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Is US labor market no longer flexible?

One of the greatest strength of American economy is its very flexible labor market.  Following my previous post on hiring mismatch in the US labor market, here is a nice piece from Economist Magazine on whether the high unemployment rate, currently at 9.5%, is more due to structural change, rather than weak demand, in American economy.

There are a few things that might have contributed to such structural rigidities in the labor market. First is the skill mismatch. Imagine how many people went into housing and construction business in this great housing bubble, how many of them can retrain themselves and find jobs in new sectors. Also imagine how many people went into financial industry.  If you agree that American financial industry is also in a secular decline, this just adds more into the structural skill mismatch.

Another factor is also related to housing.  Buying at peak price and with more than 35% price decline at nationwide, a lot of home owners have their home equity now under the water. The heavy mortgage debt limits people's mobility, and prevents them from taking  jobs in new places.

AMERICANS are used to thinking of their job market as lithe and supple. Employment snaps back quickly after recessions. Workers routinely shuttle between industries and cities to wherever jobs are abundant. But in the past decade, the labour market has resembled an ageing athlete. Each new injury is more painful and takes longer to heal. More than a year into the current economic recovery the unemployment rate remains stuck close to 10%, raising concerns about the kind of sclerosis that continental Europe suffered in the 1980s.

The slow rehabilitation is in part because the economy suffered a trauma, not a scrape. The fall in GDP during the last recession was easily the largest of the post-war period, and output remains well below its potential. Few had expected a rapid return to full employment, but even modest expectations for jobs growth have not been met. Employment has actually fallen since the end of the recession; and unemployment would be even higher than it is were it not for discouraged would-be jobseekers quitting the workforce. Some economists now fret that other barriers besides weak demand stand between workers and jobs, and that high unemployment is partly “structural” in nature.

The case begins with some kinks in recent data. Rising GDP has not led to the fall in unemployment predicted by Okun’s Law, established in the 1960s by Arthur Okun, an economist. The figures have also departed from the Beveridge curve (named for a British economist, William Beveridge) which relates job vacancies and the jobless rate. Unemployment has failed to fall in a way consistent with the increase in job openings.

Such deviations are perhaps too short-lived to be conclusive. But they jar because there are other reasons to believe that structural obstacles to jobs growth have risen. For instance, jobless benefits have been extended to 99 weeks in some states with high unemployment, compared with the usual limit of 26 weeks. Such payments provide crucial support to the long-term jobless and help to prop up aggregate demand. But they also push up the unemployment rate by discouraging workers from looking for jobs as assiduously as they might otherwise do.

A bigger worry is that jobseekers no longer have the skills demanded by employers. Half of the 8m jobs lost went in construction and manufacturing, and those departing these industries may struggle to adapt to jobs in more vibrant areas such as education and health services. The cost of this skills mismatch is compounded by America’s housing bust. Many owe more on mortgages than their homes are worth. Households often opt to stay put rather than default, leaving them trapped in places with high unemployment and unable to move to where jobs are plentiful. The rise of the two-income household has also made workers less mobile than they were: it is harder to move in search of jobs if there are two careers to consider.

How important are these factors? Very, says Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis. He recently caused a stir by arguing that “most” of America’s unemployment is thanks to such mismatches, and hence not easily alleviated with looser monetary policy. Most American policymakers believe that structural joblessness has risen little, if at all.

One of the few concrete estimates comes from the IMF. A recent report compared the skill levels of the unemployed with indicators of the skills required by employers, to create state-level indices of mismatches. It used local mortgage-default and foreclosure figures to estimate geographical immobility. The results suggest that each of these factors acts to magnify the impact of the other. The authors conclude that, because of these rigidities, the unemployment rate consistent with stable inflation—roughly speaking, the structural rate—rose from around 5% in 2007 to between 6% and 6.75% by 2009.



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