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Home Publications Blogs Beat the Press Unemployment Is Cyclical: Taking Jeffrey Sachs to School

Unemployment Is Cyclical: Taking Jeffrey Sachs to School

Monday, 06 August 2012 15:08

Jeffrey Sachs has played a useful role in challenging the economic orthodoxy in many areas over the last three years. However, when he tries to tell us that the current downturn is structural not cyclical he is way over his head in the quicksand of the orthodoxy.

Let's start with his simple bold assertion:

"Consider the new U.S. unemployment announcement. If you are a college graduate, there is no employment crisis. 72.7 percent of the college-educated population age-25 and over is working. The unemployment rate is 4.1 percent. Incomes are good."

Umm, no, that's not right. If we go back to 2007 we would see that the unemployment rate for college grads was 1.9 percent at its low that year, less than half of the current rate. It averaged 1.6 percent in 2000.

 Unemployment Rate for College Grads, 25 years and Over

college_gradsSource: Bureau of Labor Statistics.

If the current unemployment in the U.S. economy were structural than we should expect to see lower than normal for these college grads whose labor is in short supply. Instead, we see that their unemployment rate is more than twice the pre-recession level and close two and half times its 2000 level.

We should also expect to see that real wages for college grads are rising rapidly. They aren't. They have not even kept pace with inflation for the last dozen years.

In short, Sachs does not even have the beginning of an argument here. He'd better find some new data or give up his argument that the causes of unemployment are structural. His data indicate the opposite. 

Comments (20)Add Comment
College Grads Working in Coffee Shops
written by Bart, August 06, 2012 4:32
Here in a medium sized university town, one that recently flip-flopped its president, there are many underemployed graduates working in restaurants and coffee shops.
written by joe, August 06, 2012 5:14
Steve Keen has found a correlation of -0.92 between the change in private debt(NOT public debt) and the change in unemployment. Since people aren't taking out new credit, the govt's deficit is just barely big enough to keep us stumbling along. To restore employment, you either need to increase the deficit or get people to spend more than they earn (the latter will of course end in another crash). Truly, this stuff isn't rocket science.

Jeff Sachs, Classical Economist
written by Paul, August 06, 2012 8:07
The "structural" unemployment argument is merely a corollary of the classical proposition that all unemployment is voluntary, i.e., if the "structurally" unemployed would only get the proper training, they could easily find good jobs. Since they "choose" not to, the government has no obligation to help them get work.

In the Keynesian universe, unemployment is cyclical and government does have an obligation to act by stimulating the economy to create demand and therefore jobs. So the "debate" here is really nothing new. Just the same old rhetoric in a fancy new "structural" dress.
College Grad Debt loads and education inflation matter too
written by Walter, August 07, 2012 2:37
While he is doing the homework and data collection, he might want to factor in debt/income ratios for current grads, and well as how the rise in costs of education have outpaced wage growth.
What is "orthodox"?
written by Nick Rowe, August 07, 2012 6:28
Many (most?) economists who consider themselves "orthodox" ("mainstream" might be a better word) believe that the current (US) downturn is cyclical (i.e. due to Aggregate Demand) rather than structural. If anything, I would say that it's a "heterodox" opinion to say it's all structural. (Obviously, many heterodox economists think it's cyclical too).
The Confidence Fairy in Drag
written by Ron Alley, August 07, 2012 6:30

If you haven't had the time to consider this Times editorial and the earlier article it cites, check it out.

That other inflation
written by LSTB, August 07, 2012 7:02
Out [sic] kids should be in school and training, rather than in unemployment or low-skilled work.

