Tuesday, August 30, 2011

Some thoughts on the labor market during this recession

My takeaway from reading Elsby, Hobijn and Sahul’s The Labor Market and the Great Recession was that this recession really isn’t that much different from the previous recessions. This had been my conclusion looking at JOLTS data (here and here). Yet what is an inescapable fact is that this recession has been deeper than the other recent recessions, so worker flows are not the whole story.

The story of structural change is somehow linked. If as many believe, that this is the case and also believe that most of the jobs are now coming from services such as government, health and education then why is there also a nagging feeling in other quarters that fiscal stimulus policies can work in the way that it used to when the economy was dominated by pro-cyclical industries? When the economy was dominated by pro-cyclical industries such as manufacturing and construction, an increase in aggregate demand made sense in that putting more income into the pocket would allow people to spend more on stuff. In order to make more stuff, companies would have to hire more people. This story is also true with “supply-side” policies such as tax cuts. The debate continues as to its relative efficiency.

But if an economy is now largely a structural one, where industries create jobs slowly and are largely in the services sector, and other industries lose jobs quickly and are in the manufacturing sector, the obvious question is how can more incomes (either via a fiscal stimulus or tax cut) be expected to create more jobs? Do Americans go out and consume more health and government services? What do these sectors produce and how do they respond to demand shocks either through increased government spending or tax cuts?

The irony from this is that if the government is the largest growing sector then shouldn’t the stimulus (be it tax cuts or spending) be targeted unto itself?

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