Known Unknowns
No time for a victory lap
Hello,
Welcome to Known Unknowns, a newsletter about the broken bits of our economy that we don’t ever see.[1]
Men left behind
There was another good jobs report on Friday: 470,000 jobs have been added, and there were large, positive revisions for November and December as well. More people are returning to the labor market, too, which is why unemployment has creeped up to 4% and wages are higher, especially low-skill wages[2]—which is pretty good news.
The economy is still short 4.2 million jobs, but as the virus (hopefully) recedes and remaining restrictions are lifted, these trends should continue. The labor market is on the road to recovery—or the cyclical piece of it is, anyway. But during each recession we see many prime-age men leave the labor force and never come back. This was the case during the last recession, too. Prime male labor force participation is still down nearly 1 percentage point from pre-pandemic levels, and this poses huge costs to the economy because a large number of productive workers are simply sitting out. This is terrible for social reasons as well, because work is important to feeling productive, for increasing stability, for marriage, and being fully productive members of society.
This is a difficult economic problem that falls under the category of “structural,” which means that the Fed’s tools are not well-equipped to deal with it. Even with a tight labor market and rising wages, men are simply not working.
Instead, we need to think more creatively and just fix what’s broken. The common answer is that some of this is driven by a skill mismatch and that there just aren’t many good jobs for men without a college degree. I’m not sure that’s true, it’s very hard to find a good plumber or electrician, which are very well-paying jobs that don’t require a college degree. But they do require skills and training. Community college is often the answer we are given, but it has a terrible track record, primarily because it’s trying to paper over a bigger problem, namely the terrible quality of secondary school, which often fails to properly educate our teenagers. It seems like if we really wanted to keep men from leaving the labor market, this is the low-hanging fruit. Many people drop out of community college, but high school graduation rates are at record highs (or at least they were pre-pandemic). We can raise standards and accountability and fund more vocational high schools. However, tech education has become less popular from the 1980s to 2013, even if the skills are still in quite high demand.
I remember that we were offered three options when I finished 8th grade: college track, vocational agriculture track, or technical high school. The latter two had a heavy social stigma, so an overwhelming majority went with the college track—even though many of them did not end up completing a 4-year degree. That stigma really needs to go.
More risk is what we all need
Another idea, which will sound a little counter-intuitive, is to expose people to more risk. This is the opposite of what we will probably do, though, because after a big risk shock like a pandemic, we tend to retreat from risk-taking and have the government take on more of our risk—see the New Deal and the Affordable Care Act, which each followed a big economic shock.
But what’s sort of unusual is that while some people are currently paralyzed by the concept of taking even moderate risk[3], some Americans have rediscovered their risk-taking muscle over the last two years. More people are starting businesses, moving, and changing jobs. All of these behaviors had been on the decline for decades, and the cost of less risk-taking meant stagnation, less innovation, and less growth. High-income people were taking risks and starting companies in Silicon Valley all along, but most Americans were shut out of any entrepreneurial activities. It feels like we’ve written that outcome off as not really a problem. It’s harder for mom-and-pop businesses to compete with Target, and these sorts of businesses didn’t create many new jobs anyway. But that doesn’t mean that they weren’t important to the economy, because sometimes you don’t know where the real innovation is going to come from. Risk-taking is also a critical piece of motivation and engagement.
However, it feels like the policies on the table actually want to take risk out of the economy. In some ways, entrepreneurship is more difficult now, because some aspects of the economy favor big firms. But it is easier in other ways now because technology can connect us with customers all over the world, or even those within our communities that we might not otherwise have been able to reach. The current administration is having none of it, though, and instead it’s going hard on pushing unionization and making gig work both more difficult and more expensive. It talks a good game about competition, but this really just means helping existing, less-productive, medium-sized businesses, or more start-ups funded by rich people. This will leave us with more risk inequality, which is only going to make wage and wealth inequality worse as well. We don’t need subsidies and job guarantees to restore risk—just get out of the way!
Policy is now about free lunch
Getting out of the way is a policy free lunch, but those are few and far between. Policy is always about trade-offs, winners, losers, and unintended consequences. Sometimes those trade-offs are worth it—after all, some redistribution is always desirable. But lately it seems like policymakers think that whatever they do is a free lunch, whether it’s checks sent out to everyone or actually doing something meaningful about the climate.
I wrote in City Journal this week about monetary policy. It used to have trade-offs built into its rules. Now, with a hot labor market and 7% inflation, the Fed is promising to return to neutral in 2 years or so, hoping that inflation will take care of itself if it just lessens its foot on the gas and does no harm at all to labor or financial markets. And this might even happen. But if history is any guide, it will eventually face some tough choices.
In other news
Until next time, Pension Geeks!
Allison
[1] And as a special treat, some footnotes this week.
[2] Sorry, but I’m not letting “low” or “high” skill go, even if there are weird new theories about that skills that command money don’t exist. I’m a life-cyclist, which means that human capital is an important concept to me, and it is a very helpful description. Post-modernism is a scourge that we must resist.
[3] Book recommendation: Risk and Blame, by anthropologist Mary Douglas, which was written in 1992 but still pretty much explains everything about our lives right now.
There are a lot of people who are also "stuck" in the bad jobs or dead-end jobs but aren't leaving due to the bills to pay, mostly rent I'd say. The rent is rampantly high these days so you can't handle it unless you're constantly working or have solid savings, even then those get depleted pretty fast. I do like the idea of "More risk is what we all need". Ultimately we can't sit idle or keep hiding, need to take action.
One thing that has always puzzled me about unemployment figures is when people “leave the workforce” and simply do not return, what are these people doing day in and day out? If I leave the workforce, and sit out, I can’t pay for my rent, my car payment, etc. Money has to come in from some source.