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Home Publications Blogs Beat the Press Are We Suffering from Too Many or Too Few Workers?

Are We Suffering from Too Many or Too Few Workers?

Thursday, 12 June 2014 04:37

Binyamin Appelbaum had an interesting piece in the NYT more or less summarizing views of economists on the economy's near and long-term problems. The piece reflected the incredible confusion among economists. This raises the obvious question, if economists really have no clue about the economy, why do we waste good money on them?

Anyhow, we find that we are suffering from too many workers (high unemployment) and likely to continue to experience high rates of unemployment for the indefinite future due to a lack of demand in the economy. A big part of the problem from this view is that with the inflation rate near zero, the real interest rate (the nominal interest rate minus the inflation rate) can't fall low enough to bring the economy back to full employment since the nominal interest rate can't be negative (or at least not with conventional policy).

At the same time that the economy is suffering from too many workers we are supposed to also be troubled by the prospect of too few workers. Hence it is bad news that immigration has slowed, and for the longer term future, the birth rate has dropped. It's a bit hard to see this one. There could be an argument that shortages of workers with specific skills are holding up the recovery, but believers in markets know that shortages manifest themselves in rising prices, or in this case wages. There are no major areas of the economy (by occupation or location -- sorry North Dakota ain't major) with rapidly rising wages. So it's hard to see how getting more workers would provide a big boost to the economy. (More foreign doctors could drive their wages down to the averages for other wealthy countries, but I wouldn't consider this a big macro effect and I doubt these are the immigrants other economists are envisioning.)  

Remarkably, trade does not appear anywhere in this discussion. In the old days, econ textbooks told students that relatively wealthy countries, like the United States, are supposed to be exporters of capital to relatively poor countries, like China. This was part of the story of comparative advantage, capital is relatively plentiful in rich countries and relatively scarce in poor countries.

Exporting capital means running trade surpluses. In fact we have been running trade deficits, and in the years since the East Asian financial crisis in 1997 (which sent the value of the dollar soaring) we have been running very large deficits. In the most recent quarter's data our deficit was just over $500 billion, or 2.9 percent of GDP. This creates a gap in demand that we have to fill from either more consumption, investment, or government spending.(That's definitional -- if you don't like it, that's too bad, it is an inescapable truth.)

It is not easy to find a mechanism to boost these components of spending as the research cited in these articles shows. Consumption is actually quite high today relative to disposable income. Insofar as income can be shifted from the rich to the middle class and poor it can lead to somewhat more consumption, but it's hard to believe we would fill the gap created by trade.

Non-residential investment is actually close to pre-recession levels measured as a share of GDP. We can see some boost, but a rise of 2.9 percentage points of GDP would take us above the shares during the tech bubble at the end of the 1990s. Residential investment has some room to grow, but its absurd to imagine it will get to the bubble peaks. In fact, given current demographics and the rise in health care spending as a share of GDP, it is unlikely we will even get to the pre-bubble average of just over 4.0 percent of GDP. At the moment, extraordinarily high vacancy rates explain the continuing weakness of the housing sector.

We could of course boost the economy with more government spending, but politicians don't like strawberry ice cream or budget deficits. So this means we really don't have any way to replace the demand lost to the trade deficit, but for some reason no one wants to discuss it. Oh well, I guess the Catholic Church use to impose strict limits on debate back in Medieval times.

There is one other point that is worth noting in this discussion. We have seen extremely weak productivity growth since the recession. While some have argued that this is a long-term trend, there is an important sense in which productivity growth is an endogenous outcome that depends on the state of the labor market. When the economy is weak and therefore not generating decent jobs, even highly educated workers end up taking low paying low productivity jobs. We have lots of college grads who are now working in fast food restaurants.

This leads to lower economy-wide productivity. It would be wrong to infer that the slow rate of recent productivity growth reflects the economy's underlying potential, as opposed to the failure to have enough growth. In short, weak productivity growth is primarily the result of the ban on discussion of the trade deficit and politicians' dislike of strawberry ice cream and budget deficits.

