my doxy

Orthodoxy is my doxy; heterodoxy is your doxy.
--William Warburton

Commentary on politics, finance, and sometimes other tidbits when I can't restrain myself.

This page is powered by Blogger. Isn't yours?
Wednesday, February 11, 2004

Why isn't the US at full employment?

No one thinks that the US is currently at full employment--job growth well below population growth, rising long-term unemployment, and stagnant wages would seem to make this clear. But why? When have US monetary and fiscal policy ever been looser than they are now?

I am not certain that anyone knows the answer to this question, but I think we need to look at the usual suspect, "price-stickiness", or perhaps price-stickiness enhanced by other kinds of stickiness.

First, people are well-known to exhibit price-stickiness in the wages they will accept--they have an idea of how much their work is worth, and are not inclined to take jobs which pay significantly less than that. It may be that some people's notion of their value was inflated during the strong economy of the 1995-2000 period. It may be that wages in their sector of the economy are being deflated by domestic or foreign competition, or by technological change. In any case, unless they are in dire straits, people are not likely to quickly take a job which does not meet their expectations, even if their expectations no longer correspond to reality.

Second, people are well-known to exhibit sector-stickiness--an industrial worker is unlikely to consider switching to a health-care job until other industrial options are exhausted. Also, credentials and experience in one sector are likely not easily transferrable to another.

Third, the American population is aging, and very likely is less likely to migrate within the US for employment reasons than in the past--we could call this geographic stickiness. In the 80's we saw the "black tag people" moving from Michigan to Texas for work, because the Michigan economy was very depressed and Texas was booming, but now there don't seem to be any really strong regional job markets in the US, so even if people were so inclined, they might not know where to go.

It may also be that the relative strength in the asset markets (especially the residential property market) may enable people to live without work for longer than has historically been the case.

Now the thing about stickiness arguments is that stickiness isn't expected to last forever--people get retrained, expectations adjust, geographic attachments wane--but there isn't really any way to know how long those things might take. And as the economy keeps shifting, we can expect that people will continue to go through this process. The US does have some programs in place to help, but it seems clear that they are inadequate--I suspect that if widespread concern about trade and outsourcing are not to completely screw up the world economy, the US needs to get a better system of worker assistance in place.