Sebastian Mallaby has an interesting piece in the FT – “The US labour market doesn’t work“
A quarter of a century ago, the US workforce was a wonder. Laid off in one corner of the economy, Americans quickly landed jobs elsewhere. But over the past decade, a profound change has come about.
. . .
Technological change has reduced opportunities for low-skilled men and a lousy school system has failed to equip them for this challenge.
Mallaby cites a recent IMF paper, Fiscal Policy and Employment in Advanced and Emerging Economies, and summarizes the policy prescriptions from that work. Interestingly, the paper views the current employment situation as I do: both cyclical and structural. However, The IMF paper puts the structural issues squarely on policymakers: “deep-rooted weaknesses in labor market institutions and fiscal policies.” Mallaby and the IMF paper focus on areas such as payroll taxes, welfare programs and unemployment insurance — all important areas. Whereas I have tended to focus on the changing nature of the economy itself.
Apropos those changes, I would take issue with the implied analysis in Mallaby’s piece that the root cause is technological change. Yes, we have seen a rise in the importance of worker skills and a decline in the incomes of lower skilled workers. But that is only part of the story. The nature of work and the relationship between employer and employee has changed. I would also dispute that the changes have come in the last decade.
As I have argued elsewhere, these changes go back 30 years. The recession of the early 1980’s was the first recession of the I-Cubed Economy where workers were not placed on temporary layoff but permanently fired. As companies were downsized, involuntary part-time work was the response of people downsized.
This was part of the switch away from the industrial economy. In the industrial economy, temporary lay-offs were the way of buffering the labor force from cyclical downturns. Workers were kept around for the next upturn — with either union-based or government-based unemployment payments to maintain family income until the recall.
In the I-Cubed Economy, that process has disappeared. Workers have to find new jobs — often in new industries. Cyclical downturns now lead to structural changes.
Unfortunately, after 30 years we apparently still have not learned that lesson. And our public policies — such as unemployment insurance and worker training — have suffered.