Comments (28)Add Comment
Why Can't Everyone See the Parade Better?
written by Last Mover, June 12, 2014 7:14

In sum only one of three Keynesian tools among taxes, interest rates, fiscal spending - can work to restore full employment - fiscal spending. (The willfully ignorant don't know that taxes and interest rates are Keynesian tools too.)

Going on and on about whether there are too many workers or not enough, and whether they are productive is secondary to the full employment problem. Prices and wages that are supposed to allocate resources efficiently - already severely flawed due to market failures - become hopelessly flawed in sustained extensive unemployment and underemployment. They cannot and will not restore the economy to full employment on their own, no matter how low taxes and interest rates.

Yet the austerian mindset pervasively pollutes the public discussion with long debunked classical notions of a self correcting economy with falling prices and wages in a recession that restores itself to full employment - if only big government would get out of the way and let it work.

Thus the fetish on more or less workers, more or less productivity, etc, because the framework remains frozen by the sock puppets in the tortured logic of simpflied supply and demand curves that can work fine at selected micro levels.

Yes, there are no hundred dollar bills on the sidewalk because someone already picked them up under the efficient market hypothesis. Yes, if something is priced higher more of it tends to be supplied and less demanded. Yes, more productivity can drive prices down and less can drive prices up.

But this is not necessarily how things work at the macro level. They just don't, especially whether at full employment or not. The fallacy of composition applies at the macro level. When everyone stands up to see the parade better, no one sees the parade better.

So less productivity can mean more workers hired for a given level of aggregate demand at full employment rather than "a less productive economy". So less workers available can mean higher wages for a given level of full employment demand than a "a less productive economy" because of a "shortage" of workers.

This is not that difficult to understand if the sock puppets would get their heads out of the sand. Of course they don't know that do they, because when they all put their heads in the sand, they all think they can see better.
written by John, June 12, 2014 7:32
The problem has been economist telling everyone lower cost is good for you. This fact is one of the primary drivers of the trade imbalances. Unfortunately, this bad policy has led to enormous pain for Americans while staring down unfair competition from China, Mexico, etc.
Devaluation? Could happen
written by Larry Signor, June 12, 2014 7:33
There is an interesting side play going on in the China-Russia petro deal. The Russians are preparing to transact in renminbi due to sanctions imposed. This provides a strategic opportunity to devalue the dollar and drive up the price of the renminbi, making sanctions more effective, as well as improving the national account
balance. All in the name of National Security. Even "Free Traders" should be able to support that.

written by Trolley, June 12, 2014 8:38
Once in a while, you write a post that calls into doubt the wisdom of (or at least the necessity for) current levels of immigration. (Your posts on population decline in Japan come to mind.) But, while you tiptoe up to the line of suggesting immigration reduction, you never actually cross that line.

Any thoughts?
written by Bloix, June 12, 2014 9:40
You write that, by definition, a trade deficit "creates a gap in demand that we have to fill from either more consumption, investment, or government spending." I think what you mean to say is that we either have to fill it, or we have to live with lowered demand for domestic goods and services and the resulting high unemployment.

This may be obvious, but sometimes we "have" to fill a gap because the gap is in an accounting identity, and so it will definitionally fill itself whether we want it to or not. You're not talking about that kind of definition, I don't think. "We" don't have to fill the gap in domestic demand if "we" don't mind that a lot of "us" are unemployed.
written by Peter K., June 12, 2014 9:42
@ troll,

I think with the large output gap and weak labor markets and stagnant wages, more workers don't help. With full employment it would help.

The hesitancy might be over scapegoating politically weak foreigners instead of placing the blame on politically powerful policymakers and interest groups who have control over trade and government spending - Baker's two preferred solutions. Plus, more immigrants mean more Democrat voters who are more likely to vote in politicians like Elizabeth Warren and Obama who will try to deal with the real problems.

