November 20, 2013
By Oren M. Levin-Waldman
Among the problems that we as a nation have been grappling with since the end of the Great Recession, which ended in 2009, is the persistence of unemployment, or more specifically long-term unemployment. It has been commonplace to assume that long-term unemployment is due to structural change which has resulted in a skills mismatch.
There is no question that structural changes in the economy mean that jobs that were eliminated, because of shocks due to the financial crisis which then led to downturns in the business cycle, are not coming back. But this may assume too much. On the contrary, the principal issue is the depth of the recession which has led to a severe decrease in aggregate demand for goods and services.
To a certain extent the structural change model parallels the assumptions of Joseph Schumpeter’s “creative destruction” model that the new and technologically more advanced will replace the old and obsolete. While this is supposedly the mark of progress in the capitalist market place, it effectively results in the displacement of workers who find that their existing skills no longer match the skills requirements of the new industries. Hence the mantra of invest more in job training. Although upgrading of skills is always important, this approach merely shifts responsibility from those economic arrangements that have given us these problems to the individual workers. Employers who use the cover of recession to “restructure” obviously bear no responsibility for doing what they are supposed to. Rather it is the responsibility of workers to make sure that they are prepared to be reabsorbed back into the new economy.
The only problem is that labor market data from the Current Population Survey (CPS) for 2007-2010 really does not bear any of this out. In past recessions, those who bore the brunt were primarily blue collar workers. In this recession, everybody was affected across the board. In the U.S., for instance, unemployment has indeed been higher among those with no more than a 12th grade education, High School graduates, and those with only some college. It has been lower among those with Associates degrees, BA degrees, and Graduate and Professional degrees.
The New York City Metro area, however, was different. there was actually a greater increase in unemployment among those with a BA degree, followed by some college, and then advanced degrees. In fact, the long-term unemployed in the New York City Metro area has either an Associates Degree or BA, is either between the ages of 20-24 or 45-54, works as either an Office Worker/Administrative support staff or a Transportation and Material Moving worker, and is in either the Wholesale and Retail Trade or the Accommodation and Food Service industries. This person is also among the least advantaged segment of the labor force.
To the extent that this is true, it might not necessarily support the notion that long-term unemployment is a function of structural changes, or at least structural changes that occurred since 2007, as opposed to those that have been occurring over the last few decades. To be more specific, those most likely to be among the long-term unemployed in 2009 in the New York City Metro area were those in the management industry and those working in Office/Administrative occupations and Installation and Repair occupations, particularly in households earning less than $30,000.
Those in specific occupations in households earning less than $30,000 would appear to capture that the long-term unemployed are indeed among the least advantaged segment of the labor force, which appears to be more so in the New York City Metro area than the rest of the nation. Although this might well reflect a much higher cost of living in the New York City Metro area than elsewhere, it would also appear to speak to a subset of low-skilled workers.
If the source of long-term unemployment was structural, we might expect to see more long-term unemployment in manufacturing and among production workers and craftspeople. The story of structural change should be one of higher paying and higher skilled jobs, as craftspeople or other production occupations in manufacturing, disappearing and ultimately being replaced with low-paying and low-skilled jobs in the service sector.
Of course, the New York City Metro area may be different from the rest of the nation for the simple reason that the recession began with the financial meltdown and the hub of the economy in the metro area is Finance, Trade, and Management. It would therefore stand to reason that in a deep enough recession the long-term unemployed would be found among management. But as the recession rippled through the economy the effects were the same as they always were. As demand for goods and services decline, firms laid workers off, thereby resulting in further unemployment as those laid off now found that they too lacked the wherewithal to demand goods and services. The lessons could not be more clear: if middle class jobs have disappeared and what replaces them are lower paying jobs, the effect will nonetheless be a reduction in aggregate demand because workers with lower incomes have even less to spend.
The absence of structural change, then, would appear to point in the direction of some type of wage policy that would buttress the purchasing power of the middle class. The competitive market model will of course argue that tighter labor markets will drive wages up, but with the persistence of long-term unemployment we can expect slack labor markets for years to come, which according to the same competitive market theory will only drive wages down. On the contrary, a more deliberate wage policy that would effectively give workers, especially low-wage workers, voice and a degree of monopoly power would appear to be the answer. Arguably, for there to be benefit for the New York City Metro area, policy would have to occur at the national level, because competition between states and localities for investment often results in a race to the bottom, which is contrary to the objectives of wage policy: wages that bolster the middle class.