US labour market reality debunks mainstream view about structural impediments

An enduring myth among mainstream economists is that so-called ‘structural’ impediments in the labour market prevent aggregate spending initiatives from government being an effective solution to mass unemployment. According to this view, if the government attempts to reduce the unemployment rate below some ‘natural rate’ then accelerating inflation will be the only outcome. The ‘natural rate’ can, in turn, only be reduced by structural policies – attacks on trade unions, welfare state retrenchment, cutting the minimum wage, and the rest of the litany of neoliberal policies. And, in this view, the unemployed are to blame for their own state – a lack of effort on their part to adequately present themselves to the labour market. The prior view that mass unemployment is a systemic failure to create enough jobs is rejected. A piece of this fiction is that one of long-term unemployed (and other disadvantaged workers) are not capable of being absorbed into employment without extensive re-training and other personal rehabilitation and this also prevents the unemployment rate from falling quickly. The problem with all of these related propositions is that reality interferes and generates outcomes that contradict the assertions. It is quite obvious that if the economy is run at high pressure then firms are forced to scrap prejudice for disadvantaged groups and offer on-the-job training to them to ensure they can maintain market share. In other words, the long-term unemployed do not present an impediment to growth. Events in the US labour market at present are demonstrating this reality.

To begin, I sometimes provide this quote from Michael Piore (1979: 10) as a reminder of the cant that mainstream economists dish up when talking about unemployment:

Presumably, there is an irreducible residual level of unemployment composed of people who don’t want to work, who are moving between jobs, or who are unqualified. If there is in fact some such residual level of unemployment, it is not one we have encountered in the United States. Never in the post war period has the government been unsuccessful when it has made a sustained effort to reduce unemployment. (emphasis in original) [Unemployment and Inflation, Institutionalist and Structuralist Views, M.E. Sharpe, Inc.: White Plains.]

The mainstream position is in contradiction with the reality that Piore notes.

As unemployment started rising in the 1970s and then persisted, the economics profession was obsessed with unemployment as a ‘supply-side’ phenomenon.

This was part of the rise of the ‘free market’ or neoliberal dominance, which rejected the standard consensus that had created full employment in all advanced nations in the Post World War 2 period.

That consensus made it clear that employment was dependent on the state of aggregate spending.

Modern Monetary Theory (MMT) expresses this view by saying that once the non-government sector has made its saving and spending decisions, then the presence of mass unemployment indicates that the fiscal deficit of the government is too low – either taxes are too high and/or public spending too low.

The MMT view is thus that the government chooses the national unemployment rate (and all the sub-national cohort unemployment rates).

As Piore noted, there was never a time when the government has “been unsuccessful when it has made a sustained effort to reduce unemployment”.

But the neoliberal shifted the emphasis to the supply-side because they could then argue that the government was powerless to reduce unemployment.

And, that the unemployed were thus to blame for their own state – a lack of effort on their part to adequately present themselves to the labour market.

Blame the victim of the systemic failure to create sufficient jobs became the dominant approach of my profession – much to its everlasting shame.

As part of the mainstream story, they asserted that full employment should be redefined to occur at much higher unemployment rates than in the past become some unemployed cohorts were effectively ‘unemployable’ – structurally unable to compete in the labour market.

The mainstream approach asserted that long-term unemployment was a constraint on a person’s chances of getting a job and on the extent to which a government could introduce a fiscal stimulus without incurring inflation.

These economists claim that the long-term unemployed, which are overwhelmingly composed of workers with low education levels and other disadvantages, do not seek work effectively, are lazy, and employers steer clear of them for those reasons.

In addition, this line of reasoning argues that the provision of income support benefits exacerbates these negative factors.

And when the economy recovers from a downturn, it is asserted that the long-term unemployed exhibit a lower re-employment probability than short-term jobless.

However, despite a lack of evidence, the entire logic of the 1994 OECD Jobs Study, which marked the beginning of the so-called supply-side agenda defined by active labour market programs, was based on this idea.

The OECD Jobs Study agenda has been the principle policy framework since the early 1990s and has promoted privatisation, deregulation and massive welfare changes all aimed at weakening trade unions and making the most disadvantaged workers more desperate.

The OECD Jobs Study agenda was the blueprint for labour market deregulation since the early 1990s and underpinned the pernicious welfare-to-work policies that governments have introduced.

