NCPA - National Center for Policy Analysis

America's Out-of-Work Are Resilient, but Not Endlessly So

June 14, 2012

For years economists have stressed the flexibility of the American labor market.  Employers in the United States, largely unimpeded by strong unions and fussy market regulation, 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.  Without a welfare-state cushion, they were willing to pick up and move to a new job, says BusinessWeek.

The recovery from the recent recession, however, suggests that some component of this relationship has changed, perhaps irrevocably.

  • One troublesome piece of evidence is a relationship called the Beveridge curve (named after an influential British economist of the 1930s and 1940s).
  • It compares unemployment and vacancies: as the economy contracts, joblessness rises and vacancies shrink, and during the subsequent recovery, the process reverses.
  • In the current upturn, the curve isn't retracing its steps: unemployment is falling slowly relative to the rise in vacancies.
  • This suggests that there remains a significant mismatch between the skills employers want and the skills applicants are offering, which would point to higher structural unemployment.

This concern, that current joblessness woes signal permanently higher structural unemployment, would have drastic implications for the health of the economy if found to be true.  However, several other theories remain for why the current fragile recovery may not be an indication of larger problems.

  • Federal Reserve Vice Chairman Janet Yellen suggests that increased unemployment benefits could certainly have a role in the persisting joblessness rates.
  • She argues the increasing generosity of this program might encourage job seekers to be more choosey, as finding a paying job is no longer an imperative.
  • Another theory promoted by other analysts is that the sluggishness of the recovery is uniquely related to the difficulties of a mortgage crisis.
  • Referred to as "house lock," unemployed workers find it harder than usual to move to find work because many are unable to sell their current homes.

Source: Noah Feldman, "America's Out-of-Work Are Resilient, but Not Endlessly So," BusinessWeek, June 4, 2012.


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