Thursday, January 29, 2004

Labor mobility

In economic models, labor is treated as mobile in the short term, while capital is only mobile in the long term. It's easy to repurpose a worker, but it's hard to repurpose a factory. In the manufacturing sector, when orders slumped and a factory became idle, management would sometimes layoff workers temporarily until orders picked back up again, and then hire them all back.

This idea of laying people off temporarily is baffling to me. In the labor markets I have seen (and participated in), layoffs were generally structural, and therefore permanent. If the company was experiencing some idiosyncratic shock, you would join a competitor. If the whole sector was struggling, you would have to change your sector. The point is that the repurposing involved much more dislocation than the models suggest.

This excellent WaPo story outlines the difference between unemployment caused by cyclical effects and structural changes and argues that the slow job growth we are seeing now is because structural shifts take time. I agree with this, but would also add that the inflated expectations of the bubble years are a poor yard stick to judge anything else by.


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