From the book-in-progress, a draft of a dialogue in which a character representing my views is speaking.

In the Schumpeterian story, jobs are always being created and destroyed. Sometimes, though, new opportunities appear before old firms realize that they are in trouble. Lots of people try to come up with new ways to deliver news on the Internet, but old-fashioned newspapers are slow to close down. That is Schumpeter’s model of a boom.

Eventually, the obsolete firms get the memo. Perhaps they get it during a financial crisis, when it becomes clear that they are no longer viable. As a result, a lot of workers are let go at the same time.

Now the entrepreneurs have to figure out what to do with these unemployed workers. The challenge is that these are likely to be the workers whose skills have the least value in the contemporary workplace. They are not likely to be computer programmers, or effective project managers, or persuasive salespeople.

Moderator: But in today’s economy, the people that seem to be having the hardest time finding a job are younger workers. You would think that if technological obsolescence is the problem, it should be the older workers having problems, and young people should be doing okay.

Schumpeterian Adjustment: That is a bit of a puzzle. One factor at work is that a lot of older people work in occupations that are protected in one way or another. In government, they are not going to fire a 50-year-old in order to hire a 25-year-old, even if the younger worker has better computer skills and requires lower compensation.

Something like one-third of the labor force is working in occupations that require licenses, and one thing that people in those fields can do is make it harder to get a license. They require a new entrant to obtain a doctorate (this happened several years ago in Maryland in physical therapy), but existing practitioners are grandfathered in.

However, I think that the biggest reason that young people tend to have lower rates of employment than older workers is that young people have not been able to settle on their comparative advantage. Young people today do not go to trade school. Most of them get general degrees, and they have very little experience in actual work environments, so they do not know the best way to use their talents. Neither do employers.

We are seeing an economy with fewer well-defined jobs. If it’s well-defined, it can be automated. Instead, businesses have projects to try to create new capabilities or solve problems. It is harder to fit inexperienced workers into that framework. You cannot just give them a couple days of training and have them be productive. Overall, the up-front cost of bringing on a new worker has been going up, particularly for young people with no work experience.

Moderator: Shouldn’t the wage rate take care of that? Young workers will have to accept lower wages.

Schumpeterian Adjustment: In fact, what we are seeing is a different path for young workers into the workplace. Consider the phenomenon of internships, many of which are unpaid. I think that internships are a response to the high fixed cost associated with hiring a new worker. You have to put so much effort into training and acclimating a new hire before the person becomes productive that it does not work just to pay a low wage or to hire people that you will have to fire later. Instead, the internship works as a sort of trial period. By creating an internship path into the business, the firm cuts down on its up-front hiring costs. The intern bears more of those costs.