I have discovered a new kind of unemployment.

by Nathan Brooks2 min read24th Sep 20204 comments

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EconomicsWorld Modeling
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Hello everybody, I have an article that explains why since 2000: business investment has been weak; the fall in the U.S net labor share; the decline in the prime age U.S labor participation rate vs large gains elsewhere; the rise in deaths of despair. The article is called Skill Stalagmites, Technology Stalactites and can be found here. I have split the piece into two parts: a 1500 word article for the general reader and a longer piece for the more sophisticated reader. There is a link to the latter at the end of the first piece.

The punchline to the article is that the 4-5% gap in the lfpr between the U.S and peer economies is a form of disguised unemployment. And this is a novel kind of unemployment, which is not caused by a fall in aggregate demand. 

The actual cause is that firms are imposing higher effort levels on workers. I can summarize the argument you will find in the main article; it goes like this:

  1. Firms impose higher effort demands on workers; workers have to complete more tasks (for a higher wage) or be fired.
  2. The higher wage does not compensate workers for their lost work leisure; thus workers look for less demanding job positions (or refuse to move up to more senior roles).
  3. If one imagines a skill ladder, then all workers attempt to drop down a rung. This is easy for higher skilled workers, but what happens to workers at the bottom?
  4. The lowest skilled workers compete for job openings with somewhat more skilled workers. Firms prefer to hire the more skilled worker, resulting in the lowest skilled workers being pushed out of employment altogether.
  5. This assumes that employers can always identify the highest skilled worker from their pool of applicants. This won't always be the case; if the higher skilled worker has a bad interview or the weaker candidate has positive chemistry with the interviewer, then the objectively weaker candidate can win a job offer.
  6. Thus provided the lowest skill workers are willing to keep searching for jobs they will eventually obtain a job offer and regain employment.
  7. This means though that workers on the second lowest skill rung will be unable to drop down to the lowest rung unless they also increase their job search activity. And in turn this forces the workers above them to increase their job search.
  8. Any person wanting a job now has to apply to many more job positions before they can get their first job offer. But after a string of failures, job seekers become discouraged and temporarily withdraw from the search process. It is this temporary withdrawal that is responsible for the drop in lfpr. For those who are the main breadwinners, the period of withdrawal will be short - perhaps only a few months. But for workers who are more marginally attached to the labor force, it could be years or forever.
  9. Evidence for higher effort in the U.S can be found in the higher U.S productivity growth since 2000 vs peer economies.
  10. Evidence of higher job search can be found in the elevated duration of unemployment, which in 2019 was still equal to recessionary levels. The American Time Use Survey also shows higher than normal time spent on job search.

The questions of why this is happening post 2000 and not before, and why only in the U.S and not elsewhere, are taken up in the full article.

If you have any questions of your own, please ask away.

Best, 

Nathan.

P.S The article is published on Seeking Alpha, but don't let that put you off. Though I don't have a formal background in economics, I do keep up with the relevant literature.

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4 comments, sorted by Highlighting new comments since Today at 9:34 AM
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One thing I should add is that job search costs have not increased equally. At the bottom of the skill ladder, job search costs have increased the most, while at the top, they have not increased at all.

Firms impose higher effort demands on workers; workers have to complete more tasks (for a higher wage) or be fired.

This sounds correct, but I thought it was specific for IT. I mean the popular trends of being "full-stack developer" and "dev-ops", which in my opinion both mean: -- Why should I hire two or three specialists, when one person could do everything alone? And if the project size requires hiring two or three people anyway, at least this will make them more replaceable, and I can immediately move one of them to another project when the worst crisis is over. And if being unable to maintain top-level expertise at too many things at the same time makes them feel like impostors, at least it will keep them humble.

Do you suggest it also happens in other industries? Your articles has "technology" in its title, but seems to talk about economy in general. Could you perhaps provide more specific information about other industries? Unfortunately, I am not qualified to comment on the second part of your article.

I will admit that the claim American workers have become Stakhanovites is a bold one. It's the sort of claim that immediately raises all sorts of objections and questions, like: how is that even possible in a capitalist economy, and why hasn't it also happened outside of the U.S?

I don't have enough data, but is it possible that this is more about IT (and also in other countries) than about Americans? Because the hypothesis "nerds suck at negotiation, and are easily brainwashed" would explain a few things we see. I mean, even comrade Stakhanov didn't spend his free time improving his Github portfolio.

I'm in shipping and I can confirm it's happening there too. I've actually been turning down promotions for about a decade now because I can see how fast most people burn out on the next level, both in executive and management tracks, from being asked to do multiple jobs at once. As recently as two weeks ago I was offered somebody's job right in front of him. I laughed right in my regional manager's face (from across the room; it's 2020 after all). As it is, I'm already doing three-and-a-half (much easier) jobs and picking up the slack (created by bad hiring practices) in another as needed. Getting promoted would mean doing planning work over the largest group at our location, being my own secretary, taking on a number of minor managerial tasks, and interfacing directly with two different chains of command (who often want different outcomes, of course). All this and I'd still be expected to cover for the position I'm in now from time to time. The pay increase for what amounts to each of my current jobs getting promoted while still having to retain almost full functionality in what I do now would be about $1K/month. The answer will always be no. Oh, and we have a hard time keeping entry-level workers because they are expected to work at least six twelve-hour days every week, again due to many years of bad hiring practices. There are promotions from that position in both executive and management tracks. Both involve adding a more focused and responsible skillset to everything else they were already doing. The pay increase is about $1/hr for executive, and I think they end up making less in the management track since they usually end up working fewer hours (except when we're busy, of course). I've seen countless people drop back down to entry level after burning out on the next level up. This, of course, means that many of our entry-level workers are highly skilled, which seems to have (upper) management convinced that we don't need to hire a larger workforce.

My father is a pastor who often complains that he has to be a spiritual leader, an administrator, and often what equates to a politician at the same time. In his case, the overload is a result of the church (on all levels from the institutional to the congregation) being in a partially-necrotic/zombie state that is unable to support the appropriate staff, unwilling to step in and take on the work to let pastors do the thing they trained for, and absolutely unwilling to consolidate resources and move on in a new form (I've noticed that churches tend to be extremely allergic to change).

My neighbor is a retired school teacher who was increasingly stressed out about being required to be teacher, counselor, security guard, and negotiator (with parents) in addition to all the constant retraining as technology becomes more and more integrated in the "educational" environment. Moreover, her teaching role was already badly over-constrained by the need for the students to do well on standardized tests as well as actually trying to learn something. Students of more and more widely differing abilities were being integrated into the same classroom. And all of it was getting incrementally worse every semester. She would have been entirely unprepared for 2020. As it was, she was already extremely motivated to get out of that situation before she burned out; many of her colleagues were less fortunate.

Definitely not just the IT industry, I'm afraid.

Thanks for the data. This sucks.

In the meanwhile, I also talked with a friend who works outside of IT... I forgot what exactly she does, but she now has to work with five or six clients in parallel, carefully dividing each day in approximately one-hour chunks, because each of them requires to see some daily progress. This would drive me crazy.

Okay, so it definitely seems not limited to IT.

I still disagree that it is US-specific, though. (This friend of mine, also not an American.) There are many global companies; if they learn they can squeeze some extra work out of workers in one country, they are going to re-use the strategy in other countries, too.