Reading Sachs' article, I think he's just arguing for more credential inflation.
written by ezra abrams, August 07, 2012 12:43
If structural unemploy was a problem, it might affect college grads to - maybe the problem is that we don't have enough PhDs
I don't actually believe that, but the point is that , sadly, I don't think the logic here is all that good.
It is, imo, way below the high quality you normally set, and I'm a bit dissapointed.
written by ToddG., August 07, 2012 2:58
My gut feeling is that the employment numbers are way off, especially as they pertain to under employed people, a group of which I happen to be a member. In the college town where I live, population 300K with 7 universities, the hiring prospects are dim. As the first poster indicated, a college degree seems to be required for even coffee servers these days. And all the bartenders I know seem to have one or more degrees, but still can't find a "real" job. I'm closer to mid-life with a couple of advanced degrees and lots of experience, but I'm not finding the going any easier either. I pity the young right now, because with student debt being what it is, and pay being what it is, their doesn't appear to be room for lots of optimism.
written by urban legend, August 07, 2012 4:07
If there is something "structural" in the unemployment numbers, it's not what the do-nothing-wait-ten-years like Sachs are saying -- mismatches -- but the generation-long neglect of infrastructure caused by the reflexively anti-tax right-wingers. That started to show itself not only in falling bridges and failing levees, but also in the "jobless recovery" after the 2001 recession. Bush and Greenspan hid that fundamental weakness by encouraging excessive growth in the real estate sector. Two to three million more jobs modernizing and maintaining the national infrastructure would have made that artificial bubble unnecessary.
Define "Structural"
written by TVeblen, August 07, 2012 9:18
I think it would be helpful if we could agree on how to define and measure "structural" unemployment. If you fit a time-trend to the unemployment rate back to 1948, you get a slightly positive coefficient. What does that mean? Perhaps it reflects some underlying (structural) process at work, say, labor-displacing technological change or greater income inequality which dampens demand-side effects. Deans graph only covers a decade where all the net jobs have been destroyed by this depression. Another point is that the rate of growth of employment growth has been in a secular decline (which is part of that time trend). I agree that we need some sort of "employer of last resort" policy, but, over the long term, I just don't see that private capital is going to increase its demand for workers. I think both Marx and Schumpeter were on to this idea a very long time ago.
Other Countries
written by RL, August 08, 2012 2:08
Aren't there other countries that have managed to have unemployment rates that are lower than they've ever been in the United States? I don't know where to find good data on this or whether all countries are using the same standards of measurement, but Japan apparently had an unemployment rate of 1% in 1968 and despite chronic poor growth still has an unemployment rate of just above 4% right now. South Korea's rate is below 4% and was around 2% for much of the nineties. I'm sure there are other similar examples. How is is that these economies manage to have unemployment rates that appear to be unattainably low for the U.S. or Europe?

And even in these countries, there appears to be an unmistakable upward trend in the average unemployment rate. I seriously doubt that Japan will approach their 1968 unemployment rate of 1% any time soon. Does anybody have a good explanation of this? Labor-displacing technology doesn't seem convincing as this sort of technological change had been going on for many decades prior to when these extremely low unemployment rates were achieved. Income inequality seems like a promising explanation, and it would be pretty easy to figure out if it is the major cause by comparing the increases in inequality in different countries and comparing it to the secular increase in their unemployment rates. I'm guessing, though, that if there were a tight correlation there it would already be widespread knowledge.
written by jay, August 08, 2012 6:19
From what I read, I believe Japan has a culture of job security but may also have an underemployment problem too. You have a lot of people working but not necessarily in the best jobs. It seemed like there was some social stratification going on with one group of people with the good permanent jobs and then there's everyone else.
written by AlanInAZ, August 08, 2012 10:45
Dean's case would have been better made had he included unemployment for the group of less educated workers. I think everyone acknowledges some impact of the business cycle, however, the catastrophic impact is really on the less educated working class and that is mostly Sach's point.
Drives me crazy
written by Floccina, August 08, 2012 3:50
"Consider the new U.S. unemployment announcement. If you are a college graduate, there is no employment crisis. 72.7 percent of the college-educated population age-25 and over is working. The unemployment rate is 4.1 percent. Incomes are good."

This Drives me crazy. Of course college grads are more employed, they are more able and can out compete the others. I read that 50% of college graduates are taking jobs that high school grads could do.
written by A Populist, August 08, 2012 9:34
We have suffered through a long litany of bogus arguments from the right, to justify policies which redistribute income upwards, and to attack any policies which will reverse this process.

The latest canard coming from the right, is that people are Unemployed, because they are uneducated - and that the educated are doing just great. I am hearing this from all kinds of mainstream outlets.  It is the excuse-of-the-day.

Sach's main point in the article, is that stimulus and Demand are not the answer, but education IS. (and grads are doing great).

There are at least 3 problems with this:

1.  We need more Demand.

2. Education isn't going to solve this problem on a global level.  Becoming more educated has reached it's limit, and Unemployment is higher than usual among the Educated, as well.  Not to mention Underemployment.

3. He is singing in harmony with the latest talking point message from the right - by accepting and repeating their false facts.

Those arguing against stimulus (which seems to include Sachs) are making excuses for doing nothing (except improving education) by arguing (falsely) that college grads are doing fantastic.

Sachs isn't saying that "all those lazy poor people just need to go to school", but he is reinforcing a lie which gives credibility to those who ARE saying (or implying) that.

Dean is making it clear, (via the graph) that even these highly educated workers, are unemployed at a higher rate than usual.  This is a very clear debunking of the idea that a shortage of highly educated workers is "holding back" the economy.  It also debunks the idea that if people just "get educated", they will get a job and be fine.

