All Commentary
Wednesday, November 30, 2011

Unemployment: What’s To Be Done?

In Part 1 I outlined natural unemployment, government-caused unemployment, and the attempts to measure these. We saw how ambiguous and subjective some of the concepts of unemployment are and how the government, specifically the Federal Reserve, is charged with managing it. Now we turn to current conditions and what can be done about them.

There have been huge advances in technology and substantial declines in trade barriers in recent years. While these developments have raised living standards they have been hard on people whose skills were rendered obsolete or uncompetitive. When changes evolve gradually, as when so many people left farming in the last century, the disruption is not so great. Changes are now coming faster and are extending to some high-paid professional jobs. Automated systems can now handle at least the routine aspects of some legal research and medical diagnosis.

Time and time again new doors have opened to workers as old doors closed. Machines replace workers, but they raise productivity and produce new employment opportunities. We can expect this pattern to continue for a long time to come. Still, it is within the realm of possibility that robots and computers could take over so much work that the demand for human workers would shrink drastically. But those very machines would mean higher productivity and thus higher living standards.

A great deal of work can be now be done remotely, providing an advantage to areas with low living costs. Substantial outsourcing of such jobs to foreign countries has occurred (though that trend may be reversing as low-cost areas of the United States become competitive and as customer dissatisfaction and problems with managing offshore workers come up). The benefits of outsourcing and other productivity enhancements are spread across all consumers, but the job losses are concentrated among small and sometimes vocal minorities.

Another theoretical point: Unemployment notwithstanding, it is an empirical fact of life that labor is scarce relative to natural resources, as Murray Rothbard explained. Over time, this gap tends to lessen and could theoretically disappear.


Education Is Key

Problems with education are legion, but two in particular bear on unemployment and underemployment. One is the emphasis on college education over vocational training. Everyone should attend college, says President Obama. Really? What about welders, truck drivers, repair people, retail sales people? These skills are in demand, and for many people the jobs may offer good pay and personal satisfaction. Why not attend a trade school or get an apprenticeship rather than a college degree? Compare four years in school leading to a bachelor of arts in business and a big student debt versus on-the-job learning.

The second problem is that college administrators and instructors lack incentives to prepare students for good jobs. Schools usually have little to say about the jobs their graduates have gotten or the debt burdens they carry.

Even with all the emphasis on college, by 2020 only about a third of the labor force will be equipped with bachelor’s degrees or higher, according to the McKinsey Global Institute. But the glut of dubious business and social “science” degree-holders will continue while STEM (science, technology, engineering, and math) degree holders will remain scarce.

Among employers surveyed by McKinsey, a majority expect to hire more part-time, temporary, or contract workers. One reason for this trend is mandated and generally very expensive health insurance for full-time employees. But more sophisticated resource-management systems also contribute to this trend, in addition to telecommuting opportunities.


Unemployment Figures Are Grim, and Yet . . .

As this is written, the widely followed U-3 measure of unemployment stands at 9.1 percent while the broader U-6 is a whopping 16.2 percent. People are also going longer without work. About 45 percent of those unemployed have been out of work for more than 27 weeks. The number of discouraged workers rose sharply during the recent recession. Speaking of the Great Recession, it officially ended in June 2009, and if we had gotten a recovery along the lines of past recoveries, GDP would be booming by now and unemployment, always the last aspect to recover, would be falling noticeably. Not only is unemployment high, but GDP growth for the first half of 2011 was close to zero. There was talk of a slide back into recession, though this diminished in the fall.

Job losses since the start of the Great Recession number about 7.5 million; three million more people have become discouraged. Total payrolls amount to about 130 million, fewer than in 2000, when the population was about 11 percent lower. Seven people compete for each job opening.

Unemployment varies widely from place to place. The U-3 version varies from 3.2 percent in North Dakota to 12.4 percent in Nevada. Among cities the numbers range from 3.2 percent in Bismarck, North Dakota, to 27.9 percent in Yuma, Arizona. There is also wide variation among job classifications. Nutritionists, welders, and nurses’ aides are in short supply, along with computer specialists and engineers.

