Thinking About Unemployment

by Dave Schuler on June 27, 2014

Economist Heidi Shierholz dispels several myths about our present employment situation:

The long-term unemployed are not fundamentally different than other unemployed workers, and there is no evidence that the mere fact of being unemployed long-term fundamentally damages workers’ productivity. Moreover, there is no evidence that long-term unemployment cannot be solved through macroeconomic policy to boost the aggregate demand shortfall. In fact, today’s high long-term unemployment rate is exactly what you’d expect given the overall weak labor market, how long it has been so weak, and pre-recession trends in long-term unemployment. In other words, what is going on now with long-term unemployment is right in line with the historical relationship between long-term unemployment and the overall unemployment rate. Today’s long-term unemployment crisis is part and parcel of the weak labor market more broadly and there is no evidence that the long-term unemployed have somehow hardened into structurally unemployed workers with the wrong or depreciated skills.

One way to see this is to note that today’s long-term unemployment crisis is not confined to workers who don’t have the right education or happen to be looking for work in specific occupations or industries where jobs aren’t available. Long-term unemployment is elevated in every age, gender, and racial and ethnic group, and it’s elevated in every major occupation, in every major industry, and at all levels of educational attainment. Some groups definitely have lower long-term unemployment rates than others, but that is always true, in good times and bad. The key point is that for all groups, the long-term unemployment rate is substantially higher now than it was before the recession started.

Elevated long-term unemployment for all groups, like we see today, and the fact that long-term unemployment has improved right in line with other measures of labor market improvement means that today’s long-term unemployment crisis is not due to something wrong with these particular workers. It is overwhelmingly due to more than six years of weak business hiring across the board.

Her explanation for the sluggish hiring is a shortfall in aggregate demand and her prescriptions for mending the situation are:

  • Passing extended benefits again to help the long-term unemployed, who are the ones who have been the hardest hit by the lasting effects of the Great Recession,
  • Undertaking other measures that also stimulate aggregate demand, and
  • Enacting policies that spread total hours worked across more workers.

I wish that Dr. Shierholz would explain the differences between the United States and France when it attempted that third solution some time ago. Why would that work here now when it wouldn’t work there then?

It’s interesting to consider her observations in this context:

Government data show that since 2000 all of the net gain in the number of working-age (16 to 65) people holding a job has gone to immigrants (legal and illegal). This is remarkable given that native-born Americans accounted for two-thirds of the growth in the total working-age population. Though there has been some recovery from the Great Recession, there were still fewer working-age natives holding a job in the first quarter of 2014 than in 2000, while the number of immigrants with a job was 5.7 million above the 2000 level.

All of the net increase in employment went to immigrants in the last 14 years partly because, even before the Great Recession, immigrants were gaining a disproportionate share of jobs relative to their share of population growth. In addition, natives’ losses were somewhat greater during the recession and immigrants have recovered more quickly from it. With 58 million working-age natives not working, the Schumer-Rubio bill (S.744) and similar House measures that would substantially increase the number of foreign workers allowed in the country seem out of touch with the realities of the U.S. labor market.

That would suggest that immigration reform as it’s now being defined would actually aggravate the situation.

I don’t think that the report from the Center for Immigration Studies linked above should be considered dispositive but I think it should at least be considered.

Perhaps we should add this to the mix. In response to Lawrence Summers’s repeated prescription for infrastructure spending to make up for the shortfall in aggregate demand John Cochrane retorts:

It’s a quantitative problem. The natural rate is per Laubach and Williams, about -0.5%. But we still have 2% inflation, so the actual real interest rate is -1.5%, well below -0.5%. With 2% inflation, we need something like a 4-5% negative “natural rate” to cause a serious zero bound problem. While Summers’ discussion points to low interest rates, it is awfully hard to get any sensible economic model that has a sharply negative long run real rate

Moreover, to Summers, the one and only problem worth mentioning in the US economy is that the “natural rate” is negative while nominal rates cannot fall below zero. Can’t we think of one single solitary additional distortion in the American economy?

What to do? Summers sees the problem as eternal lack of “demand” and recommends more of it. I think this more of a microeconomic/lack of growth theory problem needing the removal of distortions.

We still agree a bit — Summers starts with “There is surely scope in today’s United States for regulatory and tax reforms that would promote private investment.” That’s distortion removal.

A major problem with the infrastructure prescription is that everyone I’ve seen including Dr. Summers assumes an impossibly high Keynesian multiplier—4 or 5. I think that the actual empirical evidence of anything larger than a fractional multiplier is unconvincing. I’m skeptical we could actually launch infrastructure spending amounting to 5% of GDP all at once. Dribbling it out over five or ten years wouldn’t do it.

To actually do anything serious about unemployment I think that both of our major political parties would need to discard some closely held beliefs. Republicans would need to recognize that government spending is actually needed to get us out of the hole we’re in. While it might be true that over time the workings of the market would optimize economic growth neoclassical (or Austrian) theory doesn’t promise economic growth here. Under globalization the growth that results from the workings of the market here could occur in China, India, or Vietnam.

And Democrats would need to realize that government spending as such isn’t enough. We’d need a whole raft of other reforms some of which they would find utterly unacceptable.

Since I strongly suspect that both parties will hang on to their closely held beliefs regardless of the consequences for the foreseeable future, I don’t think we’ll be putting the people who lost their jobs during the Great Recession back to work any time soon.

{ 12 comments… read them below or add one }

... June 27, 2014 at 3:42 pm

[T]here is no evidence that the mere fact of being unemployed long-term fundamentally damages workers’ productivity.

