U.S. Job Market Not (Yet) Marked by European Sclerosis
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 sticks 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. Finding work after months and months of searching makes the pain of joblessness all too clear, as told in the individual stories in the June 4 issue of Bloomberg Businessweek. The other themes in those tales, though, are persistence and resourcefulness: The flip side of flexibility is resilience.
Historically, drawing on those strengths, the U.S.’s smoother turnover of jobs has resulted in faster growth and lower 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 recent recession. An old rule of thumb -- the steeper the recession, the stronger the recovery -- has been set aside since 2008. Jobs have been slow to come back. Nearly three years after the trough, the unemployment rate in May, released today, was still 8.2 percent, up from 8.1 percent in April. The Labor Department reported that nonfarm employers added only 69,000 jobs in May, far short of the 150,000 economists had forecast.
The reason isn’t hard to see. The causes of the 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 that the U.S. is recovering, albeit tepidly by its own standards, and joblessness is inching down. The worry, meanwhile, is that 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 if 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 is happening, would be a serious setback.
One worrisome piece of evidence is a relationship called the Beveridge curve (named for an influential British economist and social reformer of the 1930s and 1940s). It compares unemployment and vacancies. In a typical recession, joblessness rises and vacancies shrink as the economy contracts. During a recovery, the process reverses. But in the current upturn, the curve isn’t retracing its steps. Unemployment is falling more slowly than you would expect, given the rise in vacancies.
This needs to be watched. It could be a sign of mismatch between the skills employers want and the skills job applicants are offering, which would point to higher structural unemployment. In an April 11 speech, though, Fed Vice Chairman Janet Yellen advised caution. Some of the shift is probably due to temporary extensions of unemployment benefits, which might encourage some job seekers to be more choosey. As the extensions end, she said, things should get back to normal. In previous recoveries, vacancies at first have often picked up faster than hires. Detours in the Beveridge curve aren’t uncommon.
Yellen points to other signs that the country’s unemployment remains much more cyclical than structural, thus susceptible to sustained monetary stimulus. For instance, many analysts have cited “house-lock” as a brake on employment: Unable to sell their houses because their mortgages are underwater, unemployed workers are finding it harder than usual to move to find work. Although plausible, it doesn’t stand up, Yellen says.
Internal migration has been trending lower in the U.S. for many years, she notes, and shows no sudden drop of late. During the recession, the fall in mobility was no bigger for homeowners than for renters, and no worse where house prices have fallen the most. As for the most important factor of all -- the determination of jobless Americans to get back to work -- Bloomberg Businessweek’s 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, the U.S. labor market is still exceptional. But let’s not imagine that this can last indefinitely. If the recovery slows, the damage caused by long-term unemployment will worsen. 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 slow recovery interrupted by a self-inflicted second recession is the formula that would finally cripple the labor market and kill one of the U.S.’s greatest economic advantages. It’s an experiment best avoided.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.