In other words, stop being a bully and pick on someone your own size.
written by Anthony, June 12, 2014 9:50
"Politicians don't like strawberry ice cream or budget deficits." Who said economists aren't funny?
written by Peter K., June 12, 2014 10:00
@ troll

Also the anti-immigrant politicians like Brat who beat Cantor the Republican majority leader - who was soft on immigrant kids - and those on the right in Europe are against immigration all the time no matter the circumstances. Why lend them support? They spread lies about how immigrants are drains on government budgets and the taxpayer and nonsense about who immigrants dilute and corrupt the national culture. It's all red herrings and those people who push that kind of stuff shouldn't be supported at all. There's the same kind of people who scapegoat poor blacks and they all find a home in the Republican Party.
written by Dryly 41, June 12, 2014 10:05
Let's be clear. Republicans become deficit hawks only when there is a Democrat in the White House.

When Republicans are in the White House, as in the 20 years of deficits in the 20 years of the Reagan, Bush I, and, Bush II-Cheney administrations. When the Clinton surpluses turned to deficits after implementation of the 2001 "supply side" tax cuts, former Vice-President Dick Cheney told Treasury Secretary Paul O'Neil: "You know Paul, Reagan prove deficits don't matter."
written by Larry Signor, June 12, 2014 10:58
How did we get from a discussion of macro constituents to a misunderstanding of Deans immigration analysis? To even imply he has a political angle is extremely misleading. His immigration analysis, like his macro discussion above, is well founded and sourced, unlike some of the criticisms of his analysis. [This may qualify as a rant, but so be it.]
written by JDM, June 12, 2014 12:01
I've been reading Dean's blog for quite some time, and what I see Dean doing is not very often advocating for one particular policy idea but instead for sensible analysis of the real-world data to be used in analyzing and advocating for particular policies. Because if bad or misleading data analysis -- garbage -- is used to inform a debate, the results of the debate will be highly likely to be a garbage result.

If the advocates of a debate cannot or will not use good data analysis, the news media should be doing their job and providing that for the public, because this is the necessary context for a sensible decision.
written by gman, June 12, 2014 1:40
Silicon Valley and Corp. Ag say they want more "immigration reform"to keep wages down. I believe them. This not the immigrants fault, it is the policy makers fault and the companies who can't stand to every raise wages.
Wage Growth by Occupation
written by Ryan, June 12, 2014 1:50
What's the best source for reviewing historical wage growth trends, specifically at the occupational level? I know the BLS discourages using OES data as a time-series. Thanks!
emigration versus immigration
written by Squeezed Turnip, June 12, 2014 1:56
How about just reduce the trade deficit (capital emigration) instead of worrying about labor immigration? Troll, why the focus on labor? If you were truly fair and balanced, you would also consider the role of capital.
Upside down thinking about deficits is the key
written by Amileoj, June 12, 2014 3:07
"We could of course boost the economy with more government spending, but politicians don't like strawberry ice cream or budget deficits."

I would put it slightly differently: We could at any time boost the economy with larger planned federal deficits. These could consist of more spending while holding the overall tax burden constant, or a lower overall tax burden while holding spending constant, or (my own preference) some combination of higher spending and lower taxes.

Yes, a dollar of tax cuts would be less effective in general than a dollar of additional spending--perhaps far less effective if the tax cuts go to those with a low marginal propensity to spend.

But make those tax cuts big enough, and target them well enough, and they would work just fine. The most obvious example would be a suspension of the FICA payroll tax, which would add about a trillion dollars of spending power to the incomes of workers who, for the most part, spend every dime they make (and more).

The key missing element here, in other words, is the willingness to deliberately engineer a larger (planned) deficit. If this were a permissible option in our public discourse, then we could be having a win-win debate right now about the optimal mix between spending increases and tax cuts, and about which spending to raise, and whose taxes to cut.

Instead we suffer under an endless and endlessly perverse public debate over which means to use to further harm the economy--spending reductions or tax increases. You may pick any form of austerity you like, but you cannot argue for the opposite of austerity, and be taken seriously on the national stage.

