Tuesday, June 22, 2010

Cant think of clever tagline today---But interesting post on why you may not be able to find a job...

    Why has job growth, as we come out of recessions, been so tepid? Don't business need employees as demand picks up? Well, yes and no.  It depends on the type of industry and the changes going on in the economy even as we experience a recession.  In large part, technology advancement has not taken a "break" as a result of recessions as far back as the early 1990's.  It seems to have flourished very well, overall (think phones, computers, tele-communications, transportation, etc) in spite of overall economic conditions.
    As firms start to recover with smaller workforces their first instinct is to not over-commit in terms of hiring people. People are expensive! At the margins, they look for a competitive edge that will reduce the cost of producing as they ramp up production again.  The first place to realistically look is at technology.  A question an entrepreneur may ask themselves: What technology has emerged since my last big investment that may help me (1) reduce costs or (2) increase my productivity? Basically they are looking for ways to efficiently replace labor (L) with some sort of technology (in economics we call that Capital or "K" for Kapital). 
     If there is adoptable technology available, and it meets the above two requirements, then the prudent business owner will "substitute "K" for "L"  Those workers who previously held those jobs and were laid off one or two years ago will re-enter the job market to find the job they performed is no longer available---time and technology has passed them by.  If the new technology becomes widely adopted, then workers cannot move ANYWHERE to find their "old job"--it has been automated out of existence.
    This is the definition of someone who is "structurally unemployed" (defined further below).  They must re-train/re-educate to find other job. For example, re-train to produce/maintain the technology that REPLACED them at their previous job (irony?). 
   If structural unemployment is the dominate form of unemployment then it is much more difficult to solve then simply spending money to increase demand for goods/ services and assuming employers will hire to meet that new demand.  Policy makers should read between the lines to determine what is really going on with the workforce and propose policies that will address the root problem...

Update on Structural Unemployment
One key question in considering demand-side economic policies, such as fiscal stimulus and other deficit spending, is whether the elevated unemployment rate is a product of cyclical or structural forces. If unemployment is cyclical, then boosting aggregate demand would mean that employers would re-hire workers earlier and save the economy a lot of pain. If it's structural, though, meaning that the economy is undergoing significant changes and there is now a substantial mismatch between workers' skills and the kinds of skills needed throughout the economy, measures aimed at increasing short-term demand might not do much to help out the unemployed.
    In 2003 the NY Fed published a paper examining whether the 1990-91 and 2001 "jobless recoveries" were caused by structural factors. The authors, Erica Groshen and Simon Potter, found evidence that these recessions, compared to past recessions, featured more "permanent relocation" of workers among industries. In other words, when the recessions were over and recovery had taken place, more industries were net gainers or losers of employment. Some industries were left permanently smaller than they were before the recession, meaning that workers couldn't return to those sectors even when demand and GDP had recovered.
     Menbere Shiferaw and John Robertson, economists at the Atlanta Fed, have replicated one of Groshen and Potter's key graphs depicting unemployment in the 2001 recession:



***The one outlier in the top right corner, if you can't make it out, is the "federal government" industry. It gained jobs during the recession and has gained jobs far faster than any other industry during the recovery

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