is the high unemployment rate cyclical or structural?
One of the more opaque, but nonetheless (I think) important, aspects of the US economy at present is the current long-term unemployment. Is it cyclical–meaning the issue will gradually go away as the economy gains strength–or is it structural–meaning the recession prompted/accelerated a change in the way business is done, and that many of the jobs lost aren’t coming back?
For what it’s worth, I’m in the structural camp.
The Fed thinks that the unemployment is structural, too, if last year’s remarks by Minnesota Fed President Kocherlakota that monetary policy can’t change construction workers into manufacturing workers are any indication. Despite this, the Fed continues to pump extra money into the economy through its “QE II” operations (dubbed that by some economics professor who lives near where the original Queen Elizabeth ships were built), as if the issue were mostly cyclical.
Why? It feels an obligation to do something–on political and social grounds, I think, not economic–to help reduce unemployment, and this is the only tool it can wield. I worry that, however well-intentioned, this will do more harm than good. I’m by no means alone in this.
The orthodox remedy for structural unemployment is to retrain workers, something the country’s community colleges do admirably. These institutions are particularly effective in getting women ready for better jobs. Men, on the other hand, appear to come back to college having fewer learning skills. They quickly fall behind in class, become embarrassed and tend to drop out.
(More than) enough preamble–What evidence is there for structural vs. cyclical? Three recent items:
JP Morgan Chase
1. At its investor day on February 15th, JP Morgan Chase talked about its $500 million plan to consolidate its global trading systems. One result will be savings of at least $300 million a year. Another is the elimination of the jobs of 3,000 people who manually type trade information into the firm’s computers–likely taking output from one computer and inputting it into a second because the firm’s disparate systems can’t “talk” to one another. 1,300 of the jobs are already gone. To date, this effort has cut the cost to JP Morgan of making a foreign exchange trade from $.75 to $.10. $.05 is the final goal.
I realize that Jamie Dimon hasn’t been at JP Morgan Chase that long and that some of the computer incompatibility has doubtless come from acquisitions made during the financial meltdown. Still, this is a project that will yield at least a 60% annual return on investment and it’s only being done now.
It’s also 3,000 jobs as typists being eliminated. If we figure that most of the savings are in compensation, that’s 3,000 typist jobs paying around $100,000 each! Talk about low-hanging fruit.
Many of these jobs may be outside the US. But not all of them. And I think they illustrate a part of the employment situation that isn’t noticed or discussed much. My experience is that every corporation has, say, 5%, of the workforce that adds absolutely no value, that’s “dead wood.” Imagine the floor you work on. There’s probably, even today, one person you’d nominate for membership in this club. But these employees have enmeshed themselves so deeply in the company that it’s either legally too difficult or it’s just too unpleasant to eliminate the positions or to replace the employees with productive workers.
Deep recession both provided the occasion and the motivation to fix these problems. When MSFT, which has money coming out of its ears, has layoffs, you know that’s what’s going on. The downturn also taught managers that they could operate productively with less labor.
Having just unloaded the burden of “dead wood,” what would ever prompt you to hire it back?
2. Watson is the IBM computer that recently soundly defeated two human champions on the game show Jeopardy. Watson can understand slang- and pun-filled speech, is chock full of mounds of trivia facts and can trigger a buzzer faster than most (at least, faster than the two human champs). Long-term, this is not good news for librarians, tour guides or people manning information booths at the railroad station. More generally, it suggests that having lots of local lore at your fingertips is eventually going to become little more valuable than having fingertips that can touch the correct keyboard keys.
In other words, the replacement of man by machine is nowhere close to being played out as a fact of modern life.
3. WMT’s sales in the US continue to stagnate. There appear to me to be two reasons for this:
–more affluent customers, who traded down to WMT during the recession, are migrating back up to the more upscale venues they frequent in better times.
–less affluent customers are trading down from WMT, to stores that are normally off Wall Street’s radar screen. In particular, the “dollar stores,” whose target market was once single heads of household who have incomes of $20,000 or less and who typically live within walking distance of the stores, have expanded their lines of merchandise to woo WMT shoppers looking for cheaper prices.
What I find telling about the WMT example is that the retail giant’s customer base is moving in two directions, one with the economic cycle and one against it. Private equity investors are falling all over themselves trying to participate in the dollar store phenomenon. They might not be the brightest crayons in the financial industry box, but they see a clear opportunity. They’re placing their bets squarely on the idea that this counter-cyclical consumer movement will be with us for a long time.
Nothing really concrete in what I’ve written, just a few straws in the wind. But they’re all evidence that support the belief that the US is facing is a structural employment issue–one that can only be fixed through retraining–rather than a cyclical one that will eventually be remedied by keeping fiscal and monetary taps wide open.
Being right or wrong on this issue won’t make much difference to stock market action this year or next. But there are long-term consequences to what policy makers believe. For example, if unemployment is structural, it won’t make much difference if we tighten money and fiscal policy to put our government finances on a sounder footing. Our efforts should go into retraining, particularly for men who left high school with few learning skills. This is the opposite of the current Washington position that we have little to lose from running super-accommodative policy. It also puts the risk of weakness in the US$ or Treasury bond markets in a different light.
I find your conclusion contradictory to your central premise that unemployment is structural. As you stated, how can you turn high school graduates or dropouts for that matter into trained machinists who grasp statistics, programming or for that matter logic?
Heck most high school teachers don’t grasp logic let alone teach it. Solid formal reasoning, i.e., logic, is required and the U.S. has no clue what it even means.
Thanks for your comment. I’ve reread my post and I think you’re right. At the very least, I’m not as clear as I should have been. In the near term, even if the level of the market is relatively the same, no matter whether the government’s current policy stance makes sense or not, the winning and losing stocks will likely be different. I’ll expand on this in tomorrow’s post.