This same perverse mindset of course presently controls debate in Europe (at least in mainstream elite circles) if anything even more than here. But we seem to be doing our best to live down to their example, when we should be providing a dramatic contrast and corrective to it.
written by Trolley, June 12, 2014 3:31
@ Peter K.

"Plus, more immigrants mean more Democrat voters who are more likely to vote in politicians like Elizabeth Warren and Obama who will try to deal with the real problems."

Thanks for your honesty.


BTW, the name is "Trolley" as in "Trolley Problem". I didn't mean to play off the word "Troll". My mistake.
written by Peter K., June 12, 2014 3:39
Thank you? My mistake. You dishonestly ignore all of my other points. You're not interested in dialogue or debate. You are pathologically obsessed with brown skin people. I will never ever make that point again in public if it gives comfort to people like you.
Sarcasm on: We should be blaming centrist and apathetic voters only!
written by jaaaaayceeeee, June 12, 2014 4:02


Blame the victims:

[the plurality of 39%] " ... mixed-preference voters could - should! - be the core of a centrist coalition. But because of their disengagement, their influence on the political process is diminished relative to the more partisan voices in the mix. This tells me that polarization may be driven as much by apathy at the middle of the political spectrum as it is by energy at the more raucous ideological ends".

See, influence peddling and garbage economics, driving bad policies, aren't the problem!
written by Trolley, June 12, 2014 4:15
@ Peter K.

"You're not interested in dialogue or debate. You are pathologically obsessed with brown skin people. I will never ever make that point again in public if it gives comfort to people like you."

Please point me to where I made any mention of "brown skin people". For your convenience, below is the entirety of my initial post:

"Once in a while, you write a post that calls into doubt the wisdom of (or at least the necessity for) current levels of immigration. (Your posts on population decline in Japan come to mind.) But, while you tiptoe up to the line of suggesting immigration reduction, you never actually cross that line.

Any thoughts?"

Further, in the interests of dialogue and debate, you might want to think about and comment on why you believe immigrants will naturally vote for Barack Obama and Elizabeth Warren.

I will be very open about my motivations: I find that most people have given very little real thought to the topic of immigration. Debate on the topic seems to be mostly platitudes and the expression of tribal dislikes. Many people, however, are willing to think about the issue honestly if politely challenged. That is my intention.

Your comment appears to fall into the tribal dislike category. You don't like a subset of the current U.S. population and you want to bring in other people who will outvote them. Not a ridiculous strategy if you believe your views are so much better for the country than those of the people you dislike. But if that is your view, you might want to be think seriously about the consequences of your strategy since you are betting the future of the country on it. You will have to explain to your grandchildren why you did it.
written by watermelonpunch, June 12, 2014 6:31
Peeps may need to read more archival Dean Baker to get up to speed. :o)

He's been accused of being anti immigration!


But no, if someone hopes he'll be anti immigraNT, then um probably you'd be barking up the wrong tree, as peter k said.

But clearly Dean Baker has indeed suggested "sharp limits",.. Qualified.

DB on Tip toes?
Only in the way a pet dog might tread lightly in rain soaked grass... Until he spots a critter worthwhile and gives chase!

why even GOP Texas is actually pro-immigration
written by Squeezed Turnip, June 12, 2014 6:42
Trolley, here in Texas, the immigrant population is a vital part of the state economy. Also, capital will take cheap quality labor wherever it can get it (except for medical providers and lawyers), because that's how capital survives to the next round, which is why the shift to policy favoring capital over labor, heralded by Reagan, has led to a 35 year stagnation of wages relative to GDP. There are important monied interests who do not want to lose that cheap labor! Otherwise, Texans might notice the regressive tax policies here that are neither business nor labor friendly.
written by Trolley, June 12, 2014 8:30
Watermelon punch,

You are right. Dean has had some thoughtful, pro-American worker things to say about immigration. To wit:

"Where Noah and I may part ways is that I would not like to see large numbers of middle skilled professionals come into the country. As it stands, employers are using H1-B visas to bring in nurses, teachers, and people with engineering and software skills. Ostensibly this is to deal with a shortage of qualified workers, but there is little evidence of rapidly rising wages or other signs of a labor shortage in these areas. It seems pretty clear that employers are simply taking advantage of the opportunity to get lower cost labor.

