Nothing ‘natural’ about unemployment?
Can Post-Keynesian inspired and Austrian inspired economists agree that unemployment should go down to 2, maybe 3% but not higher? On this blog, Fred Foldvary (a Geo/Austrian inspired economist) stated, in a comment of 30 May 2011,
The textbook case for firing at will is only optimal with genuine full employment, so that workers have contract clout. Genuine full employment implies that the only unemployment is frictional. But the textbooks posit a “natural” rate of unemployment much higher than frictional, which is bogus, since the “natural” rate is merely the long-run average, made higher than frictional by barriers between labor and resources
This statement raises, among other things, important questions about the concept of the ‘natural rate of unemployment’. And, of course, about the reason why textbooks and economists use this concept!
Another Austrian inspired economist, Tyler Cowen, raises (in a blogpost of 15 May on ‘Marginal revolution‘) somewhat similar objections against the concept of structural unemployment: if people are really needed – they will be employed. No matter what. If they are really needed, they will get training – and train themselves. If they are really needed, the utterly non neo-classical event that companies adapt to people, instead of the other way around, might take place. Companies, instead of people, will become ‘flexible’… Tyler states not exactly this, but it seems to be the consequence of the sentences his quotes:
A few times recently Paul Krugman has raised the issue of structural unemployment in the Great Depression, so I thought I would offer a look at what has been written on the topic. Here is Richard J. Jensen, from a survey article:
“Economists agree that Keynesian stimuli would not have helped structural or hard-core unemployment, only cyclical unemployment. As Table 1 suggests, about half of the unemployment was cyclical from 1931 through 1933; it was then that stimulus was needed and might have worked. By 1933, the appearance of a large, new, structural/hard-core element raised the natural level of unemployment from the 5 to 6 percent range to 12 to 15 percent. If a Keynesian stimulus had been tried and it had eliminated cyclical unemployment, the remaining unemployment still would have been io to 15 percent. Further fiscal or monetary stimuli would have resulted in inflation.”
Later he moves directly to the key question:
” …we need to discover how the war cured hard-core unemployment permanently. On the supply side, the growth of high schools and colleges, the postwar draft, and Social Security retirements removed young and old from the labor force. Wartime training and experience, in industry and in the military, made workers more productive, and upgraded skills so that the supply of unskilled labor was much smaller. In terms of efficiency wages, employers reshaped jobs to suit the skills and increase the productivity of available workers. They had to use men (and women) whom they would not have dreamed of hiring a few years before.
Personnel management became even more important. The number of industrial-relations staff rose from 2.5 per 1000 employees in 1937 to 8.0 in 1948. They were charged with improving productivity despite the extraordinary shortage of manpower, the high quit rates, the government-imposed wage freeze, and the new strength of labor unions. They dropped categorical restrictions against the poorly educated, the unemployed, women, the old, the handicapped, and sometimes, in spite of intense resistance, blacks. Recruitment of new workers became an art form, with sound trucks blaring in the streets beseeching people to come to work and earn big money. Jobs were restructured so that fewer skills were needed. Intensive in-shop and in-school training programs reached millions. Anyone with a modicum of skill was rapidly promoted, even to the status of foreman or instructor. The results further justified the use of efficiency-wage procedures, but this time efforts were made to find the right niches for workers who had been “hopelessly unemployable” in the 1930s.”
In other words, the path out of high unemployment involved much more than a mere reflation of nominal values. (By the way, when it comes to terminology I might not use the phrase “structural unemployment,” but it also is not “simple cyclical unemployment.” I would say that in some circumstances the traditional distinction between cyclical and structural unemployment breaks down, but note that in terms of its parent literature this piece is using the terms properly, even if they sound somewhat off in a 2012 blogosphere context.)
In any case, history suggests that stimulus policy has to take some very specific forms to reach those “called cyclically unemployed by some, structurally unemployed by others” unemployed workers and that is the practical upshot.
Another practical upshot is that you still can believe in labor market hysteresis, as presented by DeLong and Summers. Without some analysis like the above, the DeLong/Summers claims are otherwise contradicted by American post-Depression productivity once joblessness lifted. Where were the long-term scars? Well, they were fixed but it wasn’t easy. So the relevance of hysteresis can be saved, but we still are left with proper stimulus being very difficult to do, unemployment being quite sticky, and proper policy requiring lots of structural attention. The Great Depression is evidence for all of those views, not against them. Here is one more bit, with a sad sting at the end:
“The war, by removing millions of prime men from the labor market, by restructuring the work process, by subsidizing wages, and by massive retraining, finally gave the private sector the methods and the incentives to rehire the hard-core. Never since has hardcore unemployment affected more than one worker in a hundred.”
So, no long term reasons for more than 2, maybe 3% unemployment?