The OECD has also been constantly pressuring governments to abandon the hard-won labour protections which provide job security and fair pay and working conditions for citizens.

Their endorsement of inflation-first macroeconomic policies where monetary policy plays the prominent role and uses unemployment to discipline the inflation generating process and fiscal policy is largely contractionary has left a legacy of persistently weak growth, entrenched high unemployment and rising underemployment.

The OECD and the lackey economists that provided them cover with flawed research advanced the so-called so-called ‘irreversibility hypothesis’.

This claim asserted that long-term unemployment represents a constraint on growth and therefore needs supply-side programs rather than direct job creation.

To establish that assertion one would have to find that during periods of economic growth, long-term unemployment was inertia prone.

However, once you examine the dynamics of the data for any nation you might choose, you quickly realise that short-term unemployment rates do not behave in a qualitatively different way to long-term unemployment rates. The so-called ‘irreversibility hypothesis’ is unfounded.

The relationship between long-term unemployment and the unemployment rate is in fact very close.

As unemployment rises (falls), the proportion of long-term unemployment in total unemployment rises (falls) with a lag. Several studies have formally examined this relationship.

My earlier academic work found that a rising proportion of long-term unemployed is not a separate problem from that of the general rise in unemployment.

This casts doubt on the supply-side policy emphasis that OECD governments have adopted over the last two decades.

While the mainstream economics profession may claim search effectiveness declines and this contributes to rising unemployment rates, the overwhelming evidence is that both are caused by insufficient aggregate spending in the economy.

The policy response then is entirely different and supports fiscal stimulus measures being used to create jobs growth.

Please read my blog – Long-term unemployment – stats and myths – for more discussion on this point.

This brings the ideas of the late US economist Arthur Okun into the discussion.

He outlined his upgrading hypothesis (in the 1960s and 1970s) and the related high-pressure economy model, which provided a coherent rationale for Keynesian demand-stimulus policy positions.

Two references are Okun, A.M. (1973) ‘Upward Mobility in a High-Pressure Economy’, Brookings Papers on Economic Activity, 1: 207-252 and Okun, A.M. (1983) Economics for Policymaking, Cambridge, MIT Press.

Okun (1983: 171) believed that:

… unemployment was merely the tip of the iceberg that forms in a cold economy. The difference between unemployment rates of 5 percent and 4 percent extends far beyond the creation of jobs for 1 percent of the labor force. The submerged part of the iceberg includes (a) additional jobs for people who do not actively seek work in a slack labor market but nonetheless take jobs when they become available; (b) a longer workweek reflecting less part-time and more overtime employment; and (c) extra productivity – more output per man-hour – from fuller and more efficient use of labor and capital.

The positive side of this thinking is that disadvantaged groups in the economy were considered to achieve upward mobility as a result of higher economic activity. The saying that was attached to this line of reasoning was “all boats (large or small) rise on the high tide”.

Okun’s (1973) results are summarised as follows:

• The most cyclically sensitive industries have large employment gaps, and were dominated by prime-age males, offered high-paying jobs, offered other remuneration characteristics (fringes) which encouraged long-term attachments between employers and employees, and displayed above-average output per person hour.
• In demographic terms, when the employment gap is closed in aggregate, prime-age males exit low-paying industries and take jobs in other higher paying sectors and their jobs are taken mainly by young people.
• In the advantaged industries, adult males gain large numbers of jobs but less than would occur if the demographic composition of industry employment remained unchanged following the gap closure. As a consequence, other demographic groups enter these ‘good’ jobs.
• The demographic composition of industry employment is cyclically sensitive. The shift effects are in total estimated (in 1970) to be of the same magnitude as the scale effects (the proportional increases in employment across demographic groups assuming constant shares). This indicates that a large number of labour market changes (the shifts) are generally of the ladder climbing type within demographic groups from low-pay to higher-pay industries.

The evidence is that when the economy is maintained at high levels of employment, workers in low paying sectors (or occupations) also receive income boosts because employers seeking to meet their strong labour demand offer employment and training opportunities to the most disadvantaged in the population.

If the economy falters, these groups are the most severely hit in terms of lost income opportunities.

Upgrading also focuses on the mapping of different demographic groups into good and bad jobs. The groups who experience the greatest relative employment gains when economic activity is high are those who are stuck in the secondary labour market, typically, teenagers and women.

