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Structural Unemployment: Does Anyone Care About Evidence? Print
Wednesday, 09 February 2011 05:41

Most news outlets have given considerable space in recent weeks to the argument that the U.S. economy suffers from structural unemployment. This means that the reason that people are unemployed is that they lack the skills necessary for the available jobs. This contrasts with the idea that the unemployment is primarily cyclical, which means that it is the result of a lack of demand in the economy. This issue is central to our understanding of the economy since it effectively raises the question of whether we blame unemployed workers for lacking the skills needed to get a job or we blame policymakers for lacking the skills needed to run the economy.

The evidence for the structural unemployment argument has mostly been anecdotal -- interviews with managers who complained that they could not hire people at the wage they wanted to pay. The news reports on structural unemployment have not sought to look for the sort of data that would support this view of the economy, such as evidence of rapidly rising real wages for some occupations or a large increase in job openings.

One item that had been cited as supporting the structural unemployment view was the modest increase in the number of job openings from the trough of the downturn in the summer of 2009. Job openings had risen by close to a third from their low, although they were still down by more than 25 percent from their pre-recession level. Openings also never rose above 25 percent of the number of unemployed.

In any case, given the importance of the job openings number for those making the structural unemployment argument, it might have been expected that the release of data from the Labor Department showing that the number of openings had fallen for the second consecutive month would have gotten considerable attention. Instead, it merited just a few small pieces or blognotes.

 
Wall Street Journal Finds Evidence that Employers Cannot Find Qualified Staff for Top Management Positions Print
Tuesday, 08 February 2011 17:07

The Wall Street Journal ran a piece on how some companies are unable to fill positions even when more than 14 million workers are unemployed. The article indicates that the management personnel used as sources are either not competent or not being truthful.

All the people used as sources for the article complained that they were unable to find qualified workers. For example, Josh Williams, the chief executive of Gowalla, a social networking start-up, is quoted complaining that: "most people we want are employed somewhere already. We don't get a lot of applications coming in."

The way employers are supposed to deal with this situation is to offer a higher wage than their competitors in order to attract away good workers. Apparently Mr. Williams has not thought of this approach.

Later, the article comments on the experience of Toll Brothers Inc., a major builder. It cites a senior vice president of human resources, who claims that it has taken six months to find qualified applicants for some of its IT and Web developer openings. Here also, raising the offered wage likely would have reduced the search time substantially.

It will always be the case that employers will have difficulty attracting skilled workers to positions where they are offering below market wages. This seems to be the problem identified in this article, not a lack of qualified workers.

 
Did Good Housing Policy Give Chicago a Bigger Bubble? Print
Tuesday, 08 February 2011 07:53

Edward Glaeser is full of praise for the reign of Chicago Mayor Richard Daley. Among the items that he gives Daley credit for is a build-everywhere construction policy that Glaeser credits with keeping housing in Chicago affordable. He reports that the average condominium is about 30 percent cheaper in Chicago than in either New York or Boston.

Much of the reason for lower house prices in Chicago than in New York or Boston is that its housing market took a sharper plunge with the collapse of the housing bubble than in the other two cities. Prices were already lower in Chicago at the start of Daley's tenure in 1989, however they increased by an almost identical amount as in Boston through the peak of the bubble in the summer of 2006 (137 percent for Chicago versus 138 percent for Boston), although the cumulative rise was 21 percentage points less than New York's 158 percent. The biggest difference in housing costs between the three cities stems from the fact that house prices fell 27.8 percent from their peak in Chicago, compared to 21.0 percent in New York and just 14.0 percent in Boston.

It is not clear that Daley's housing policy can be blamed for the greater volatility in Chicago's house prices and it is always possible that the prices will fall more rapidly in New York and Boston going forward. However, if Glaeser had written his piece at the peak of the bubble, it would not have been possible to highlight lower housing costs in Chicago as one of the benefits of Daley's tenure.  

 
Life in Central California After the Housing Crash Print
Tuesday, 08 February 2011 06:53
USA Today has a good piece on the devastation in central California following the collapse of its housing bubble. Meanwhile, Alan "who could have known" Greenspan was giving the keynote address at the Brookings Institution at a conference on restructuring the system of mortgage financing.
 
