“What Workers Lose by Staying Put,” Enrico Moretti in the Wall Street Journal

The New Geography of Jobs

“What Workers Lose…” is an article in the Weekend Edition of the WSJ, adapted from Dr. Moretti’s recent book (which I haven’t read) The New Geography of Jobs.  Dr. Moretti was born and grew up in Italy, but now teaches economics at Cal Berkeley.

The thrust of the article is that Americans are unusually mobile in search of work, in contrast with Continental Europeans, who seldom stray from their birthplace.  Dr. Moretti believes that this flexibility is an economic virtue–not necessarily a surprise, given his own career.

His observation is interesting because it runs so counter to the views of prominent 20th century European literary and social critics, who look on American willingness to move as evidence that we’re rootless, soulless wanderers who have no sense of belonging.  Even worse, we eat at McDonalds, vacation at Disneyland and use disposable pens!  That’s all evidence, in their minds, that we’re an inferior brand of humanity–which, by the way, finds its highest and purest expression in the stay-at-home residents of whatever their native country is (read: themselves).

More important from a stock market point of view, the article sheds some light on the problem of the current high level of unemployment in the US.  And it offers a policy prescription for helping to alleviate it.

cyclical or structural?

The key unemployment issue, to my mind, is whether the current high level is

–a cyclical phenomenon, that is, a function of the slow economic rebound from the Great Recession, or

–a structural onemeaning that the unemployed don’t have the skills needed to qualify for jobs in today’s world.  If so, unemployment won’t just go away.

White House and Capitol Hill vs. the Fed

Politicians in Washington seem to adhere to the former view, which, conveniently for them, means that no legislative action is needed.  Time, patience and continuing low interest rates will solve the problem.  The Fed is in the latter camp (where, for what it’s worth, I am, too).  Structural unemployment requires retraining programs, plus continuing unemployment benefits until workers gain skills needed to compete successfully in the job market.

The Fed points to the Labor Department’s Job Openings and Labor Turnover (JOLT) studies.  The latest report, from the end of March, shows the private sector has 3.7 million+ unfilled job openings.  Washington replies that workers are trapped in their home towns by houses the can’t sell because the mortgage exceeds the house value.

What does Dr. Moretti bring to the discussion?

He says:

–“willingness to relocate is a large factor in American prosperity”

–“the financial return for geographical mobility keeps increasing”

–the willingness to move is very strongly related to education level.  45% of college graduates will likely move to find better jobs before they’re 30 years old, vs. 17% of high school dropouts.  Dr. Moretti cites research by Prof. Abigail Wozniak of Notre Dame who says education explains most of the willingness to move.

Why the huge difference?

The less educated:

–have less information about the possibility of good work elsewhere

–may lack the skills needed in high-paying jobs

–don’t have the savings needed to finance the trip and support themselves while they look for a job.

Example:  the Motor City, 2009

Dr. Moretti cites the example of Detroit in 2009. Unemployment there was 18%.  Unemployment in Iowa City, 500 miles away, was 4.5%–basically meaning Iowa City firms were crying for workers of all stripes.  But high school dropouts in Detroit didn’t budge.

a policy recommendation

Dr. Moretti suggests that in high unemployment areas government unemployment benefits include vouchers that cover part of the expense of moving to find work.  This doesn’t address the lack-of-marketable-skills problem, but it does address the lack-of-cash one.  Such a program–already being implemented in a small way for workers whose firms have been hurt by foreign competition–would have two benefits.

It would help shift workers who were willing to move to places where they could find work.  And, by starting to drain the pool of unemployed in high unemployment areas, it would make the job search there somewhat easier.

two kinds of structural

All of the commentary–at least all that I’ve seen–about structural unemployment is concentrated on the long-term issue that many young men leave the US school system unequipped to compete for the best-paying jobs.  They’re prime candidates to be chronically unemployed.

Dr. Moretti’s insight is that while we can’t educate these men overnight, we can make them more mobile with the stroke of a pen.  We may also find that removing the structural rigidity of no-money/no-information does much more to relieve unemployment than we might imagine.

care for a Beveridge? … a curve, that is.

the Beveridge curve

This is a new one for me.  …and I thought I had seen most basic macroeconomic relationships.