While these groups are proportionately favoured by the employment growth, the industries with the largest relative employment growth are typically high-wage and high-productivity and employ mostly prime-age males.

Expansion is therefore equated with ladder climbing whereby males in low-pay jobs (as a result of downgrading in the recession) climb into better jobs and make space for disadvantaged workers to resume employment in their usual sectors. In addition, favourable share effects in predominantly male industries provide better jobs for teenagers and women.

So there are many benefits from growth which spread out across rising participation, rising wages, rising hours of work, rising employment and falling unemployment.

But the downside is that the iceberg takes a long time to melt if (a) it is large; and (b) if the recovery is not robust enough. Recovery alone is not sufficient.

Real GDP growth has to be consistently strong for some years before the iceberg melts and the upgrading bonuses accrue.

This is the prima facie reason why governments have to do everything they can to prevent a recession from occurring and quickly moving to stimulate an economy where non-government spending is faltering.

This also relates to the concept of a skills shortage and structural mismatch, where the requirements of available unfilled jobs do not match the available skills of the unemployed.

Unsurprisingly, analyses of skills shortages by industry and governments invariably consider the issue from the perspective of business and profitability, which places the emphasis on containment of labour costs both in terms of wages and conditions, and hence, whenever possible, externalising the costs associated with developing the skills firms require in their workers.

Within this context the notion of structural unemployment arising from so-called ‘skills mismatch’ can be understood as implying an unwillingness of firms to offer jobs (with attached training opportunities) to unemployed workers that they deem to have undesirable characteristics.

Indulging in prejudices against this and that cohort is easier when there is mass unemployment. There are plenty of idle workers to choose from and firms can pick and choose at will.

When labour underutilisation is high, firms can easily increase their hiring standards (broaden the desired characteristics they demand from workers) and the training dynamism driven by labour shortages is lost.

Then we observe, in a static sense, ‘skill mismatches’ which are really symptoms of a ‘low pressure’ economy.

But, when the labour market is tight, the willingness of firms to indulge in their prejudices is more costly. If vacancies run ahead of the available labour, then firms have to scramble to get labour and offer training with job slots to keep their enterprises functioning.

Thus, one of the advantages of maintaining full employment is that it introduces a dynamic efficiency into the economy.

Firms have to be continually offering training and skills development as they create new jobs because otherwise they will not maintain market share.

Workers are molded to the needs of the job with appropriate skills on an on-going basis.

Firms cannot afford to indulge in irrational prejudice. Disadvantaged groups rise with the tide.

With mass unemployment, firms get lazy and refuse to offer on-going training. They then cry out that there are skills shortages when, in fact, all they are saying is that they cannot be bothered laying out the resources to train their workers in job-specific skills.

And finally, this also bears on the advantages of introducing a Job Guarantee.

While conservatives are continually extolling the primacy of market forces, they actually express a fear of letting market forces work when it comes to providing advantages and opportunities to the most disadvantaged workers in our communities.

The critics prefer to keep this disadvantaged cohort suspended in a void of joblessness and cycle them through clearly irrelevant training programs.

They seemed to distrust the ability of the private sector to structure interesting and attractive jobs to lure workers away from Job Guarantee positions.

Remember, that the Job Guarantee, which forms an integral part of Modern Monetary Theory (MMT), provides buffer stock employment to anyone who wants such a job at any time at any fraction of a working week.

It is an unconditional fixed wage offer to anyone by the Government. That is a very powerful aspect of the proposal as it means the Government ‘hires off the bottom’ rather than the top and can never be a source of inflationary pressure.

Further, the private sector can employ the JG workers any time they choose. All they have to do is provide a better ‘market’ opportunity.

That would encourage dynamic efficiencies because the incentives would be there in the private sector to improve productivity and on-the-job training to ensure that the wages paid were profitable.

Others argue that the JG workers might never want to leave the Job Guarantee despite the fact that the private sector has complete scope to hire out of the Job Guarantee workforce by simply offering attractive employment conditions.

To think that the workers would never be lured out of the Job Guarantee is to display a staggering lack of confidence in market forces.

Moreover, what a shocking thing it would be that the workers who have been unable to find work because the economy has failed to produce enough jobs (due to deficient macroeconomic policy) might actually enjoy working for the safety net wage.

