Why Is There Air?

In its most recent post Melinda Pitts of the Atlanta Fed examines some of the various theories on why the recovery in employment has been so weak during the recovery. The first is an examination of the relation between the unemployment rate and the labor force participation rate. I honestly don’t think that a coherent discussion of that can take place without considering the effects of two-income households and reduced mobility due to, for various reasons, being stuck with a home that the owners are unable to sell or unwilling to sell at the price they would receive.

The second explanation, that

the ongoing decline in the demand for less educated men in manufacturing has generated a negative trend in labor market outcomes for these workers for three decades. This trend continued unabated during the years after the 2001 recession but was masked by the housing boom, which lifted employment for less-skilled workers for another five years. This observation is relevant for how one interprets the time series changes in labor market outcomes. If we view the housing boom as an aberration that is unlikely to resume, it is inappropriate to compare current labor market outcomes with those just preceding the onset of the Great Recession.

fits neatly with my last post. My only cavil would be that I strongly suspect that demand for “higher-skilled” workers is itself an artifact. Note that the demand for new law school graduates has crashed since the financial crisis. Without the extraordinary level of government spending on healthcare and education I really wonder how strong that demand would be.

The third considers the barbellization of the U. S. job market—more jobs at the ends of the income distribution than in the middle. In my view that’s a consequence of policy and the folks at the high income end of the barbell will fight like hell to keep it that way.

Another idea is an interesting attempt at quantifying and measuring uncertainty as a factor in the lack of growth in employment.

The final idea is a discussion of the role of tax and regulatory disincentives on employment growth.

Food for thought.

3 comments… add one
  • Drew

    The Fed discussion is far too academic.

    I’d give my views, but they are well worn, probably rejected, and now boring.

    I will just say deny me at your peril.

  • A third hypothesis is that the weak recovery reflects an increase in economic uncertainty, which induces firms to wait rather than hire and invest. “Measuring Economic Policy Uncertainty” by Scott Baker, Nicholas Bloom, and Steve Davis proposes a novel methodology for quantifying the overall level of economic uncertainty and the portion of uncertainty that is induced by economic policy. They show that both measures of uncertainty have been elevated since the onset of the Great Recession and have scarcely recovered during recent years. “Uncertainty, Productivity and Unemployment in the Great Recession” by Edouard Schaal examines how an increase in uncertainty affects labor market outcomes in the context of a job search model. He focuses on one measure of uncertainty, the cross-sectional variability of sales growth rates across business establishments, which increased sharply in 2008 but has since subsided. Because of this finding, Schaal finds that the model can account for a large deterioration in labor market outcomes at the time of the shock but that it cannot explain why the deterioration has been so persistent.


    In the second paper assumes that firms and consumers are risk neutral…probably not the best assumptions, but they might be necessary to obtain solutions for the model that is being used. In any event, when you develop a model like that, calibrate it and then test the data it generates with the real world data and there is a divergence the model should be considered deficient.

    Also, the uncertainty isn’t quite the same as policy/regime uncertainty. The paper looks at industry wide idiosyncratic shocks. That is one way to introduce uncertainty, but I’m not sure it has the same implications as policy uncertainty.

    Haven’t had much chance to look at the first paper, their uncertainty index looks interesting though.

  • No one is talking about the cost of oil. It never dropped much below $80 bbl and was between 90 and a 100 most of the time. At those prices a 2% growth rate is about all we can expect. And it’s only going to get more expensive. All these wonderful new sources are very expensive to develop and produce.

Leave a Comment