Unemployment: Long-term vs. Short-term

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Tyler Cowen points to an analysis that says that short-term unemployment is at reasonably low levels, but long-term unemployment is much higher than normal. I have written about this before, and there is no single uncontested interpretation. Possibilities:

1. The long-term unemployed really are different. They are destined to drop out the labor force. In some sense, we are now close to full employment.

2. As I wrote before, when the job-finding rate falls, it is natural for some unemployment spells to lengthen.

3. Firms have finished firing, but they have not started hiring. So initial claims for unemployment insurance are low, and short-term unemployment is low. But the job market is still weak. However, the problem is concentrated among young people, who transition in and out of the labor force quickly. Instead of remaining unemployed for a long time, they might go back to school.

By the way, from a PSST perspective, I cringe at writing “the job market is still weak.” Jobs are not some commodity that is scarce. Jobs are created when the decentralized trial-and-error of entrepreneurs leads to the discovery of comparative advantage.

6 thoughts on “Unemployment: Long-term vs. Short-term”

  1. “The long-term unemployed really are different. They are destined to drop out the labor force.”

    Proposition B really doesn’t follow from A. I would say something like: the long-term-unemployed were, on average, a little different (below average performers are laid off first), they’ve become more different (due to the effects of long-term unemployment), and after a while they’re treated as near untouchables due to their status (because prospective employers can afford to eliminate the long-term unemployed from their hiring pools and don’t trust their ability to find jewels in the rough). But that certainly does not mean that these workers were always ‘ZMP’ and destined to be out of the labor force.

    And note, too that for a worker to be a below average performer in one particular context doesn’t mean that they would be below average in any context — perhaps there was a poor fit with the industry, company culture, supervisor, etc. And, of course, many of these workers were never below average at all — just caught in the wrong place at the wrong time.

  2. At the moment entrepreneurs are trying to discover and implement successful regulatory arbitrage. If they can find a way forward they can eventually hire

  3. Kling > I cringe at writing “the job market is still weak.” Jobs are not some commodity that is scarce. Jobs are created when the decentralized trial-and-error of entrepreneurs leads to the discovery of comparative advantage.

    I think I share the sentiment, but I think you might be knocking down a straw man with the commodity analogy. Is “the job market” or “labor market” any more cringeworthy than say “the credit market”?

    • Upon reflection, I think there is a substantive difference, particularly in the PSST story. We know how to supply most markets. We know how to supply credit, beef, bacon, and applesauce.

      We like to say that we can produce jobs — that we have the know-how and ability to supply the labor market. But the PSST critique of that narrative suggests it’s an exploratory process. Easterly comes to mind.

      • Though I would say our mastery of credit supply might be closer to that of labor than beef. It seems to be the intimate involvement in the production process that credit and labor share, rather than being simple product outputs like beef, which makes these markets more amenable to bottom-up, exploratory strategies than top-down, planning strategies.

        This is not to say that beef production overall benefits from top-down planning, but that any successful firm utilizes exactly this — whereas the market competition among firms provides the exploratory dimension — such that we could reasonably take that firm’s plan as a blueprint and reliably produce beef with some measure of success, all in accordance with PSST. There is no analogous blueprint for job production.

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