Wouldn’t that be something to regret!

I note that commentators on my blog still occasionally think that we can separate MMT from the Job Guarantee and should do so because the Job Guarantee component is unattractive and turns people off MMT.

Well, that just reflects a failure to understand the role of the Job Guarantee in the macroeconomic stability framework that MMT offers.

The Job Guarantee is an intrinsic part of the macroeconomic policy structure. If we cut it out where would the inflation anchor come from?

Where would the dynamic labour market efficiency come from?

Where would the income support with inclusion come from?

New York Times article on prisoners

Bearing on this topic – and what motivated me to write on it again – was a recent New York Times article (January 13, 2018) – As Labor Pool Shrinks, Prison Time Is Less of a Hiring Hurdle – which provides a clear example of how real world mechanisms as opposed to mainstream ‘textbook’ models operate.

The article notes that:

A rapidly tightening labor market is forcing companies across the country to consider workers they once would have turned away. That is providing opportunities to people who have long faced barriers to employment, such as criminal records, disabilities or prolonged bouts of joblessness.

It notes that in some areas where the unemployment rate is now down to 2 per cent, “manufacturers are taking their recruiting a step further: hiring inmates at full wages to work in factories even while they serve their prison sentences.”

A case study from the article concludes that the manufacturer:

… has raised pay, offered referral bonuses and expanded its in-house training program. But it has still struggled to fill dozens of positions.

So they started offering ‘market wages’ and skill development to prisoners.

The trend is now spreading as the unemployment pool contracts – the “surge in demand for … workers, creating opportunities for people who might have struggled to find work earlier in the economic recovery.”

Hiring standards are falling:

Two years ago .. companies required warehouse workers to have high school diplomas and experience with the scanners used to track merchandise. Now, increasingly, they require neither …

Further, some of the workers who were recruited while serving time in prison are now “thinking bigger”.

We read that for one such worker:

Other jobs in the area pay higher wages, and his freedom has opened up more options. He has been talking to another local company, which is interested in training him to become an estimator – a salaried job that would pay more and offer room for advancement.

Upgrading, high pressure, dynamic efficiency, demand side dominance.

I had a look at the data and the following graph shows the evolution of the unemployment rate in the US for all workers and those with ‘Less than a High School Diploma, 25 yrs. & over’ from January 1992 to December 2017.

Three points are interesting:

1. The unemployment rate for the least skilled is consistently higher than the overall unemployment rate but cycles closely with it.

2. Low-skill workers endure disproportionate rises in unemployment in downturns, particularly during the GFC period.

3. The drop in the low-skill unemployment rate has been faster than the overall fall in US unemployment, which rejects the ‘irreversibility hypothesis’.

Another angle on this issue is to examine the Employment-Population ratios. The aggregate ratio for the US has fallen from a peak of 63.4 per cent in December 2006 to its current rate (December 2017) of 60.1 per cent.

This is one of the reasons I maintain my position that despite the official unemployment rate having fallen to relatively low levels in recent months, the US economy remains well below full employment.

But the interesting question for today’s blog is what has been going on with the ratios for the education-level cohorts?

The facts are:

1. The Employment-Population ratios for the four Bureau of Labor Statistics educational cohorts in December 2007 were 42.8 per cent (Less than a High School Diploma, 25 yrs. & over), 59.6 per cent (High School Graduates, No College, 25 yrs. & over), 76.4 per cent (Bachelor’s degree and higher, 25 yrs. & over), and 69.5 per cent (Some College or Associate Degree, 25 yrs. & over).

2. The ratios in December 2017 were, 42 per cent; 55.4 per cent; 71.9 per cent; 63.8 per cent, respectively.

The following graph tells the story in a simple way by indexing the respective Employment-Population ratios at 100 in December 2007 and then tracing their evolution until December 2017.

The data shows that the above 25 years group that has improved its position the most in the recovery has been those with the least education.

Conclusion

More detailed research is needed to understand this result more fully but is consistent with my earlier research that the current recovery in the US is biased (just) towards low paid jobs.

But, it is clear that the least skilled can enjoy jobs growth in a labour market that is expanding. They are not a constraint on growth.

Firms relax their prejudices (it is too costly not to) and lower their hiring standards and have more relaxed screening mechanisms.

All the boats rise!

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.