‘Structural Unemployment?’ Why Not Throw Money at the Problem?

The Business Desk of the PBS NewsHour has the article ‘Structural Unemployment?’ Why Not Throw Money at the Problem?  In the article, Dean Baker, gives a well reasoned explanation as to why the current level of unemployment is cyclical, not structural.  The usual Keynesian stimulus is the solution.

In short, this story — that employers would be hiring workers if workers just had the right skills — is not supported by the evidence. If employers can’t find the workers they need, they raise wages. This is how a market economy works.

The problem with the structural unemployment story is that it is very difficult to identify any substantial segment of the labor market where there are rapidly rising wages. In the last decade, even the wages of college grads have not kept pace with the rate of inflation. If college grads just got their share of productivity growth, their wages would be rising by more than 1.5 percentage points a year above the rate of inflation. In fact, there is no major occupational category, even among workers with a college degree or higher, where wage growth has kept pace with productivity growth over the last decade.

We don’t see rising wages, therefore we can assume that employers are not having trouble finding workers; end of story.

This simple fact, and others that follow from it, has led to a growing consensus in the economics profession that the economy’s problems stem from a lack of demand rather than from structural issues.

As a rebuttal to Baker’s rebuttal, Paul Solman, of The Business Desk, offers an ill thought out experiment as proof.

Look, I have my own thought experiment — the “Mass Massage Mobilization” or MMM — in which every American would be given tax incentives or subsidies to get one-hour-long massage per week. That would employ 7 to 10 million newly trained massage therapists, depending on how hard you want to work them. No college degree would be necessary, and everyone, pretty much, would be better off. (See chapter 9, “Touch,” in the book “Born to Be Good” from Berkeley’s Dacher Keltner, for the psychological benefits to giver and receiver alike.)

But to make the MMM a sustainable solution, at some point, people need to be willing to pay for their massages. Either that or we move more and more to a socialist answer to the problem of unemployment. That may be okay, but it’s hard to ignore the problems that socialism typically brings with it — the sort of problems that conservative economist Ed Yardeni raised when we did a story on government infrastructure spending with liberal economist Bob Frank of Cornell during the depths of the Great Recession.

I would expect Solman to understand Keynesian Economics better than he shows in his thought experiment.

In my thought experiment, there is several trillion dollars in infrastructure spending that we need to keep our infrastructure from falling apart.  Hiring private sector companies and workers to build and repair this infrastructure would fulfill a much needed gap in our economy without increasing government workers very much.  The money these companies and people would earn would circulate back through the economy creating many other jobs.  As the burst of infrastructure spending was completed and infrastructure work fell to a normal level, the demand created by these other jobs would sustain the economy.  The distribution of jobs would shift from infrastructure work toward other work that was in insufficient supply at the time to meet the demand at the time.

It is beyond naivete to think that the jobs created to get the economy out of recession would have to be exactly the same jobs that would sustain the economy in perpetuity.  Even capitalists know that the economy does not work that way.

However, an economic system is never all one thing or all another.  This is not a binary system where we only use ones and zeros to describe economic activity.  We use real numbers with an infinite range to measure the economy.  To the extent that there is a structural unemployment problem it is due to the shift in economic policy that favors giving all the rewards of productivity increase to a few wealthy people at the top of the economy.  To make the Keynesian solution sustainable, there will have to be policy changes that put the distribution of wealth and income back to the more normal levels that existed before the advent of great redistribution upward that started around the 1980s.

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