The Beveridge curve is named in honor of a British economist, William Beveridge–although he didn’t develop it himself.  It maps the relationship between the unemployment rate and the job vacancy rate (number of unfilled jobs as a percentage of the labor force).

The relationship is inverse:  the higher the unemployment rate, the lower the percentage of vacant jobs should be; the lower the unemployment rate, the more likely it is that jobs will go at least temporarily unfilled–therefore raising the vacancy rate.

why is the curve important?

I found out about the Beveridge curve from a post written by Gavyn Davies, former head of the global economics department for Goldman, on the blog he writes for the Financial Times.  The post is titled “Why the Fed has taken QE3 off the agenda.”

It gives two important reasons for thinking that further quantitative easing is unlikely in the US.  One of these is the current behavior of the Beveridge curve.

In illustration, Mr. Davies prints a pair of charts which he’s borrowed from an economist from Barclays Capital, Peter Newland.  They depict the job vacancy rate on the vertical axis and the unemployment rate on the horizontal.

The first chart demonstrates that the current Beveridge curve is different from the pre-recession one.  The curve has shifted substantially to the right since 2008.  The present job vacancy rate would have been associated with a 5.5% unemployment rate less than a decade ago.   It’s now associated with an 8%+ unemployment rate.

Both Mssrs. Davies and Newland appear to believe that this shift is a permanent change.  In support of this idea, Mr. Newland’s second chart shows that a similar phenomenon occurred after the first oil shock in 1973-74, which triggered the worst post-WWII recession the world had seen until the recent Great Recession commenced.  So an outward shift of the Beveridge curve during a time of great economic change has already occurred before.

The conclusion they draw is that the current 8% unemployment rate is the functional equivalent of the pre-recession 5.5%.  If they are correct, and I think they are, today’s shifted Beveridge curve signals that we’re much closer to full employment in the US than the raw unemployment data would suggest.

This is important.

At full employment, monetary easing doesn’t create new jobs–there’s no one with the skills needed to fill them.  Instead, all loose money does is create a potentially damaging inflationary wage spiral as bidding wars break out to lure already employed workers from one firm to another.  Therefore, QE3 won’t happen.

another reason QE3 is off the agenda:  labor force participation rate

The labor force participation rate is the percentage of people of working age who are actually in the labor force–that is, either employed or willing to/looking for work.  What’s left over includes homemakers and students, among other groups.

One other group of non-participating persons of particular economic concern are so-called “discouraged workers.” These are people who have lost heart because they can’t seem to find a job and have ceased to look.  Although without jobs, they disappear from the unemployment statistics.  But they still lurk in the shadows, as it were, waiting to reenter the workforce when they conclude their chances they’ll find a job are more favorable and start looking again.

A quick look at the labor force participation rate suggests there might be a lot of discouraged workers.  The rate during 1998-2001 was 67.3%.  Now it’s at 64%.  Where did all those other 3.3% go?  Are they discouraged workers?

The short answer is “no.”

Mr. Davies cites a recent study by the Chicago Fed which concludes that the largest force behind this decline isn’t workers being discouraged by recession.  Rather, it’s a natural falloff in participation owing to the aging (and retirement) of the Baby Boom.  The Chicago Fed predicts that by 2020 the labor force participation rate will be lower than it is today, for the same age-related reasons.

Why is this important?  It, too, suggests that, with no gigantic pool of discouraged workers to fall back on, we’re much closer to full employment than the raw data would lead one to believe.

my thoughts

I’m solidly in the structural unemployment camp.  The wage increases for workers that we’re just beginning to see are further evidence that the US is running out of suitable candidates for jobs available.

Chronic unemployment is a terrible social problem.  But it can only be fixed through retraining and through continuing unemployment benefits.  Accommodative money policy won’t help.  Make-work infrastructure spending programs won’t do anything, either.   Facing a similar situation in 1990, Japan launched a series of massive public works construction projects, whose sole impact has been to mire that country more deeply in debt.

The bottom line is that the present loose money stance isn’t likely to last until late 2014, in my opinion.