Doctors Remove Bullet From Victim's Head: Seek to Determine Cause of Death, Dylan Matthews Edition

Wednesday, 05 September 2012 19:40

Dylan Matthews usually writes insightful pieces, but he really strays from the mark today in buying a story that unemployment in today's economy is to any significant extent an issue of skills. He picks up on a new paper by two economists (Nir Jaimovich from Duke and Henry E. Siu at the University of British Columbia) that argues that structural changes rather than weak demand is the main factor behind weak job growth in the last three recoveries.

Tying structural change to the last three recoveries should immediately raise some hackles. The largest shift upward redistribution in wages from the middle and bottom to the top, occurred in the early 80s. In the folklore of skills biased technical change that dominates the economics profession, the early 80s really hold pride of place as the period that best fits the story. But Jaimovich and Siu want to put the early 80s back in the post-war golden age where we all prospered together. If they are right, then a lot of other economists are seriously wrong.

But getting to the substance, the real issue here is if there was a ton of new demand in the economy -- the government had a huge make work program, the dollar plunged and net exports soared, and job creators doubled their investment inspired by the Romney-Ryan vision for America (just kidding) -- whether or not we would not see a huge surge in employment. It's hard to see anything in Jaimovich and Siu's paper that would suggest otherwise.

We know that less educated workers bear the brunt of unemployment any time the economy falls below full employment. This was the theme of my book with Jared Bernstein a decade ago (The Benefits of Full Employment). There's a simple logic to this. The marginal workers that firms hire when demand picks up tend to be less educated on average than the core workers who stay employed no matter what.

Think of a factory where output has been cut by 50 percent or a store where sales fall by the same amount. The managers likely stay on in their jobs, as well as the most skilled maintenance crew in the case of the factory. The people who get laid off will be the line workers in the case of the factory or the retail clerks in the case of the store. However this change in skills mix is not an indication of a change in technology, it's an indication of weak demand.

If we actually had a serious issue with technology changing the mix of skills needed in the economy then we should be able to find large sectors of the economy where there are large numbers of job openings, where wages are rising rapidly and the average weekly hours are surging. We don't see this. (Yes, employers complain about not being able to find qualified workers, but if this is true then our job creators have forgotten how to raise wages.)

The real story of this downturn seems very simple. We had a huge housing bubble that was driving the economy through its effect on consumption and residential construction. When it collapsed, it created a gap in demand on the order of $1.2-$1.5 trillion. There is no easy way for private sector demand to fill this gap. (Anyone got a story of how that would work?)

This means that we have to rely on government deficits to fill the demand gap in the short-term. In the longer term we should be looking to reducing the trade deficit. Residential construction should also help as it gradually returns to its trend levels from the extraordinarily depressed levels that resulted from the overbuilding of the bubble years.

Anyhow, the housing bubble story provides a simple answer as to why we are not creating jobs. I suppose we can keep a lot of economists employed looking for other explanations, but aren't there more productive things they would be doing?