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What's behind the jobless recovery?

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(Read caption) Tan Ruihan, second from right, who recently received a Masters of Finance from Boston University, waits in a line to enter a job fair earlier this year in New York. The number of new claims for unemployment remains high even as economists say the recession is over.

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US economists would like us to believe that the recession is over. However, unemployment has been reluctant to go along with the farce, and has remained at newly high natural levels of 9.7 percent despite reports of solid growth last quarter.

How could that be? Basic economics theory would argue that an employee is hired for a wage that is roughly equal to the value he or she adds to the company’s output. This would mean that workers should get hired now that the US is back to growth. In the face of the discrepancy, economists would describe that such a monster as an aggregate demand (AD) shock is responsible for the difference, but can that really explain it all?

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According to Marginal Revolution:

“I would start with the fact that output has bounced back more robustly than employment has. AD theories per se do not explain that differential. One simple possibility is that better management and better measurement have allowed us to identify (and fire) hundreds of thousands of low-wage people who just weren’t producing much of value. That’s a real shock, even if it does not qualify as a sectoral shift in the traditional sense.

“It’s also the case that the rate of new job creation has been especially low. Yet the nominal wages on those jobs-to-be are not constrained by previous contracts or agreements. Tell stories as you may, but it’s hard for me to see that as exclusively an AD problem. I wonder what is the behavioral postulate for how long all these unemployed workers are all staring jobs in the face yet persistently stubborn about their appropriate nominal wage. I’m all for behavioral economics, but I don’t buy the necessary story here.

“I don’t want to oversell the minimum wage hike + unemployment compensation extension + means-testing hypothesis here, but surely it deserves a mention as one relevant factor. Those are real factors too. I also see that wages, and the job market, are more flexible today than in a long time, with so much service sector employment, so much flex-time and part-time, and such a low rate of unionization. In most AD theories that implies the job market bounces back relatively quickly yet that is not what we observe.”

A mix of factors appear to be at work here. First, it seems managers — during good years — are far too reluctant to fire people, because, after these companies post good numbers, why should they lower employee morale by firing people?

This could mean that we’re now back on a path to growth, and that these people that are surely missing… but, they probably didn’t produce much anyway. Only further growth will increase the need once again for new employees. But, it may also be the fact that people are simply reluctant to work for lower wages in the hopes that the Obama administration will indefinitely prolong unemployment benefits…. because life, without working, is always more convenient.

You can visit Marginal Revolution to see if current unemployment is all about aggregate demand.

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