Is Anemic Employment A Symptom Of Hysteresis?

With unemployment at a sickly 9 percent, a renewed push for public service jobs may be just what the doctor ordered.

The Occupy movement has often been criticized for lacking an overarching political message. One of the roots of its discontentment is not so difficult to discern, though: the enduringly high level of under- and unemployment. While the popular debate on the level of unemployment is highly partisan, politicized, and unproductive, Occupy is telling us that we cannot lose sight of the personal cost of unemployment. It also merits a more serious study of why joblessness remains so high. While there are a wide variety of global macro-economic factors that are contributing to the sputtering economic recovery, one process that could be at play is often referred to as unemployment hysteresis. This term describes the way in which temporary shocks to employment levels can cause more long-lasting unemployment.

In 1986, Lawrence Summers and Olivier Blanchard wrote an influential paper in which they discussed some of the possible ways this process can occur. First and foremost, there can be a difference in bargaining power between the unemployed and the remaining workforce. Those who have retained their jobs can manage, through organized labor or simply through contractual stipulations, to prevent wages from declining in the bust cycle. As a result, the price of labor cannot decrease as aggregate demand is falling and therefore the demand for labor cannot increase. The employed can thereby effectively block the unemployed from the labor market. Furthermore, the remaining workforce may also bargain in such a way that when economic recovery sets in, their wages and productivity increase, and thus the recovery does not translate into increased employment but rather into increased payment for those already working.

Alongside the difference in bargaining power there is a second, though not mutually exclusive, reason for sustained unemployment. This has to do with the loss in skills of those who have become unemployed. Their knowledge and skills, especially if they are on the sideline for a fairly long period, become outdated, rendering them less appealing to employers.

A possible diagnosis of hysteresis has crucial policy implications. We may very well be dealing with an increase in unemployment that cannot be attributed to an increase in the natural rate of unemployment, but rather to a shock-induced structural increase. After all, it is unlikely that the natural unemployment of the United States, determined by its total production capacity including factors such as its population size, has changed dramatically in the course of the last three years. If this is so, then expansionary demand policy, on the condition that it is implemented well, may bring the unemployment level back down.

Indeed, there is some interesting tentative evidence that seems to point to hysteresis in the United States today. While it is hard to measure a loss in skill sets, it is possible to take a look at the development of wages versus the growth in GDP.



Here, it seems that some of the high unemployment in the United States could potentially be attributed to the build-up of a wage differential. While output declined significantly in the recession of 2008-2009, wage levels did not decline accordingly, but stayed high.

So what we are seeing is a slightly dualistic labor market from which the large pool of unemployed people is excluded. With our political system incapable of providing the stimulus the economy needs, this calls for a grassroots public service employment plan across the country, with each community organizing its public service jobs according to its needs and goals. This would greatly benefit those who are locked out of the private labor market and the economy at large. Working in public service jobs tailored to their talents, knowledge, and interests, they can keep their skill sets up to date. We cannot afford to leave 9 percent of the labor force behind. The increase in employment from such a plan would stimulate demand in the private sector, reopening the labor market and paving the way for public workers to move into the private sector.

Furthermore, an embedded public service plan would constitute a form of an automatic stabilizer in boom and bust cycles — absorbing labor in bad times and releasing labor in good times.

Governments traditionally face a nasty tradeoff when it comes to unemployment benefits. Paul Krugman argued that the reason Europe experienced high unemployment throughout the 1980s and early 1990s was that European states were providing compensation for the unemployed that was too high. With technological changes decreasing the wages of low-skilled jobs, they came too close to unemployment benefits, taking away the incentive to hold a job. In response, a government can decide to stop providing these benefits, thereby keeping employment levels high but increasing inequality in the process.

However, there is also a middle road that blunts some of the sharp edges of this tradeoff. If the benefits are connected to a public service job, and only to a public service job, then we can take care of the unemployed, reducing inequality, while simultaneously incentivizing them to work. With almost 10 percent of the American workforce ready, willing, and able to hold a job but unable to find one, public service employment would undoubtedly appeal to many.

Hysteresis is a disease with a cure. Despite earlier attempts to remedy this disease, with unemployment still at 9 percent, we cannot give up on public service employment. Perhaps we can learn from Occupy in that sense as well: do not give up too easily.

Sander Tordoir is a former Summer Academy Fellow for the Roosevelt Institute | Campus Network and remains involved with the Campus Network from Istanbul.

Reese Neader is the Roosevelt Institute | Campus Network’s Policy Director.

Cross-Posted From The Roosevelt Institute’s New Deal 2.0 Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.


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