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For years economists have stressed the flexibility of the American labor market. Employers in the U.S., less impeded by strong unions and fussy labor market regulation than in other advanced economies, were quicker to fire workers during downturns—and faster to hire once demand picked up. Workers were flexible too, partly because they had to be. With less of a welfare-state cushion than most Europeans, they were more willing to pick up and move to a new job. They did their part.
Unemployment is hard, especially in a country that reveres effort and expects its citizens to pull their weight. The stories in this issue of Bloomberg Businessweek about individual Americans finding jobs after long spells of searching make the pain of joblessness all too clear. The other themes in those tales, though, are persistence and resourcefulness: The companion to flexibility is resilience.
Historically, drawing on those strengths, America’s smoother turnover of jobs has resulted in faster growth and a lower overall rate of unemployment. Particularly important was the lower rate of long-term unemployment, the kind that most corrodes skills and saps the will to work. This labor-market edge over the competition has been a critical ingredient in the country’s economic success. Is this great American advantage now fading? What prompts the question is the slow, un-American recovery from the Great Recession. An old rule of thumb—the steeper the recession, the stronger the recovery—has been set aside since 2008. Three years since the trough, the jobless rate still hovers around 8 percent.
The reason isn’t hard to see. The causes of this recession were unusual. Downturns brought on by debt overload and financial breakdown are thankfully rare, but when these so-called balance-sheet recessions happen they take longer to shake off. The good news is the U.S. is recovering, albeit tepidly by its own standards, and joblessness is inching down. The worry, meantime, is that the toll of long-term joblessness may be causing permanent damage, pushing the U.S. toward European labor-market sclerosis.
The implication is that “full employment” is no longer what it was. It might mean an unemployment rate of 7 percent, say, rather than 5 percent as before the recession. If so and the Federal Reserve tried to push through the new floor for joblessness with extra monetary stimulus, the result would be rising inflation, not more people at work. A rise in so-called structural unemployment, if it’s happening, would be a serious setback.
One troublesome piece of evidence is a relationship called the Beveridge curve (named after an influential British economist of the 1930s and ’40s). It compares unemployment and vacancies. As the economy contracts, joblessness rises and vacancies shrink. During the recovery, the process reverses. In the current upturn, the curve isn’t retracing its steps. Unemployment is falling more slowly than you’d expect, given the rise in vacancies.
This bears watching. It could be a sign of mismatch between the skills employers want and the skills applicants are offering, which would point to higher structural unemployment. In an April 11 speech, though, Fed Vice Chairman Janet Yellen advises caution. Some of the shift is likely because of temporary extensions of unemployment benefits, which might encourage job seekers to be more choosey. As the extensions end, she says, things should get back to normal. In previous recoveries, vacancies often picked up faster than hires. Detours in the Beveridge curve aren’t uncommon.
Yellen points to other signs unemployment remains more cyclical than structural, hence susceptible to sustained monetary stimulus. For instance, many analysts have cited “house lock” as a brake on employment: Unable to sell their houses because of underwater mortgages, unemployed workers find it harder than usual to move to find work. Although plausible, the theory doesn’t hold up, says Yellen.
Internal migration has been trending lower in the U.S. for years but shows no sudden drop of late, she says. During the recession, the fall in mobility was no bigger for homeowners than for renters and no worse where house prices fell farthest. As for the most important factor of all—the determination of jobless Americans to get back to work—our stories suggest it’s undimmed.
In all, it’s right to regard American unemployment as still predominantly cyclical. Jobs will keep coming as demand revives, and it’s too soon to let concerns about inflation drive monetary policy. For now, you might say, the U.S. labor market is still exceptional. But this can’t last indefinitely. If the recovery slows, the damage caused by long-term joblessness will worsen. At some point, labor-market sclerosis will set in.
Remember that fiscal policy is set not just to slow the recovery at the end of this year but to crush it. The expiring provisions of current law promise to push the economy over the fiscal cliff of abruptly higher taxes and severe cuts in public spending. A self-inflicted second recession is the formula that would finally cripple the labor market and kill one of America’s greatest economic advantages. It’s an experiment best avoided.
To read Noah Feldman on censorship at Sina Weibo and William D. Cohan on more Facebook IPO fallout: Bloomberg.com/view.