The Soft Bigotry of Low Expectations

In a country with almost 15 million people out of work, it is amazing that any economists still have jobs. This one is their fault first and foremost. Economists are supposed to know about the economy and provide advice on how to avoid disasters before they happen and help us recover from the bad things that happen in spite of good advice.

The economics profession has not done well on this simple scorecard. Remarkably, rather than improve their game, economists are now busy dampening down expectations so that the public will not hold them responsible for the state of the economy.

Towards this end, a group of Fed economists recently put out a new study claiming that it was impossible for economists to recognize the $8 trillion housing bubble before it wrecked the economy. In effect, they argued that economists should not be blamed for this failure because:

“The state-of-the-art tools of economic science were not capable of predicting with any degree of certainty the collapse of U.S. house prices that started in 2006.”

This raises the obvious question: If economists can’t see an $8 trillion housing bubble, what can they see? This is a bit like the firehouse where everyone sits around calmly sipping their coffee as the school across the street burns down. Completely missing the largest financial bubble in the history of the world is pretty inexcusable, even if economists continue to make excuses.

Having failed to prevent disaster, economists are now anxious to tell us that there is nothing that they can do to remedy the situation. The story they are pushing is the unemployment is structural, not cyclical. This means that people are not unemployed because of a lack of demand in the economy, but rather they are unemployed because there is a mismatch between the available jobs and the skills and location of the available workers.

Before examining the argument here more closely, it is worth noting that arguments about rising structural unemployment come around during every recession. When the economy fails to produce jobs fast enough to bring down the unemployment rate economists quickly turn to blaming the workers. The problem is not that economists came up with bad policies; the problem is that workers don’t have the right skills or live in the right place. This happened after each of the last four recessions.

The story the economists tell is that we have jobs available but the workers who are unemployed don’t have the skills to fill these jobs. The “structural unemployment” gang got a big boost last week when the Bureau of Labor Statistics reported an increase of 180,000 in the number of unfilled job openings for July.

There are some logical implications of the structural unemployment story that are easy to test. For example, if there are sectors of the economy where they is a substantial unmet demand for labor then we should expect to see wages rising rapidly in these sectors. This is a simple supply and demand story. If demand exceeds supply then we should expect to see wages rising as firms compete for workers.

There is no major sector in which wages are keeping pace with the overall rate of productivity growth. Wages have been rising pretty much at the rate of inflation in most sectors for the last year and a half. In fact, taken as a whole the wages of production/non-supervisory workers have been rising slightly more rapidly than the wages of all workers over the last year and a half. Since all of the less-skilled jobs fall in the production/non-supervisory group, this suggests that the premium for skills has actually fallen somewhat in the last year and a half, the direct opposite of the structural unemployment story.

In the same vein, if employers can’t find enough skilled workers, then we would expect them to have their existing workforce put in more hours. So, there should be sectors of the economy where average weekly hours are increasing. The evidence refuses to cooperate here also. The biggest increase in average hours over the last year has been in mining and logging and manufacturing, industries that are not typically thought to be centers of new economy skills. On the whole, average weekly hours are far below their pre-recession level.

Oh yeah, and what about that big jump in job openings in July? With the July jump there are just over 3 million job openings being reported, which gives us a little more than one opening for every five unemployed workers. Furthermore, the current number of openings is down by roughly one-third from its level in 2007, before the recession began. And, no one was talking about structural unemployment three years ago.

In short, there really is no evidence for a problem of structural unemployment. The problem is that because of bad policy we don’t have enough demand in the economy. If there is a mismatch of jobs and skills it is between economist positions and the people who fill them.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.