The Structural Unemployment Canard

European Industrial Production Then and Now

Paul Krugman offered the graph above that I think is really important. What it shows is the economic recovery in Europe following the beginning of the 2008 crisis and the beginning of the Great Depression. The results are stark: even though the downturn isn’t nearly as bad, Europe is only doing as well now as then. Even more important, the trend was great then and terrible now.

It isn’t a completely valid comparison. But it is something that conservatives everywhere should be ashamed of. What’s so dangerous about it is that more and more we hear conservatives making the most specious of arguments to explain it. According to this line of thought, the new economy ain’t like the old economy. There is a new normal and it sucks, so there’s just nothing we can do. This is brought up most of the time to explain why unemployment is so high. It isn’t that we are in a prolonged depression; it is that companies aren’t hiring because there aren’t enough mechanical engineers who are willing to work for $12 and no benefits.

No one has done better work on the “structural unemployment” canard than Dean Baker. But it just takes a bit of thought to show how wrong the idea is. If I had a business and I knew that I could make a killing if only I had more mechanical engineers, then I would hire them. To do that, I would offer more money to people who came to work with me. This would cause a pay spike in people who have the right skills—in this case, good mechanical engineering skills.

We don’t see this in the data at all. There is no area of employment where wages are going way up. Instead, we get anecdotal evidence that this or that employer just can’t find qualified people. And in every case, what find is the “$12 mechanical engineer” problem. As at any time, employers are desperate to hire employees who will work for far below the going rate. So there is no structural unemployment—just employers who are trying to cut costs so they can make more money.

Let me address one other side of this issue. I can hear libertarians complaining that the mechanical engineers are clearly not worth more than $12 to this employer. I agree! But clearly mechanical engineers are worth a lot more than that to most employers. So the problem here is that this employer either doesn’t have good enough ideas to justify hiring mechanical engineers or is too inefficient to afford to hire them to implement his good ideas. Regardless, libertarians shouldn’t turn him into a hero. He’s just one of those whinny takers they hate so much.

What is behind what’s going on in Europe (and to a lesser extent here) is that the economy lacks demand. It is entirely understandable that people in the 1930s didn’t understand what was going on and so responded to the depression in many bad ways. But before the crisis of 2008, it was unthinkable that our response to such a crisis would be even as bad as it was in the 1930s. I remember sitting in economics class in college and thinking, “I’m glad that we won’t have to live through that again!” I was assuming that we would use the combination of fiscal and monetary policy that easily fixes such problems. What I wasn’t prepared for was that the actual science of economics wouldn’t matter in the least. The depression goes on because there are many rich and powerful people who want it to go on.

Update (15 November 2015 3:01 pm)

Krugman wrote a followup to his piece:

The response I get from a lot of people is that things were different then, because Europe was rearming.

Um, and your point is?

There’s nothing special that makes military spending a better stimulus than other kinds of spending—actually the reverse, because spending on useful stuff can enhance the economy’s long-run potential as well as giving it a short-term boost. So when you attribute European recovery in the 30s to military spending, you’re saying that what the economy needed back then was expansionary fiscal policy—and it needed it so badly that even destructive spending had a positive effect.

This time around, the good news is that we have peace. The bad news is that Europe’s leaders, lacking the incentive to build up their armies, have listened to prophets of austerity, and cut spending when it should have been going up. And the result is a depression that is well on track to be worse than the 1930s.

I run into this all the time, “Roosevelt only got us out of the Depression by getting us into World War II.” These people just aren’t thinking; they’re grasping at straws to justify what they just “know.”

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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