Structural Change

Back in the day, a 5.4% unemployment rate in the United States was considered a very tight labor market. Now, not so much.

Tim Worstall comments on why that may be, prompted by a Bob Herbert article in the NYT on the same subject. Concludeth Tim:

So, there has been a change, a structural one, one which theory predicts would have the result we now see: what would in the past have been considered a tight labour market leading to wage inflation is now regarded as a slack labour market, one which does not give labour increased bargaining power. All at the same unemployment rate of 5.4%. In the jargon, NAIRU has been shifted down, or the Phillips Curve shifted left, something that we should regard as a good thing. The long term unemployed are no longer left to fester in slums, but encouraged, indeed forced, to go out and join in the American dream.

What bugs me about Herbert's analysis, that of the EPI and others, is that this structural change is regarded as a bad thing, when in fact it is something to be celebrated. Much to everyone's surprise a Democratic Administration listened to a leftist academic, managed not to screw up the implementation and actually had a success with an economic plan. This is something so unusual that we really ought to celebrate it.

Tim gets to this conclusion by figuring that the structural change was due to welfare reform, and now that people can't sit on their butts after losing their jobs, they'll keep trying to find one, and thus the influence of the extra, desperate long-term unemployeds will eliminate the usual pressure for wage increases. Voila!

I think this is a bit simple. The bulk of the economy is not in long-term marginally employable people to begin with, nor is the labor market mainly composed of people eligible for welfare covered by welfare reform, and the dramatic change in the economy (and day to day life in general) wrought by the Internet/WWW would seem to be the primary causes of any structural change. There are also the problems of dealing with the massive temporal imbalance between job skills offered on the market and what is actually needed by firms to fill market demand.[1]

Also, Arnold Kling's essay on total labor compensation (wages & benefits) points out that total compensation is rising faster than inflation (thus is increasing in real terms), while wage rates (take home pay) have risen slower than inflation. Arnold points the finger (correctly) at rising health care costs eating up employee compensation, but it would seem clear that simply looking at wage rates isn't going to give you the whole picture or even a relatively accurate picture of what is going on. If total compensation is rising faster than inflation, then the labor market is acting as you'd expect it to given the "low" unemployment level- the only difference is that in this case most of the benefit of labor power is going to... benefits.

Which would seem to be less of a welfare-reform issue and more of the ongoing health care cost problem and the attendant concerns of poor and misaligned incentives, inefficient intermediation, 3rd-party payers, etc. Also, it seems that the current (mandated?) system of employer-provided insurance is an obstacle to more efficient compensation bundles (as in, more take-home pay vs. less health insurance, or vice versa), in that an employer has to provide the insurance to attract employees but then is saddled with a cost that can't easily be checked, and so the easiest thing to give/hold the line on is the nominal wage.

To cap off this rambly post, I'll say one more thing for the welfare hypothesis- the nature of the current recovery seems to be like that of the early 90s- growth first at the low end of the labor spectrum vs. re-hiring of high salary/professional types[2]. This would seem like support for the welfare thesis except that welfare reform didn't occur until the mid 90s. The difference and lag between low wage and high wage employment recovery would seem to be structural within the nature of US firms moreso than any shuffling of federal welfare incentives.


fn1. Recently that being the massive amount of people with IT training chasing a lot fewer jobs after the 2000 bubble burst, among other things.

fn2. Being one of the higher salary/professional types caught out on underemployed side of the ledger, I can attest to this fact. :bigcry: The peril of working for a consulting company with all its contract eggs in one basket...

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"I think this is a bit

"I think this is a bit simple. "
I agree. It is a bit simple. Attempting to explain an entire complex economy by a change in one small part of it is absurdly simple. So simplistic as to be wrong. So mea culpa.
What I wanted to point out, and obviously lacked the skills to do so, was that one of the intellectual reasons proferred for welfare reform was precisely that it would bring down the unemployment rate which we would describe as a "tight labour market". Even if that was not politically so in the US, that is at least what I recall from undergraduate lectures by Richard Layard, the figure most closely associated with the idea in the UK.
Welfare was reformed, NAIRU does seem to have fallen. Cause and effect? Who knows, certainly not me. A link that would benefit from further examination? I think so.