The Dismal Jobs Picture

July 19, 2010

by Jerry O’Driscoll  

Steve Horwitz has stimulated a lively discussion of the slow recovery in jobs at Coordination Problem.  There are two letters in today’s Wall Street Journal addressing the issue.  One letter references an earlier article in the July 10th Journal. 

The article is titled “Debt, Bank Troubles Leave U.S. Trailing in Job Growth.” It has charts showing how the U.S. is lagging shockingly in the jobs recovery compared to other major economies, and select developing countries (those reporting jobs numbers in a timely fashion). The only problem with the article is that it can’t explain the lag with the factors it adduces. Other countries with banking and debt problems are doing better than the U.S. in the jobs picture.

9 Responses to “The Dismal Jobs Picture”

  1. Mario Rizzo Says:

    On related note, I made this comment at Marginal Revolution:

    “In his 1936 review of the General Theory, Joseph Schumpeter points out that for Keynes “the employment of labor is an ‘adequate’ index of the output resulting from it.” In other words, Keynes is assuming that there is a fixed relationship between aggregate demand, aggregate supply and employment Therefore, he makes no room in his analysis for the phenomena described above [basically, the recovery of real output but not the recovery of employment].

    I believe that many modern day Keynesians do the same. So, for them, the failure of employment to recover is *necessarily* an aggregate demand failure.”

    What this suggests to me is that we must pay attention to capital complementarities. If certain capital-processes are no longer available — they could not be completed or they have been abandoned — then certain labor inputs will find themselves with very low marginal products in their accustomed jobs.

    Or, at least, this is something worth thinking about.

  2. Pietro M. Says:

    Are the struggling (thriving) countries in the WSJ article also countries which experienced (didn’t experience) a large housing bubble?

    Besides the depressing effect of bank deleveraging, unemployment may be due to an overproduction of unemployable workers specialized in construction and related fields. The natural rate of unemployment may have spiked where construction boomed more and more workers flocked in the field.


  3. Pietro,

    True about construction. Some construction workers were not legal, and a good portion have gone home. Hence, they would not be counted as unemployed (nor, perhaps, as employed if they were working off the books).

    The countries in the article have different stories. The U.K. certainly mimics the US story on housing, debt and weak banks, but even it is doing notably better on jobs.

    A number of countries (e.g., Brazil and Chile) suffered greatly from declining trade, but have bounced back nicely. Hungary is a basket case in the mdist of a grave financial crisis as we write, but even its jobs picture is better (for now at least).

  4. Daniel Kuehn Says:

    Mario – I do think that’s something worth talking about, and the zero marginal product point as well as the recalculation point is an important one. This is particularly true of a downturn like this one where a specific industrial bubble popped (construction).

    But we’re also seeing high profit rates and holdings of liquid assets. This suggests to me that another fruitful avenue is to (as you do) recognize where the General Theory stopped short and think about how pushing some Keynesian ideas like liquidity preference even further than Keynes himself did could explain some of the decoupling between output and employment. Most Keynesians think about liquidity preference’s impact on the interest rate and output. I think it’s worth emphasizing that it should also impact the relationship between output and employment in precisely the way that we’re seeing things play out now.

    My understanding is that Richard Kahn pushed Keynes to talk more about employment in the General Theory than he did in the Treatise. The fact that he was cajoled into that emphasis might suggest that Keynes’s primary interest was explaining the behavior of output, rather than employment. If that’s the case, it would make sense that he thoroughly worked through the money-output connection, but was a little weaker on the output-employment connection.

  5. Daniel Kuehn Says:

    I should also note – the “employment functions” in the General Theory (at least the ones in the early chapters, and in chapter 20, which I reviewed again recently) have a very flexible, unspecified functional form.

    I think it’s accurate to say that he didn’t really say much about the nature of that relationship, but I don’t think it’s necessarily right to say that he assumed a fixed relationship. He left it pretty non-descript.

  6. Mario Rizzo Says:

    Schumpeter is implying that (1) Keynes thought employment was a rough-and-ready (“adequate”) index of aggregate supply and (2) that Keynes, the policymaker, seemed to recommend policies as if the relationship were fixed.


  7. There appear to many transitory demand and supply changes playing out in the goods markets. I’ll name three: expiring tax credit for first-time home buyers; expired tax credits for cars; and inventory rebuilding. I would not expect firms to gear up hiring for what they know are not permanent changes.

    Then we must add in issues discussed in prior posts: regime uncertainty and a plethora of anticipated tax increases. In this environment, there is no mystery why firms would (1)be restrained in hiring, and (2) hold large cash reserves.

    The same thing happened in the 1930s. FDR complained that capital had gone on strike. That’s what capital does when it is unrewarded.

    A good part of reported profits are due to (1) the aforemtnioned temporary factors, and (2) cost cutting. Firms are reporting higher bottomlines even as toplines shrink.

  8. Daniel Kuehn Says:

    Jerry –
    I agree, but have you:

    1. Identified unwise stimulus efforts, or
    2. Fully explained liquidity preference.

    I’d argue you’ve probably only done the former (which is quite important to impress upon people, don’t get me wrong!)


  9. Agreed. A full explanation for LP would need to bring in alternative assets to the analysis.


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