I’ve been away, so have not done a new blog for a while. Getting back into action, I’ve returned to the theme in my last blog on US unemployment (It’s a long and winding road for America’s jobless, 6 August 2010).
It’s been a traditional assertion by ‘vulgar’ capitalist economics that unemployment is more the result of choice than something forced upon people by a capitalist economic slump. Yes, seriously, mainstream neoclassical economics claims that unemployment is really just people searching for jobs by choice!
You see, as long as there is no interference in the ‘free market’ for labour from trade unions pushing up the price of labour or from government imposing minimum wage laws, then market forces will ensure full employment at a certain price, depending on the demand and supply of labour. Anybody out of work is just in the process of searching for a job at that price.
Mainstream economics argues that unemployment will rise because of an increase in the number of those who do not want to work, either at all or in any of the jobs that are available. Say there is a downturn in construction industry due to the fall in house prices and sales (where has that happened?!), then construction workers may find it difficult (to say the least) to switch to jobs in computing or health care where employment may be expanding. So unemployment is thus structural or frictional, so the theory goes.
You don’t believe me? Then listen to John Cochrane, a leading economist from the Chicago School of Economics, the most prominent centre of mainstream economics.
When we discover we made too many houses in Nevada some people are going to have to move to different jobs, and it is going to take them a while of looking to find the right job for them. There will be some unemployment. Not as much as we have, surely, but some. Right now, ten percent of people are unemployed. Many of them could find a job tomorrow at Wal-Mart but it is not the right job for them—and I agree, it is not the right job for them. That doesn’t mean the world would be right if they took those jobs at Wal-Mart. But some component of unemployment is people searching for better fits after shifts that have to happen. The baseline shouldn’t be that unemployment is always constant. So that is a big and enduring contribution—some amount of fluctuation does come out of a perfectly functioning economy. Now have to talk about how much, not just look at any unemployment and say markets are busted.
Thus Cochrane tells us:
think about an unemployed accountant in New Jersey, fired from a big bank. How is going to build a road in Montana going to help him? Keynes thought of a world in the nineteen-thirties where labor was more amorphous labor. If you hired people to dig ditches, that would solve the unemployment line in the car industry. Now we have very specialized labor, and just hiring people doesn’t resolve the problem. Somebody who lost their job in a bank—building more roads is not going to help them.
So the old vulgar explanation for unemployment has been dredged up by the supporters of ‘free markets’ to explain America’s high unemployment level after the Great Recession. The reason that there is such high unemployment in the US and elsewhere in the advanced capitalist economies is not because of the Great Recession. It is because of ‘structural changes’.
The leading American liberal Keynesian economist, Paul Krugman has launched an attack on this concept. Keynesian Krugman (KK as we can call him) is not somebody I often agree with. But on this issue he is so right. KK says that the reason for high unemployment in the US is the capitalist slump not the mismatching of jobs and the choices of individuals. As KK says in his recent column, The conscience 0f a liberal (in the NYT on 26 August):
Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today’s unemployment problem is caused by issues the Fed can’t solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted.
But this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts. And this is strikingly true this time around. Kocherlakota would have us believe that there’s a big problem of mismatch because manufacturing is trying to hire, while construction has slumped.
But here’s the employment reality. Manufacturing employment has slumped, not risen — in fact, it has fallen more than construction employment. The problem is lack of overall demand, not worker mismatch.
It’s the capitalist slump that creates the reserve army of labour, as Marx called it, so necessary to restore profitability to capitalist investment. Jobs will not return if the unemployed ‘choose’ to look for work. It will only come if capitalism regains full profitability at the expense of years of unemployment. Such is the cycle of capitalist boom and slump. Even then there will still be a large number (the older, the less educated and skilled, those with young children to look after, etc) who will not get work. even when they ‘choose’ to look for it.
It is not just the vulgar fallacy of the ‘mismatch’ of jobs and choices that mainstream economics has dug up again. They have also regurgitated the argument that extended unemployment benefits stops people from looking for work.
Take the esteemed Harvard Professor Robert Barro who opined in the Wall Street Journal that America’s high rate of long-term unemployment is the consequence rather than the cause of today’s extended unemployment insurance benefits. Cut benefits to the jobless and they will get back to work.
This Malthusian meanness is just plain baloney. US unemployment benefits are only a fraction of the wages and benefits people lost when their jobs disappeared. Indeed, fewer than 40% of the unemployed in most US states are even eligible for benefits. As Keynesian economist Robert Reich puts it: it’s hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work. Anyone who bothered to step into the real world would see the absurdity of Barro’s position. … Right now, there are roughly five applicants for every job opening in America. …
The difference that Marxists have with Keynesians over the explanation for unemployment lies with the causes of the capitalist crisis. Keynesians like KK see the crisis as caused by a lack of ‘effective demand’. Marxists see the cause in the collapse of profitability that in turn causes a loss of effective demand as capitalists stop investing and workers then lose their jobs.
For KK there is no explanation for a sudden lack of effective demand – it is just unpredictable and uncertain. And for KK, the solution is to print more money and increase government spending to fill the gap in effective demand. Marxists would say that this won’t work (and the continued high unemployment now after 18 months of monetary and fiscal ‘stimulus’ seems to confirm that). Jobs will only come back under capitalism if profits do. Under capitalism, workers must pay for the crisis through a loss of work. That’s the real ‘choice’.