Christina Romer, head of the Council of Economic Advisers, gave a speech last week in which she declared the
rise in long-term unemployment is readily explained by the prolonged collapse of aggregate demand. When hiring rates are very depressed, workers who lose their jobs are unlikely to find work quickly, and thus face a substantial chance of becoming long-term unemployed. This effect is compounded by the fact that exit rates from unemployment, both in normal times and in recessions, are typically lower the longer a worker has been unemployed. This makes it even more likely that those who do not find work quickly will have long spells of unemployment. Thus, the rise in long-term unemployment is the almost-inevitable consequence of the severe recession. We do not need to appeal to any underlying structural changes to understand it, and there is every reason to expect that long-term unemployment will come back down when aggregate demand recovers.
Responding to this, Matt Yglesias in a recent post called “It’s Aggregate Demand, Stupid” argues the technocratic-liberal position on the state of the economy:
Every time there’s a downturn a certain swathe of the elite starts to label it unfixable and structural. And the worse the downturn, the louder come the calls. Look at the history of the Great Depression and you see an enormous chorus of voices from the right arguing that nothing could be done and people would just have to suffer through it. They were countered by a chorus of voices from the left arguing that nothing could be done and people would just have to stage a revolution. It wasn’t true then and it wasn’t true now.
Hmm. Maybe I am an elitist. Probably because I work in publishing, I am sympathetic to the argument that at least some substantial part of the U.S.‘s current lingering unemployment is structural rather than cyclical—a matter of misallocated and mismatched skills (the so-called Austrian view) rather than a lack of aggregate demand (as Keynesian theory suggests). Here’s economist Joseph Lawlor, an Austrian sympathizer, explaining the distinction in an American Spectator piece from last year.
Cyclical changes are responses to the business cycle: companies across all industries tighten their belts and start laying off employees when austerity threatens, but then rehire the workers they laid off when good times roll again.
A structural change in the labor market, on the other hand, occurs when hiring patterns change not as a function of economic fluctuations, but because of shifts in the economy’s production that reallocate workers among industries. In other words, a mismatch between what consumers demand and what producers are making necessitates a shake-up in the mix of industries. Perhaps the most familiar example of a structural change is the Industrial Revolution, when, starting in the 18th century, Great Britain’s labor force transitioned from manual labor to machine-aided manufacturing jobs in great numbers.
The Austrians thus think that government stimulus is detrimental, artificially sustaining moribund economic relations and forestalling necessary structural adjustments—what Arnold Kling, another Austrian leaning economist, calls the “Great Recalculation.” The argument makes a good deal of intuitive sense to me; it fits with my predilection for thinking through social changes in terms of technological developments. If immaterial labor is becoming a potent force in the economy, as I’ve argued should happen theoretically, then structural unemployment would eventually be the result. Jobs would be replaced by voluntary “workers” contributing uncompensated labor in forms they don’t recognize as work. A strata of jobs would be destroyed and new ones must be created in different fields—or if you want to go to the next level, the entire concept of employment would need to be reconceived. (That is the analogous position to those leftists calling for a revolution in Yglesias’s historical sketch. We need to increase unemployment to destroy the capitalist structure of employment as surplus value extraction, etc.)
Responding to Lawlor’s piece, Menzie Chinn at Econobrowser put up some charts that throw some cold water on the Austrian view: the gist is that unemployment doesn’t seem to be confined to the particular sectors Lawlor argued would be particularly hit.
The debate is not really about data in the end but ideology, and which story conforms to the way one wants to view the nation’s economic destiny. In The Consumer Society: A History of American Capitalism, Peter d’A. Jones, discussing labor movements in 19th century America, makes the point that unions were routinely crushed, with legal support being found in the idea that they constituted a conspiracy. But the second point he makes in the following passage can be applied to this debate about unemployment, or at least reveal some of the potential ideological underpinnings:
The general count of conspiracy to raise wages could scarcely be used to crush workers’ demands in the 20th century economy. Embedded in the indictment is a purely European view of society in which each profession and trade has a certain clearly defined social status, and the ‘just wage’ is that which maintains the social hierarchy in its fixed and unchanging form: a place for everyone and everyone in his place (which was, of course, his father’s before him).
Social mobility, to some degree, may come at the expense of job security and stability. The Austrian economists’ celebration of entrepreneurship reflects that idea. Fixing the employment picture and denying structural change through stimulus funding may ultimately preserve the “social hierarchy in its fixed and unchanging form” in the name of protecting jobs—even if those jobs come with a class stigma. More pertinent to the current debate, stimulus spending, from the Austrian point of view, can protect moribund jobs that doom a whole class of people to stagnation across several generations. (In other words, it’s a road to serfdom, as one of the most heralded of the Austrians, Hayek, might put it.)
Jones’s point (and I don’t know if I buy this) is that in the early decades of the American economy, there was an opportunity for some jobs that had become stigmatized as working class to be redefined purely in terms of their social necessity, as reflected by wages. But that proved impossible as inherited social capital—the hierarchy as embedded in those productive forces that manufacture not goods but society itself, its norms and codes and practices—came into play. These assumptions carried over into the relations of production in the economy—an example of the “superstructure” determining the “base” in a dialectic ricochet. The perceived value of work is not what entirely a matter of what it contributes to society and the wealth of the economy; instead it is refracted through the lens of social judgment so that certain forms of idleness can be protected as status. What follows from that is the notion that the entire working world is structured to preserve these class distinctions, not to reap the greatest amount of growth or the most social justice in distribution or whatever. Such rationalizations are ex post facto. Holding jobs within that structure preserves those distinctions. Along with bringing misery, deprivation and want, mass unemployment (or, from another point of view, general strikes) threatens that hierarchy. This is the perpetual problem revolutionaries encounter, that the only apparent way to undermine the hierarchy that provides a modicum of stability is to preach a course of action that will first bring about massive dislocation and suffering, often for those who are expected to carry that course of action out. Realizing that, it begins to make more sense to moderate one’s views, and seek ways to diminish inequality from within the existing society without undoing the hierarchy that structures it. The traditional society begins to seem expedient.
Anyway, a structural-unemployment view evokes a story of the economy in which workers are driven to acquire better skills, which, if they have the innate merit or perspicacity to do so, allows the best people to thrive regardless of what class in which they entered the economy. A cyclical view evokes a story in which circumstances beyond the control of workers conspire to make their lives miserable, but the government can act to mitigate this misery and make everyday life more livable, a more worthy goal than establishing an abstract meritocratic freedom of opportunity.
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