Asymmetrical Information - Megan McArdle

06.18.13

Why Aren't We Creating Enough New Jobs?

Labor markets aren't adjusting to the disappearance of certain kinds of work

Last Friday, I wrote a piece about When Work Disappears.  On twitter, by email, and in the comments, I got pushback.  Wasn't I committing the Lump of Labor Fallacy, assuming that the jobs that were disappearing meant permanent unemployment?

No, but I can see why people were worried.  Let me explain.  

For starters, let me define the Lump of Labor Fallacy for those who don't fill their spare hours by reading classical economics texts. Or rather, let me let The Economist define it for you.  From their excellent Economics A to Z, also available on the web:

One of the best-known fallacies in ECONOMICS is the notion that there is a fixed amount of work to be done - a lump of LABOUR - which can be shared out in different ways to create fewer or more jobs. For instance, suppose that everybody worked 10% fewer hours. FIRMS would need to hire more workers. Hey presto, UNEMPLOYMENT would shrink.

In 1891, an economist, D.F. Schloss, described such thinking as the lump of labour fallacy because, in reality, the amount of work to be done is not fixed. GOVERNMENT-imposed restrictions on the amount of work people may do can actually reduce the EFFICIENCY of the labour market, thereby increasing UNEMPLOYMENT. Shorter hours will create more jobs only if weekly pay is also cut (which workers are likely to resist) otherwise costs per unit of output will rise. Not all labour costs vary with the number of hours worked. FIXED COSTS, such as recruitment and training, can be substantial, so it will cost a firm more to hire two part-time workers than one full-timer. Thus a cut in the working week may raise AVERAGE costs per unit of OUTPUT and cause firms to buy fewer total hours of labour. A better way to reduce unemployment may be to stimulate DEMAND and so increase output; another is to make the labour market more flexible, not less.

Is that what I am worrying about?  Am I under the delusion that when we lose 10,000 steelworker jobs, that necessarily means 10,000 fewer people working?  

No, not at all.  Nonetheless, I am worried about unemployment at the bottom of the economy.  Let's unpack why.

For starters, there's just the empirical fact that labor force participation has been declining since the turn of the millenium.  After rising through the 1970s and 1980s as women joined the workforce, labor force participation rates largely leveled off in the 1990s.  Then, over the last decade, they began falling.  

Some of that can be explained by the aging of the population, and women deciding that they don't actually want to work the same hours as men.  But not that much of it.  The Baby Boomers only began retiring a few years ago; most of them are still working age.  Moreover, much of what appears to be a separate trend (women pulling back from the labor force, older workers retiring) may actually be a response to a weak labor market.  If you can't get a very good job, you may decide it makes more sense for you to stay home with kids, or take early retirement.  

So if it's not population aging, why do I think this is happening?  

Competition from technology and trade.  (Immigration may contribute, but the evidence for this isn't that strong, and at best, it's a very small contribution.)   Global shipping and trade liberalization has made it more practical to manufacture in low wage countries.  Meanwhile, in high wage countries, technology is substituting for labor.  At its peak, General Motors employed 600,000 people to make slightly less than half the cars in the country.  Today it employs 77,000 to produce about 1/5th the cars on the US market.  Even if it regained the market share it has lost to imports, employment in the industry would be way down.  

Of course, those workers could be redistributed to growing industries; that's what's supposed to happen.  And for some workers, that's what has happened.  We've got more computer programmers and technicians, and fewer people turning wrenches on assembly lines.  

But that won't do for the folks without the aptitude to enter the new high-skilled fields.  For those people, with the exception of a few areas (like oil drilling), the work that is available is on average both lower-skilled and lower productivity than what they might have done a few decades ago.  For many, it falls below their reservation wage; they would rather stay home and be poorer.  It's also often physically demanding work that keeps you on your feet all day.  

For older workers, that's a problem because it may be hard, at 55, to prepare for your new career as a stock clerk.  For younger workers, the physical rigors aren't so bad, but there's little obvious path for progression, which means that there's little incentive to keep going to work every day.  You can always pick up another low-skilled job that isn't going anywhere next month.

As a result, there's a pool of surplus labor for the better jobs--seated, skilled, steady, decently paid; that pool drains very slowly because the alternative pools are so shallow and otherwis unattractive.  Employers for those jobs can be incredibly picky about who they want to hire: exact matches to incredibly detailed specificiations, and please don't bother to apply if you're over 50 or have been out of work for a while.  

In other words, it isn't that the economy couldn't create new jobs.  But those jobs are, on average, pretty unattractive ones.  The US domestic market could presumably absorb large numbers of very cheap domestic servants and field hands.  But Americans aren't willing to do those jobs unless they're very, very, very well paid, because they are miserable and low status.  So instead they go to immigrants willing to work at lower rates, or to no one at all.  Minimum wages and the government safety net make such adjustments even less likely.  

Now, you could argue that this means we should get rid of the minimum wage and the safety net.  (And on the minimum wage, I'm with you).  But even if you think that we should get rid of welfare, social security and unemployment insurance so that the upper middle class winners in the new system can employ an army of domestic servants, you should probably recognize that this isn't going to happen because it would be politically unsupportable.  

So I don't think that there's a given lump of labor that society has, and if old jobs go away, we just end up with more unemployed.  But I do think that right now, we are not creating a lot of good new jobs--defined as jobs that are relatively secure, physically tolerable, and decently paid.  People with enough grit and imagination can invent themselves new jobs, but at no time in history has that described the majority of the population.  The alternatives for the rest aren't very attractive.  And since modern-day America tries hard to keep people from becoming truly desperate, those jobs aren't being created.