Wednesday, August 17, 2011

Golden Gate Before the Bridge

One of my all time favorite photos.

Wednesday, August 10, 2011

Employment and Unemployment in the US Today

With a 'jobs bill' expected from President Obama soon after Labor Day, many economists, columnists and other earnest citizens have offered their thoughtful suggestions on what must be done. Pundits have held that it is far more important to actually do something than to merely promise that something will be done, or that it would be done if only another party would do their part. In other words, a plea that politics be set aside in favor of immediate action.

Serious people, however, realize that it is important to understand the causes of unemployment before beginning a crash program to address it. In the belief that all those capable of engaging with the subject have a duty to do so - because it eventually affects them all, this post is offered.

The three economists I am about to cite each have, interestingly enough, a significant Canadian connection, but each has had stellar academic and professional careers in the United States. The first, and most famous of them all, quite possibly the most famous economist of recent times, is John Kenneth Galbraith, born in Southern Ontario in the early 20th century, but eventually reaching, and attaining iconic status at Harvard University [via graduate school at Cal Berkeley, the New Deal, and Fortune magazine].
Writing in his 1968 treatise (revised 1976) The New Industrial State, dealing with that part of the economy that is dominated by large firms with significant market power [each such firm controlled not by its owners or shareholders but by a techno-bureaucracy that he calls the technostructure, operating what he terms a "planning system"]:
Unemployment in the planning system includes those who cannot find work in their particular craft or skill. It also includes qualified workers who are in the wrong place and who are reluctant to move. The number who fall in these categories will increase as demand presses less strongly on the capacity of the labor force, and unemployment rises in consequence. But the increasing educational requirements of the planning system add to the mobility of the working force both as between occupations and as between regions. The skilled craftsman of modest education does not easily learn a new skill. And the risks of movement are his own. So if he established himself as a tool-and-die maker in Detroit, there is a fair chance that he will remain there. The engineer or sales executive, though he is strongly specialized as to task, can acquire other, perhaps less demanding, qualification if he must. He is less tied to his surroundings. If there is greater need for his specialty on the other side of the country, he moves in response to a promise of employment or is moved by his new employer as a matter of routine. (emphasis added)
Unemployment can thus be due both to structural causes and the result of inadequate demand, but also to something more. It will appear with slackening of aggregate demand, and it will be among those who are most inflexibly tied to particular occupations and locations. At the same time there will be vacancies in positions requiring high and specialized qualifications. Employment will be higher both with stronger demand and with a better accommodation of preparation to need…..

A strong echo of these sentiments, in the modern day, is in the statements of Prof. Narayana Kocherlakota, President of the Minneapolis Fed and a member of the Federal Open Market Committee who offered an unprecedented publicly expressed dissent in its decision of 9 August 2011 [Kocherlakota, together with 2 other FOMC members, dissented over whether the Fed should explicitly indicate that it would hold rates at "0 to 1/4 per cent at least through mid-2013", or merely describe economic conditions as "likely to warrant exceptionally low levels for the federal funds rate for an extended period".] Kocherlakota was born in Baltimore, USA, where his parents were graduate students at the Johns Hopkins University, but spent much of his childhood at Winnipeg, where they were later faculty members at the University of Manitoba. Speaking last fall in Missoula, Montana, he said:
Since December 2000, the Bureau of Labor Statistics has been keeping data on the job openings rate, which is defined as the number of job openings divided by the sum of job openings and employment. Not surprisingly, when job openings rise, the unemployed can find jobs more readily, and the unemployment rate typically falls. The inverse relationship between the unemployment rate and the job openings rate was extremely stable throughout the 2000-01 recession, the subsequent recovery, and on through the early part of this recession.
Beginning in June 2008, this stable relationship began to break down, as the unemployment rate rose much faster than could be rationalized by the fall in job openings. Over the past year, the relationship has completely shattered. The job openings rate has risen by about 20 percent between July 2009 and June 2010. Under this scenario, we would expect unemployment to fall because people find it easier to get jobs. However, the unemployment rate actually went up slightly over this period.
What does this change in the relationship between job openings and unemployment connote? The disincentive effects of extended unemployment insurance benefits are one possible cause for this change. However, I suspect that these effects are not all that large. I am comfortable with the San Francisco Fed’s 2009 estimate, which finds that the extensions of benefits have boosted the unemployment rate by 0.4 percent.
The bigger issue is mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch—geography, skills, demography—and they probably interact in nontrivial ways. For example, there may be jobs available in eastern Montana and western North Dakota because of the oil boom. But a household in Nevada that is underwater on its mortgage may find it difficult to move to those locations.
[SB adds: Nevada and North Dakota are at opposite ends of the statewise US unemployment rate list; at 12.9% and 3.3% as of July 2011. The GoogleMaps driving distance from Carson City NV to Bismarck ND, the respective state capitals, is 1,376 miles, or about 23 hours driving time.]

Of course, the key question is: How much of the current unemployment rate is really due to mismatch? The answer seems to be a lot. I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of 2.2 percent, we would have an unemployment rate closer to 6.5 percent, not 9.6 percent. Together with the San Francisco Fed’s estimate of the impact of benefits, this analysis implies that over 2.5 percentage points of the current unemployment rate is attributable to mismatch.

The last of the distinguished economists that I cite is Nobel Laureate Michael Spence of Harvard. Although he too, like Kocherlakota, is US-born, he did his secondary schooling at the University of Toronto high schools, which gives him his Canadian connection. Writing in the current edition of Foreign Affairs, Spence argues that
By relocating some parts of international supply chains, globalization has been affecting the price of goods, job patterns, and wages almost everywhere. It is changing the structure of individual economies in ways that affect different groups within those countries differently. In the advanced economies, it is redistributing employment opportunities and incomes.

I was particularly struck by the near-convergence in the views of Galbraith and Kocherlakota, as expressed here, writing (or speaking) as they did nearly 50 years apart. (Galbraith finished the first draft of his The New Industrial State in 1961, locking it away in a bank vault before leaving for New Delhi as President Kennedy's Ambassador to India!).