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.