reading. And the following link may interest you, as it sits at the intersection of your job and Kevin Murphy: http://www.chicagobooth.edu/news/2006-04-11_pricetheory/02-talentmarket.aspx

  3. foxpauli says:

    Low Income Families…What’s happening to the families of Labor Market Drop-Outs?

    I’m in the process of completing a book, “Cinderella’s Housework, Families In Crisis, Households On the Edge Of Chaos” (still seeking a publisher).

    This book is a study of the Political Economy of the American family in the current economic crisis.

    From what my research has turned up, it seems that the pressures of ‘families in need’ push many ‘Labor Market Drop-Outs’ into the Underground Economy.

    Looking at the Rortybomb-Bureau of Labor Stats data, out of a total of 238.2 million, shall we say potential workers, 41.51% are not employed, and most of those are ‘Not In the Labor Force.’

    The ‘Labor Market Drop-Outs’ comprise over a third of potential workers. That is a staggering admission of economic failure.

    How do these families live? I suggest that the bottom 41% must perpetuate the Underground, illegal, economy. Certainly, unemployment insurance and public assistance have never been adequate to support what the media describes as “the good life.”

    My family helped me get through university with the aid of the Moonshine industry during the 1950’s. That’s the only Underground business I know, but I have been acquainted with hundreds of people who managed quite well in the “Juice Business,” as we once called it.

    What I do know is that savvy people in the Underground economy keep a low economic profile, and like most low-income families, they dare not, or can not pour money into the consumption machine.

    One solution to the lack of spending is to provide low-income families with monthly family subsidies, as do most European nations. It might be a private agency that sells interest bearing bonds, and with the recycled pool of bond investment funds, provide a permanent “Low-Income Family Economic Security” agency.

    The inspiration is the successful Victory Bond effort during the 1940’s (WWII). As we are in the midst of a global economic war, such an approach would seem appropriate.

    Paul Meinhardt, pmeinhardt@optonline.net

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