The Jobs Cri.sis

by James Surowiecki

The recession has been over for more than a year now, but so many people are out of work that it doesn't feel like much of a recovery. In November, the economy added just thirty-nine thousand jobs. The failure to translate G.D.P. growth into job growth has given us an unemployment rate that remains near ten per cent (twice what it was in 2007), and has swelled the ranks of the long term unemployed.

Why have new jobs been so hard to come by? One view blames cyclical economic factors: at times when everyone is cautious about spending, companies are slow to expand capacity and take on more workers. But another, more skeptical account has emerged, which argues that a big part of the problem is a mismatch between the jobs that are available and the skills that people have. According to this view, many of the jobs that existed before the recession (in home building, for example) are gone for good, and the people who held those jobs don't have the skills needed to work in other fields. A big chunk of current unemployment, the argument goes, is therefore structural, not cyclical: resurgent demand won't make it go away.

Though this may sound like an academic argument, its consequences are all too real. If the problem is a lack of demand, policies that boost demand fiscal stimulus, aggressive monetary policy- will help. But if unemployment is mainly structural there's little we can do about it: we just need to wait for the market to sort things out, which is going to take a while.

The structural argument sounds plausible: it fits our sense that there's a price to be paid for the excesses of the past decade; that the U.S. economy was profoundly out of whack before the recession hit; and that we need major changes in the kind of work people do. But there's surprisingly little evidence for it. If the problems with the job market really were structural, you'd expect job losses to be heavily concentrated in a few industries, the ones that are disappearing as a result of the bursting of the bubble. And if there were industries that were having trouble finding enough qualified workers, you'd expect them to have lots of job vacancies, and to be paying their existing workers more and working them longer hours.

As it happens, you don't see any of those things. Instead, jobs have been lost and hiring is slow almost across the board. Payrolls were slashed by five per cent or more not just in the bubble categories of construction and finance but also in manufacturing, retail, wholesale, transportation, and information technology. And take hiring: one of the industries that have been most cautious is the hotel and leisure business. Needless to say, there's no shortage of people with the skills to be maids or waiters; there just isn't enough work. Another sure sign of weak demand is that people with jobs aren't deluged with overtime; hours worked have barely budged in the past year.

Believers in the structural argument refer to something called the Beveridge Curve, which measures the historical relationship between job vacancies and unemployment. They argue that the curve currently shows more job openings than there should be, given the current unemployment rate-implying that businesses are having a hard time finding qualified workers. But a careful analysis of Beveridge Curve data by two economists at the Cleveland Federal Reserve shows that it's behaving much the way it has in previous recessions: there are as few job vacancies as you'd expect, given how desperate people are for work. The percentage of small businesses with so-called "hard-to-fill" job vacancies is near a twenty-five-year low, and open jobs are being filled quickly. And one recent study showed that companies' "recruiting intensity" has dropped sharply, probably because the fall-off in demand means that they don't have a pressing need for new workers.

Don't expect the structural argument to go away, though. It's a perennial: nearly every recession leads pundits to proclaim that the job market is facing structural challenges, and that higher unemployment is here to stay. During the 1981-82 recession, now seen as a classic cyclical recession, the economist Barry Bluestone warned that, as a result of structural issues, there might not be "much recovery in terms of overall employment in the United States." Yet, by 1984, unemployment was back to where it had been before recession hit. A 1964 survey of economists found that more than half believed structural issues were playing a significant role in limiting the number of jobs; three years later, unemployment was below four per cent. And, during the Great Depression, even F.D.R. thought that unemployment might well be stuck at a permanently higher level. Recessions are, among other things, crises of confidence, and one manifestation of lack of confidence is the conviction that this time we're not going to be able to climb our way out.

Structural issues aren't irrelevant, of course; there are certainly plenty of construction workers who are going to have start plying a new trade. But what defined the recent recession was the biggest decline in consumption and investment since the Depression. Dealing with that is the place to start if we want to do something about unemployment. The structural argument makes government action seem irrelevant. But if we don't do more to get the economy back up to speed, it won't be because stimulating demand won't work. It will be because we've chosen not to do it. If we can't find the way, it's because we don't have the will.

THE NEW YORKER - 3 January 2011 - page 23