Not sure about that. It certainly wrecks one’s confidence. And after six years I’m at least two iterations of software behind, skill-wise.

Hell, I’m not even sure if I could do a decent job at anything anymore. Not that I’m ever going to get the chance, of course.

Moreover, there is no evidence that long-term unemployment cannot be solved through macroeconomic policy to boost the aggregate demand shortfall.

There is also NO goddamned evidence that macroeconomic policy can do a goddamned thing except make the rich richer at the expense of everyone else.

First, we must kill all the macro-economists. Preferably very, VERY slowly, and with all the pain that modern medicine and science can inflict. Although one can always go back to the old methods, like strappado and drawing and quartering.

... June 27, 2014 at 3:45 pm

there is no evidence that the long-term unemployed have somehow hardened into structurally unemployed workers with the wrong or depreciated skills.

Really, this is just incredibly fucking stupid. Does she really think I can be out of work for six years and not see my skills deteriorate, from lack of practice if nothing else? How is this stupid bitch still employed when so many of the rest of us got screwed?

... June 27, 2014 at 4:07 pm

That would suggest that immigration reform as it’s now being defined would actually aggravate the situation.

Again, what reason is there to think the people running the country don’t know that, or that at least their smart backroom advisers should.

And now Obama has unilaterally dissolved the southern border.

At some point the idea that they mean well but don’t understand what they’re doing just doesn’t hold water.

... June 27, 2014 at 4:12 pm

Some conclusions from that immigration study:

First, the long-term decline in the employment for natives across age and education levels is a clear in­dication that there is no general labor shortage, which is a primary justification for the large increases in immigration (skilled and unskilled) in the Schumer-Rubio bill and similar House proposals.

Second, the decline in work among the native-born over the last 14 years of high immigration is consis­tent with research showing that immigration reduces employment for natives.

Third, the trends since 2000 challenge the argument that immigration on balance increases job oppor­tunities for natives. Over 17 million immigrants arrived in the country in the last 14 years, yet native employment has deteriorated significantly.

Here’s the thing. I’d like someone to ask Mr. Schumer or Mr. Boehner about this. Tell them about the study and the conclusions, and then for the sake of argument ask them if this is true why should we keep importing tens of millions of people at the expense of the natives? I’d ask someone to ask Obama the same, but that’s too funny even for a pie-in-the-sky hypothetical. He’d just say that’s more bitter clinger talk.

... June 27, 2014 at 4:47 pm

And of course, we’re not the only nation whose borders have been dissolved by their rulers.

Gotta say I’m a lot less impressed by people crossing the Mediterranean than I am those Cubans that came over on inner-tubes. Or the Haitians, back before Clinton started flying them over here. My God but that took serious courage, I’ll give them that. That’s a really long haul to undertake in things that were floatation devices mostly in the theoretical sense.

TastyBits June 27, 2014 at 6:46 pm

Ghost cities. China has a replica of Manhattan. The US could build a replica of Beijing. Even better, build replica of all the major capitals. The government can always borrow the money, and if necessary, it can lend it to itself.

Just think of the currency to be created. What could possibly go wrong.

... June 27, 2014 at 7:41 pm

TB, and if that plan doesn’t work we can always blow up the ghost cities (imagine the Michael Bay movies that could be made!) and do it all over again. Now THIS is genius macroeconomic policy making right here!

TastyBits June 27, 2014 at 10:18 pm

@Icepick

I suspect the dollar will blow-up first. In order to finance the projects, they will need to borrow tens of trillions of dollars into existence. Of course, the same geniuses who have assured you that the last 10 years could not happen will assure you that the dollar cannot blow-up.

I suspect there are several people here who were arguing that there was no housing bubble, and even if there was, it could never affect the financial industry or the whole economy.

It is amazing how the same people are consistently wrong, and it is even more amazing how nobody even notices. The economy and Iraq have the same clowns being paraded out as if their last failures were just minor mistakes.

... June 27, 2014 at 10:39 pm

The economy and Iraq have the same clowns being paraded out as if their last failures were just minor mistakes.

They were just minor mistakes to the clowns. What price did they pay?

Look at Turbo Timmay. Failed at every job he had, all the way up to SecTreas. All that failure made him The Indispensable Man, according to Barry O.

For that matter, Eric Cantor didn’t fail so much as get promoted when he lost that election. He’ll work on K Street now and rake in the big bucks, and probably have at least as much influence as he had as Majority Leader.

jan June 27, 2014 at 11:25 pm

The economy is holding on by it’s fingers, and housing is doing a repeat performance just before 2008 took it down a peg or two or three….Ocean communities on the east and west coast don’t feel it, as they are escalating so fast in price. However, all these financial sectors are built on shifting and liquid foundations — nothing stable, or nothing that signifies real economic growth that I can see.

TastyBits June 27, 2014 at 11:37 pm

@Icepick

Geithner is even worse. At the NY Fed, he was actively working for the banking industry interests. He is one of the reasons they were able to keep the party going.

As Sec. of Treasury, he was pulling every string to allow the banks to pay back the TARP funds ahead of schedule. While they were under TARP, they could not get bonuses, but again, Timmy “the Toady” put their interests ahead of the public’s.

TastyBits June 28, 2014 at 12:04 am

@jan

I think it is the dollar that is experiencing the bubble mechanics this time. Dollars are being created through borrowing, and the paper created is being leveraged to create other inflated assets. When it crashes, it will have a far wider impact like the housing crash.

Of course, I again expect to be assured that this cannot happen, and it will be the same people.

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