The Washington Post Is Badly Confused About International Trade: Blames Bernanke for Higher Food Prices Print
Tuesday, 08 February 2011 05:26

We have been treated to articles in the Post and elsewhere about how employers can't find qualified workers even though the unemployment rate remains near double-digit levels. The Washington Post editorial page gave us new evidence for this claim in an editorial that said there was at least some truth to claims that the Fed's quantitative easing policy was responsible for higher food prices in Egypt and elsewhere.

The editorial tells readers:

"International commodity prices are set in dollars, so QEII means more dollars chasing the same supply of goods. The Food and Agricultural Organization calls the dollar's post-September 2010 weakening a "leading factor" in commodity inflation."

Both parts of this are wrong. Yes, food commodities, like other commodities, are typically traded in dollars, but this means absolutely zero in terms of food price inflation in other countries unless their governments have made a decision to link their currency to the dollar.

This one is easy to see. Suppose that the Fed's action reduces the value of the dollar by 10 percent so that the price of wheat goes from $5.00 to $5.50 a bushel. That might sound like a 10 percent increase in the price of food. However, if the value of the dollar has fallen by 10 percent measured in wheat, it should also fall by 10 percent measured in Chinese yuan, Indian rupees, and Egyptian pounds. This means that there is no change in the price of wheat for people in these countries. (This is not true if the country has linked its currency to the dollar, but then the blame for higher food prices lies in this decision to link the currency, not the Fed's actions.)

Of course, some food is sold under long-term contracts, which will usually be written in dollar terms. In this case, the people of Egypt or other countries will get cheaper food as a result of a weakening of the dollar.

The second part of  the Post's story is also wrong since there is little evidence of any decline in the dollar associated with QEII. The Fed's data show the dollar falling a bit less than 3.0 percent in the months since QEII was announced. That is about the same decline as we saw the prior four months, so there does not seem to be much case of a plunge in the dollar due to QEII.

In short, the fact that food is priced in dollars does not affect the cost of food in Egypt and the dollar did not fall because of QEII, so there is not much of a case here. In fairness, the Post recognized that QEII was not the main cause of higher food prices, but it was wrong to treat it as any part of the cause, except insofar as it boosted growth in the U.S. In that way, the Fed would be as much to blame for higher food prices as Microsoft and Facebook if they announced a huge new investment plan.

 
Bringing Us to Edge of a Second Great Depression Might Have Hurt the Standing of Central Bankers Also Print
Monday, 07 February 2011 05:36

The NYT had an article warning that the reputation of Mervyn King, the head of the Bank of England, is being damaged by the increase in inflation there. It says that the status of other central bankers are suffering for the same reason.

While the modest increase in the inflation rate in many countries may have some negative impact on the standing of central bankers, their failure to stem the housing bubbles that brought on the worst downturn since the Great Depression would be a more obvious explanation for their loss of status. According to the claims of many, including central bankers like Federal Reserve Board Chairman Ben Bernanke, their mismanagement actually brought many economies to the edge of a second Great Depression. While this claim is not true, it is widely believed. Most people would consider a second Great Depression to be a considerably more serious issue than 3.5 percent inflation. 

 
Robert Samuelson Thinks You Can Have Your Oil and Burn it Too Print
Monday, 07 February 2011 05:17

Robert Samuelson wants the United States to increase domestic oil production to insulate itself from political unrest in the Middle East and other oil producing regions. There is a fundamental flaw in this logic. If the United States increases its production of oil at a time when it is still readily available from elsewhere in the world, then it would not be available if the United States was subsequently cut off from foreign sources of oil.

For example, the Energy Information Agency estimated that it would take 5-10 years to bring the Arctic Wildlife refuge to peak production of 1 million barrels a day. It could sustain this rate of output for roughly 10 years and then phase down to zero over the next 10-20 years. This means that if we had begun producing oil from the area in the early 90s, as many had advocated, the flow of oil from the region would already be passed its peak and on the way down.

The same logic applies to any domestic drilling. If anyone wants to increase U.S. energy independence in the event of a sudden cutoff of oil, they should be urging less domestic production, not more.

