September 13, 2012

One of the passages in Clinton’s speech to the Democratic convention didn’t sound right to me.

"Of course, we need a lot more new jobs. But there are already more than three million jobs open and unfilled in America, mostly because the people who apply for them don’t yet have the required skills to do them." Are there many jobs begging, whatever the exact number, for lack of adequately educated or trained applicants? Is that the root cause of unemployment? Will retraining bring the unemployment number down? I didn’t know the answer to the first question, but, on checking found his estimate of open jobs to be correct, even an understatement. Why there are that many unfilled positions is a mystery to me; statistics show that the number of people becoming employed and the number leaving jobs are about even.⁸⁰

However, it seemed that the answer to the other two questions must be negative. The economic slump and the consequent rise in unemployment are the result of insufficient demand; businesses without customers do not need additional employees. Retraining and other educational initiatives are important, but they take too long to have any impact in the short run. A technical study confirms my guess.

Ezra Klein, in The Washington Post,⁸¹ pointed out the fallacy in Clinton’s analysis and cited a study recently released, "The United States Labor Market: Status Quo or A New Normal?" by Edward P. Lazear and James R. Spletzer.⁸² Their paper examines the opposing theories, that unemployment is "structural," i.e., the result of permanent changes in the economy, or is "cyclical," the result of the recession. If the problem is structural, if the economy has changed in such a way that there is a mismatch between skills and open jobs, then retraining would be critical. However, the authors reject the view of Clinton and many on the right that the cause is structural.

An analysis of labor market data suggests that there are no structural changes that can explain movements in unemployment rates over recent years. Neither industrial nor demographic shifts nor a mismatch of skills with job vacancies is behind the increased rates of unemployment. . . . The patterns observed are consistent with unemployment being caused by cyclic phenomena that are more pronounced during the current recession than in prior recessions.

Cyclical unemployment, the sort to be expected in a recession — although worse this time than usual — will respond to stimulus by the administration or the Fed. Conservatives oppose stimulus, and Clinton helped their cause.

Clinton also said "even as we get Americans more jobs, we have to prepare more Americans for the new jobs that are actually going to be created. The old economy is not coming back. We’ve got to build a new one and educate people to do those jobs." I’m not sure about that either. Does it mean that manufacturing is dead? If we don’t produce goods, how can we straighten out the balance of payments? Can that be done with services alone? I don’t know, but simply saying we have to plan for a different economy without specifying what that is, and how we create it, and whether it’s desirable doesn’t help much, and it gives comfort to the business lobby by turning attention away from repatriating jobs.

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80. http://www.bls.gov/news.release/jolts.nr0.htm
81. http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/11/the-politicians-are-failing-theory-of-unemployment/ . Michael Lind offered similar comments; http://www.salon.com/2012/09/11/obamas_a_supply_sider_too/
82. http://www.kansascityfed.org/publicat/sympos/2012/el-js.pdf