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The solution to unemployment? Jobs.

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Wednesday, June 15, 2011


I don't think the idea that the unemployment problem is mostly structural stands up to the evidence, but for the sake of argument suppose it is. How should we respond? There are three choices:

1. Do nothing to help. Even though the problems facing the unemployed were created by events out of their control -- they did nothing to deserve unemployment and the struggles that come with it -- and even though those who did cause the problem have received lots of help from bailouts, unemployed workers should not get anything from the government. They're on their own.

2. Provide government help in the form of transfer payments (i.e. cash or the equivalent, e.g. food stamps, from the government), but don't expect anything useful in return. Just send checks and vouchers.

3. Provide the same amount of support as under 2, or better yet even more support, in return for jobs that do useful things for the community. That is, bridge the time while structural adjustments are underway with useful employment for those waiting for the structural changes to be completed.

4. Provide job retraining, use tax incentives to promote better matching by inducing workers and firms to move, and implement tax and other incentives that encourage more business investment and hence faster adjustment from firms.

Importantly, with cyclical unemployment there is also a fifth option, increasing aggregate demand, that does not exist when the problem is structural. But if we cannot increase aggregate demand sufficiently due to political or technical reasons, we also need to bridge the gap while demand recovers by providing jobs for those who will not be able to find employment no matter how hard they try.

To me, the choice is easy. For long-term structural unemployment, 3 is best. There is an argument for 2, we want workers to have the resources they need to search for jobs that suit them best, so we shouldn't eliminate this type of help. But the structurally unemployed will not be able to find a job easily even with an extended, dedicated search supported by unemployment compensation. They need jobs to provide income for their households and to keep them connected to the labor market.

But there is one potential caveat to a jobs program for the structurally unemployed -- it might reduce labor mobility. Workers who might have been inclined to move to take a new job will be less inclined to do so if they have a temporary, community value enhancing job from the government. I don't think that's a significant worry even when the problem is largely structural, but it's worth noting. (Remember that I am assuming structural unemployment for the sake of argument. If the problem is mostly cyclical, as I think it is, this isn't an issue.)

But even if reduced mobility is an issue (and, again, I don't think it is), there is an important offsetting effect. Long-term unemployment, the type that occurs with slow structural adjustment, has long-term negative consequences for the economy (and this is true for both the cyclically and structurally unemployed). The longer people are unemployed, the higher the chance of them dropping out of the labor market permanently. Workers close to retirement will find a way to hang on for a few years by living with family, doing odd jobs, etc., and their experience and skills will go to waste.

Younger workers tend to drop out, or work in the underground job market, e.g. doing construction outside of the formal job market. Or they take whatever job they can get and then buy a car, a house, have a kid, etc. and get stuck in a job that does not make full use of their capabilities. They are part of the long-term under-employed. We are all worse off when this happens. The point is that long-term unemployment causes the labor force to erode in both numbers and skill, and that is costly to society. Simply keeping workers connected to the labor market with a job of any type -- doing things the community needs for example -- avoids the erosion of the workforce and the negative consequences (lower economic growth rate) that come with it.

Thus, contrary to what you sometimes hear, we can help the structurally unemployed through job creation. Those who insist, contrary to the evidence, that the problem we face right now is mostly structural cannot use this to argue against a job creation program. In fact, since increasing demand is unlikely to work in the case of structural unemployment in the way it will for a cyclical problem, there is a sense in which the argument for job creation to bridge the long adjustment gap is even more compelling when the problem is structural.

So it doesn't matter whether the problem is the inability to offset the slow recovery of demand through monetary and fiscal policy due to political or technical problems, or long-term structural adjustment, we need jobs, jobs, jobs.

Mark Thoma writes the Economist’s View blog. He is a professor of economics in the Economics Department at the University of Oregon.



0 #1 Accountability Makes a DifferenceLisa 2011-06-16 10:24:22
I agree with the concept of a government payment for services rendedered/comm unity projects etc versus just writing checks and giving people "money for nothing" as the Dire Straits' song lamented.

Studies have shown that many unemployed get jobs just before their benefits run out...coinciden ce? I don't think so. As with "Work Fare" instead of welfare, giving the unemployed an opportunity to be producers instead of receivers provides some sense of worth, gets community projects done in an era of declining state and local budgets, and also discourages those who'd rather sit around until benefits dry up from doing so.

I suspect though that such a measure would be impossible to put into place. Cries of "slavery" would ensue along with union complaints that while no one wants to pay them $25 an hour to pick up trash, we're willing to take advantage of the poor unemployed schmuck who doesn't have the union to preserve his/her job through political wrangling, thuggery or threats.

Let's hope that given Oregon's noteworthy budget deficit (hey we made the news again!) we spend money wisely and get some of these projects done using unemployment benefits.
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RD Rung
0 #2 Short-term vs. long-termRD Rung 2011-06-16 10:55:57
I have no major argument with this analysis and set of preferences, but it does illustrate the frustrating slowness and weakness of available short-term options.

Option #3 would be stronger if it mentioned what the "structural changes" were, and option #4 would be improved by replacing/augme nting "incentives" with increased friendliness to business investment (taxes, regulations, permitting, etc.) in general. Incentives to create green jobs may do some good, but in the same time period an even greater number of non-green (i.e. politically neglected) jobs may be lost. Texas is an example of a business-friend ly and enthusiastic state that is responsible for between 37% and 48% of all US job gains in the current tepid recovery.
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