Edward Lazear maintains that the reason that unemployment remains stubbornly high is the failure to address the problems of inadequate demand:
Research I’ve done with James Spletzer of the U.S. Census Bureau shows that the problems in the labor market are not structural. They reflect slow economic growth, and the cure is a decent recovery.
In 2007, the unemployment rate was 4.4%. Two years later, it reached 10%. The structure of a modern economy does not change that quickly. The demographic composition of the labor force, its educational breakdown and even the industrial mix did not differ much between 2007 and 2009.
More specifically, from 2007 to 2009 unemployment grew dramatically in a few industries, and these changes contributed to the rise in overall unemployment. But the changes were similar to those experienced in prior recessions. As unemployment rates declined somewhat after 2009, the pattern played out in reverse. Industries that saw the largest increases in unemployment were the ones with the largest decreases as overall unemployment fell.
I think that’s an excruciatingly weak argument. For one thing it assumes that the cause of developments in 2007 through 2009 must have occurred in 2007 through 2009. That reminds me of the old joke that I’ve mentioned here before. A guy jumps off of a skyscraper as he passes the 48th floor some wiseacre yells out the window: “How are you?” He replies “So far, so good.” You’ve got to keep in mind that it’s the jumping that will kill him.
The events that caused the recent financial crisis had been developing for decades. They didn’t suddenly occur in 2007. The question he should be asking is why were demand and employment so high?
For another thing a lot of the people who’ve lost their jobs over the period of not just the last 5 years but the last 15 years were involved in the creation of organizational capital. That’s something that companies don’t see as nearly so essential when they’re hunkering down in survival mode. However, as I predicted in 2007 and 2008, some companies inevitably overshoot. Then they re-hired people. That’s no proof of Dr. Lazear’s claims. The dynamics of U. S. job market were just completely different from what he’s suggesting.
The title of this post refers to another old wisecrack. This one was by Harry Truman. When confronted with economists who not only corporately but individually gave him conflicting advice, saying “Well, on the one hand…” he quipped that what he needed was a one-handed economist. The search continues.