Aggregate figures always mask important differences. Many employers still find it hard to locate good people. The McKinsey study reports that 40 percent of companies surveyed have had openings for six months, while 64 percent reported positions for which they cannot find qualified applicants, with managers, scientists, and computer engineers topping the list.

Anecdotally, “Now Hiring” signs are not hard to spot. Friends who own businesses tell me they have difficulty filling even a receptionist’s job with someone who is reliable, can write a passable letter, or create a simple Excel spreadsheet. Alas these days one cannot assume that a holder of a bachelor’s degree in business, for example, has these basic skills.


Recent Government Policy

The Fed has been unable to do anything about unemployment in recent years. The massive doses of money inflation, which tripled the monetary base (currency plus bank reserves) from about 2008 until the present, have not produced any significant price inflation, and unemployment remains stubbornly high. Money inflation has not produced price inflation largely because banks are not lending but instead have accumulated massive amounts of excess reserves—above and beyond the levels mandated by the Fed to back deposit liabilities. (The Fed pays interest on reserves held in the banks’ Fed accounts.)

As we have seen, the distinction between U-3 and U-6 hinges on the rather arbitrary classification of some unemployed workers as “discouraged.” Alternately, one could simply count the number of work-age people who do not hold jobs. For example, one-fifth of all men of prime working age are not getting up in the morning and heading for a job either because they’re officially unemployed or excluded from the labor force.

Labor productivity is way up and with it, corporate profits. This is typical of the early stages of a recovery. Employers realize that they may have gone overboard with hiring during the boom and need to pull back. When they need additional help they usually turn first to temporary workers. Employees work harder with the specter of unemployment looming large. Only later does employers’ confidence pick up enough that they’re willing to take the risky step of adding permanent hires.

Productivity increases are a good thing in the long run, but by this stage of the recovery employment should be picking up. Why isn’t it?


What's to Be Done?

Businesspeople have to predict the future, so they hate uncertainty, especially the kind that comes from government—and there’s plenty of that around right now. What will Obamacare do to them? Will the Bush tax cuts be allowed to expire next year? Will there be another debt crisis? What will happen to the not-so-almighty dollar? Who will win next year’s election? The best way to get the economy on track again is to lessen these vexing uncertainties. Given the performance of the President and Congress in the recent debt ceiling debacle, this seems unlikely to happen before the next election.

Rhetoric matters. By 1937 unemployment had recovered somewhat from its Great Depression peak of 25 percent. But with the failure of the New Deal becoming evident, FDR, needing a scapegoat, turned against businesspeople with new regulations, antitrust action, new taxes, and hostile rhetoric—he called them “economic royalists” at one point. The recovery stalled, unemployment rose, and only the war brought an end to unemployment—good news if you got a job, bad news if it was a job that got you shot at. (But what was being made? Not consumer goods.) President Obama has referred to “fat-cat bankers” but has backed away from inflammatory rhetoric, perhaps because of adult supervision.

Can stimulus programs mitigate unemployment? Sure, they can put people to work, but the projects are politically motivated and do not represent the best use of scarce resources, as market-based projects must try to do. The projects end, the workers disperse, and there has often been little or no lasting benefit. About all we have to show for those programs are massive new debt levels, a weakening dollar, and a feeble economy—and yes, a frightened and angry populace.

The economics profession must lessen its fascination with dubious macroeconomic aggregates. Production of needed and wanted goods and services is what really matters, not just production of any old thing that gets added to GDP. Economists should focus on conditions that generate real jobs, jobs that produce things people really want, not just any activity that draws a subsidized paycheck.

Congress must make serious spending cuts, and proponents should not pretend these won’t hurt short-term. Cuts should be immediate, because promises about cuts ten years from now are all but meaningless. Today’s Congress has little influence over future officeholders.

The Federal Reserve should be relieved of its unemployment mandate (and the new Consumer Financial Protection Bureau). Its money-creation powers should be reined in, and ultimately it should be abolished.

  • Warren Gibson teaches engineering at Santa Clara University and economics at San Jose State University.