60 Years of Too-High Unemployment?

“I found that the men and women who got to the top were those who did the jobs they had in hand, with everything they had of energy and enthusiasm and hard work.” 
-Harry Truman

Show up, work hard, and you will get ahead.  That was the mantra championed by the leaders of our society for at least two generations. This message, despite its inconsistencies with reality in many communities, nevertheless retained followers. 

But times have changed and the veracity of this idea has eroded. New innovations in manufacturing and the expansion of worldwide trade have eliminated many jobs that US workers ‘had in hand.'  While jobs went away, a housing bubble – created by perverse incentives in the financial sector – was able to take up the slack for a while.  But as we all know by now that phenomenon was simply unsustainable. 

Now individuals who spent decades gaining knowledge and skills in one sector are forced to start anew.  But, of course, that isn’t easy.  Economists call this difficulty, ‘labor market friction,’ and it’s a hotly debated topic.

Lately, I find myself siding more with those who claim the problems of unemployment and stagnating wages are structurally embedded in our economy.  In other words, they are a result of more than just a sputtering financial system that started in 2008.

To the extent that is the case, I heard troubling news today at a lecture by Kerem Cosar, a professor of economics from the University of Chicago.  Here he outlined his newly developed model describing how labor markets adjust to changing conditions, specifically to new competition from trade. 

Admittedly, much of the lecture went over my head as he and recent Nobel laureate, Thomas Sargent, maintained some animated scholarly banter.  But I did absorb one unfortunate point.  According to his model, after a shock disrupts a labor market, it may take over sixty years for workers to gain the new knowledge and skill (human capital) required for the country’s new economic condition.  And without the necessary skills, aspiring workers won't find jobs. 

Cosar states, “the reallocation (of workers to new jobs) is very sluggish, it is costly for displaced workers, and these costs are increasing with age.”

The questions is, of course, does this model describe the US?  Have we experienced a labor shock that has altered the skills companies need from workers?  Or, will unemployment drop back to pre-recession levels when our economic growth gains momentum?

The answer to those questions may indicate whether we’ll see two generations of under-performing employment levels and, consequently, if the old paradigm of ‘work hard and be rewarded’ will reflect nostalgia rather than reality. 

Now I see why it’s such a contentious issue. 

As always, feel free to comment!