There are many arguments which require analyzing data about low income workers, in order to refute them.  But this latest canard is not one of them.  Adding more data confuses the point.
written by AlanInAZ, August 08, 2012 10:38
@ A Populist

The US economy has been juiced up for at least the last decade by increasing levels of both public and especially private debt. The US aggregate was sustained through debt accumulation. I don't see how starting another debt driven bubble is a long term solution. There must be a better more sustainable path.
Labor and Livelihoods Coordinator
written by khalil shahyd, August 09, 2012 9:28
This discussion over cyclical or structural declines in the American economy are fundamental and something progressives need to have more carefully.

I think Dean (and many other Keynesians)miss a couple of points.

1. They are analyzing the US economy in a national bubble and not as part of a global economy, where in the next 30 years, upwards of 80% of the world's economic growth will take place not in the US and Europe but in the newly emerging economies. That implies structural (and ecological) limits to the ability of the US economy to grow and more important, grow equitably. Dean like too many other progressive economist, neglect any incorporation of natural resource scarcity and ecological economic analysis to their work.

2. Dean argues that we should expect to see lower unemployment for college grads, when the reality is that those jobs have seen the least amount of growth in the past 5-10 years, which also might influence (coupled with the over all decline in the strength of organized labor) the fact that wages for college educated workers haven't kept up with inflation. There is simply a glut of us out here competing for fewer and fewer jobs, not to mention the increasing internationalization of these jobs putting us in greater direct competition with similarly or better educated graduates abroad.

Ultimately, the motivation for progressive economist to dismiss talk of "structural" implications to the current crisis is a faith in the ability for the economy to "recover" some pre-crisis equilibrium provided we implement the correct policy mix. Labor Unions and Civil Rights groups are in a similar state where they hope to recover the now defunct "social contract" and some semblance of the pre-crisis social mobility into the middle class.

The truth perhaps is that we are in a structural and indeed global re-balancing of the economy, where the US economy will produce and specialize in lower wage, lower skilled work for the majority and fewer high income "middle class" jobs for the rest.

If that is the case, then this economic crisis is not something to "recover" from but something we have to transition from to a new type of economic system.
written by A Populist, August 09, 2012 12:59
Re:  "The US aggregate was sustained through debt accumulation. I don't see how starting another debt driven bubble is a long term solution. There must be a better more sustainable path."

I agree.

But first we need to become much more efficient at  discrediting false narratives, which prevent us from even seeing the real problems.

If we blame our problems on lack of education, too much government, the national debt, too high taxes, etc, then we basically end up doing nothing - which apparently suits those in power just fine.

Why is "private debt" too high?  Well, clearly there are creditors for every debtor, so those who want and need to spend, don't have the cash.  Redistributing money upwards, depresses the economy, as the money is socked away by the wealthy.

The idea of stimulus, is to increase Demand (and thus employment) to the point where low end wages rise faster than assets and prices, at which point the economy can be self-sustaining at low Unemployment.

If the stimulus is insufficient to get the economy near full employment, then wages stay low, and debt will increase without getting us all the way there.

Now, you could argue that we will run into resource constraints, etc, but that is not a problem now.

I would still argue for stimulus, because there is permanent damage being done to our long term capacity.

Also, with bridges collapsing and killing people, it is pretty much a no-brainer to fix our roads, bridges, pipelines, and other infrastructure, while we have excess labor.

 I agree with Dean that productivity means that the "chicken littles" crying about the baby boomer "Demographic Doom" and SS, make no sense.  However, even if it were true that we face a future labor shortage, then we need to "stock up" on infrastructure to free up future labor to care for baby boomers.  If we do indeed have a future labor shortage, a bunch of credits on bank computers isn't going to solve that.

Seriously, though, if I were to make just one point, it would be that we really need to get working wages high enough that people can survive, save for retirement, pay taxes, etc, without going into massive debt.

Even those who argue for lower total consumption should be on board with that.  With higher working wages, we could work less, consume less, and retire early, with less stuff, but no debt.

We really have the opportunity to have better lives for all, if we just stop the craziness.
written by AlanInAZ, August 09, 2012 1:54
@ A Populist

I might think a stimulus is ok if I could imagine projects that are both beneficial long term and available for immediate spending. I think you will have a problem if you actually try to come up with a realistic list for 500 billion dollars.

I think the key economic problem has been funneling gains from productivity improvements into the very top income group. The relative income stream into the lower and middle class must be increased. Adding a stimulus doesn't solve this problem. My ideal solution would be some forms of private debt relief and tax overhaul to increase transfers from top to middle/bottom. My main issue with Dean's post was the that I thought he presented the case that we only have a cyclical unemployment problem when in fact I think we do have a structural problem that I recognize is not limited to eroding educational achievement.

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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.