I wouldn’t zero out immigration in these areas, but I would want it limited. The proposal put forward by the AFL-CIO and the Chamber of Commerce to have a commission that would evaluate needs for labor in various markets sounds promising. I would also want any workers who did come into the country to be free to work for whoever they wanted for the time that they are here, as opposed to being tied to a specific employer, as is the case with H1-B visas.

As far as less-skilled immigration, I would want it sharply limited, except for family re-unification. The evidence is that this does lower wages, although most of the impact is on the wages of other immigrants because we have a highly segregated labor market. I don’t consider this to be a good thing. As I’ve written elsewhere, I don’t want policy to be structured to give professionals cheap help. I would be very happy with a world where no one could afford to hire nannies for their kids."
Trolley, if you provided links, your selective Dean Baker quotes'd represent him.
written by jaaaaayceeeee, June 12, 2014 8:45

Watermelonpunch uses links, which you should also. For example, if you read the post you linked to, and the op-editorial it links to, you would see what Baker is saying when he writes that, "immigration policy shouldn't be structured [with the goal] to give professionals cheap help [whose pay is thus reduced]...

More of Dean Baker's writings on immigration
written by John Wright, June 12, 2014 10:53

In the comment section you will see a follow-on comment:

"written by Dean, February 02, 2013 10:33"

with this statement:

"The illegal aliens and migrant workers have a president, business, most of the left, most of the right, too many politicians, and most of the media on their side. The people who are really in the shadows are the american workers displaced by illegal migrant workers, H1-B workers, etc. The outsourced and displaced american workers don’t have a president working for them or much representation in congress.
Can the ‘open borders, path to citizenship crowd’ come up with something that will fool at least some of the people some of the time? Congress should cut immigration to 50,000 a year for a decade or so."

It is a measure of the power of the elite, in business, the media and both political parties that immigration reform (which will probably not have effective employer sanctions) can get so much positive press.

One should remember American families, at the median level have little net worth, one July 2012 estimate had the median net worth per American adult was 52,752.
(from middleclasspoliticaleconomist of 2012)

Given the recent bubbles and meltdown, outsourcing and insourcing (1/3 of IBM's employees are in India) it is quite understandable that Americans, at the middle and lower income levels, may not be supportive of high levels of immigration.

The myth of the exceptional American is just that, most people realize they are NOT exceptional and do not welcome more competition for the jobs the currently have.
Link to the Median wealth figure of my previous posting
written by John Wright, June 12, 2014 11:09
Middle Class Political Economist: U.S. Trails at Least 15 OECD Countries in Median Wealth

written by Trolley, June 13, 2014 7:37

John Wright,

Thank you for the links. I had been assuming that Dean would follow the party line on immigration because so many partisan hacks do so. (I was assuming he would refuse to go where this current post naturally leads.) Dean earns points for independent, and honest thinking.
the skills gap so called
written by Jeff, June 13, 2014 11:03
Dean is right to challenge the notion of the skills gap. Having said that i'm not sure sighting the absense of rising wages is the most effective counter arguement.
Anyone who has a real job knows that there is no skill gap because there are no skills. The overwhelming majority of the jobs in the US economy can be learned from instructions taking up no more room than two sides of 11 by 8 piece of paper.
Thank you, Dean, for bringing this up
written by Dave, June 13, 2014 6:08
I have a theory about immigration that slightly counters this, but to what degree I don't know.

I believe if you bring in new resident workers/consumers, that their debt profile is generally very different than the debt profile of the consumers that are holding back the economy.

And so while they might not cause huge growth, they might not hurt either -- and I 'm talking about reasonable, proportional immigration, not targeted, market-specific immigration.

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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.