Job Destruction

Paul Krugman’s NY Times piece  focuses on the government’s ability to stimulate short run demand and employ unemployed people.

“For the fact is that right now the economy desperately needs a short-run fix. When you’re bleeding profusely from an open wound, you want a doctor who binds that wound up, not a doctor who lectures you on the importance of maintaining a healthy lifestyle as you get older. When millions of willing and able workers are unemployed, and economic potential is going to waste to the tune of almost $1 trillion a year, you want policy makers who work on a fast recovery, not people who lecture you on the need for long-run fiscal sustainability.”

This is  a powerful (and dramatic) paragraph.   I am puzzled about how the U.S will get its groove back.   Which of our private sector firms are actually creating new jobs right now?  What occupations are they hiring in?   Net job growth = job creation – job destruction and job destruction is certainly taking place.  One salient example is  Margot Roosevelt losing her job at the LA Times.

In Econ 101, we teach that during bad times wages fall and firms will seek to hire workers at these lower prices.   But, how much of total compensation is health care?  Are firms afraid to hire full time workers due to expected health care obligations?

I am in Berkeley right now and my pro-Krugman piece of my brain is alert.  I would be happier endorsing Dr. Krugman’s stimulus plan if the government could pre-commit to how it would be financed and to build in safeguards so that the money would be spent on productive activities (such as rebuilding infrastructure). 

There are millions of unemployed people today.  Do you expect them to be hired by companies such as Facebook or IBM or by service firms?  If the RBC could interview a representative sample of unemployed people, what type of work do they seek?  What is the lowest wage that they would accept for doing this work?  I would then want to speak to employers concerning whether they are considering posting jobs with these attributes and what is the highest wage they would be willing to pay for such workers?   Are there gains to trade in the labor market and search frictions have slowed these mutually beneficial transactions down?

The final issue that has not been discussed by “serious people” is duration dependence.   Does the experience of being unemployed lower your future job prospects as your skills and self discipline erode? If the answer is yes, then the “Krugman case” is even stronger. Labor economists have long debated this point.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

7 thoughts on “Job Destruction”

  1. Here’s a simpler idea: employment in state and local government has been falling due to their fiscal problems. That is, we’re laying off cops and schoolteachers. If the Federal government paid state and local governments to increase their employment, that would stimulate the economy while also preventing the losses due to poorer law enforcement and poorer schooling. This ain’t rocket science.

  2. Of course, even non-productive uses of government investment in the national economy would be useful. I appeal to the authority of J.M. Keynes:

    “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

    Sure, repairing bridges and fixing water pipes would be useful, but even waste would be better than nothing. Unemployment is about as low-productivity as you can get.

  3. Go to the worst parts of Berkeley, and see what jobs you think should be done.

    Do you see graffiti?
    Do you see derelict, decrepit buildings?
    Do you see buildings with lousy insulation?

  4. … if the government could pre-commit to how it would be financed…

    It’s difficult to arrive at any commitments if we can’t even have a dialogue about jobs (and, no, droning on about how closing the deficit will create jobs is not a dialogue). Hopefully, the rump of sanity remaining amongst some influential Republicans will start to get traction with their policy makers.
    ________

    I agree with your point (I think) that it would be beneficial to have a skills profile of the unemployed in devising any jobs policy.

    The private sector will only create jobs when there is a sufficient increase in demand for their products & services. So I don’t think it’s realistic to focus job creation in the private sector as a starting point — unless you want a really slow recovery. I think we need to start creating jobs in the public sector. But we could get an assist from the private sector by implementing a job sharing policy.
    ________

    Does the experience of being unemployed lower your future job prospects as your skills and self discipline erode?

    Most job skills are like riding a bike. They don’t so much erode as become dormant. To most people, there’s no sense in exercising your skills and self discipline if there’s no worthwhile task to apply them to. But once faced with such a task they quickly resurface. However, I don’t think employers see it this way. They’re quick to exclude the long term unemployed from opportunities: “If they can’t get a job they’re either lazy or useless.” In a strong economy this might have some merit, but not in our current situation. Still, it’s a hard prejudice to combat (for employers & job seekers).
    ________

    P.S. Stay in Berkeley if you can. It seems to do your thinking good.

  5. The final issue that has not been discussed by “serious people” is duration dependence. Does the experience of being unemployed lower your future job prospects as your skills and self discipline erode?

    Whether the skills and self-discipline actually erode is almost irrelevant. Employers unquestionably assume that they do, or that being out of work means that you were a bad employee at your last job. I’m 43 and I’ve been unemployed for several years. This despite going back to school and getting a master’s degree in accounting, and applying for pretty much every accounting job I could find in a part of the country with a lower than average unemployment rate. More than a thousand applications later, I can count the number of interviews I’ve gotten on my fingers.

    In my masters program, I was by 13 years the oldest student. My classmates have all managed to get a job. A part of the disparity comes from my undergraduate degree being in history and statistics rather than from the business school; I took my accounting classes as a continuing education student, which means I never had the internship that accounting undergrads take between their junior and senior years. Still, they’re all employed and I’m not.

    I’m coming to the conclusion that I’m never going to hold a serious job again. I’m now starting the process of trying to make a go as a freelance writer. That seems to be my last, best hope.

  6. Mr. Kahn: “This is a powerful (and dramatic) paragraph. I am puzzled about how the U.S will get its groove back. Which of our private sector firms are actually creating new jobs right now? What occupations are they hiring in? Net job growth = job creation – job destruction and job destruction is certainly taking place. One salient example is Margot Roosevelt losing her job at the LA Times.”

    Ya know what? People have been asking that question for a few decades now. The usual answer from Chicago has been either ‘STFU, that’s how’, or ‘The magic of the market will provide (and if it doesn’t, suck on it)’.

    You are not in a position to make criticisms, or to give advice.

  7. I’m not sure where exactly people get the idea that being poor means you are undisciplined. There are certainly some, I’m sure, as with any group. But I’d love to see some of you try it. These types of posts are why I think we give way too much influence to economists. I think the average plumber probably has more insight, that Joe guy aside.

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