 
Jacob Lew's Scary Oped Print
Sunday, 06 February 2011 23:08

Jacob Lew, the head of President Obama's Office of Management and Budget, had a column in the New York Times that should really scare the American people. While the purpose of the column was ostensibly to tell the American people that there are few easy budget cuts left, the scary part is that Mr. Lew seems to have little understanding of the economy.

Lew boasts about the huge budget surplus at the end of the Clinton administration. He shows no understanding of the fact that these surpluses were largely the result of a stock bubble, which was inevitably going to burst. The story of the economy's growth at that point was that the $10 trillion stock bubble fueled a consumption boom, which led to strong economic growth.

Of course the bubble was not sustainable, when it burst, the consumption it supported also disappeared. We only recovered from the recession when the housing bubble created enough demand to replace the demand lost from the collapse of the stock bubble.

The underlying problem was the over-valued dollar. This was a conscious policy of the Treasury Secretary Robert Rubin, who actively pushed a "strong dollar" policy. This policy effectively gave a large subsidy to imports and imposed a large tax on U.S. exports. The result was a huge U.S. trade deficit.

Given a large trade deficit, the economy needs either large government deficits or very low private savings to sustain high levels of employment. This is not a partisan issue; it is an accounting identity.

Mr. Lew shows no understanding of this basic point. Either this top Obama official is ignorant of basic economics or he is not being honest with the American people. Either way, it is an incredibly scary column.

 
The NYT Doesn't Like Argentina's Economic Policy Print
Saturday, 05 February 2011 22:03

That is what readers of an article on inflation in Argentina would likely conclude. The article tells readers that Argentina's government: "has tried to quell concerns about mounting inflation by continuing to keep the economy growing at China-like rates."

The implication is that having China-like growth rates is a silly distraction from inflation. In fact, China-like growth rates create the possibility of enormous improvements in living standards. Most countries would be delighted to have growth rates half as fast as China has been able to maintain over the last three decades or that Argentina has sustained since 2002. The problem of even relatively high rates of inflation seem small by comparison. In fact, the reason why economists view inflation as a problem is that it can lead to slower growth.

This article is also somewhat confused in trying to describe the problem that inflation is causing in Argentina. It claims that wages are not keeping up with food prices, but that is not the relevant issue. The question is whether wages have kept pace with inflation. The article does not address this issue.

The article includes a quote from Domingo Cavallo that is highly critical of the government. Cavallo is identified only as "a former economy minister." It would have been worth pointing out to readers that Mr. Cavallo was the minister who designed the policies that led to Argentina's crisis in 2001-2002. The Kirchners' government broke sharply with Mr. Cavallo's policies setting Argentina on a path of solid growth. Without this information, readers might think that Cavallo was a disinterested commentator on the economic situation.

 
The NYT Can't Find Anyone In Germany Who Is Not an Employer Print
Saturday, 05 February 2011 21:06

The NYT told readers that:

"While a jobless rate in single digits would be cause for celebration in many countries, in Germany it is the sign of a critical lack of workers."

Actually, for the vast majority of people in Germany a low unemployment rate is cause for celebration because most of them work for a living. A low unemployment rate both means that they are likely to be able to find work and that they will be in a position to get pay increases through time.

This 2-page article actually presents zero evidence for its claim that Germany is faced with a "critical lack of workers." It reports that:

"employers in many sectors of the German economy are facing labor shortages, under the dual pressures of an aging population and inflation-fighting measures that have kept wages low in comparison with its neighbors."

This is evidence of not very competent employers. If they need workers and can't get them, then the answer is to raise wages. People who run businesses should understand this logic. (It's not clear why "inflation-fighting measures" would keep a business from paying its workers the market wage.)

Some businesses will not be able to pass on higher wages in higher prices. This will squeeze profit margins and might force them out of business. This is the way a market economy works. Workers move from low productivity sectors to high productivity sectors. It is not clear why anyone would think of this as a crisis, although the employers who go out of business are probably not happy.

The article also goes on to complain about worker shortages due to low birth rates and limited immigration. If there are fewer workers this just means that the least productive jobs go unfilled. There will be fewer people working as store clerks in convenience stores, housekeepers in hotels, or as parking lot attendants. There is no obvious economic problem associated with workers moving into more productive occupations.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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