Employment, Price, and the Quantity Demanded: The Mystery of the Labor Boom That Wasn’t

Free exchange, The Economist’s new web log, has an awful piece about globalization and employment security. Mark Thoma does a good job, in his gentle and collegial way, of ripping it a new one.

The basic claim of The Economist piece is that unemployment is low and measures of job security have not fallen, despite the fears of antiglobalists that outsourcing would put them out of work. Mark points out that the research is not so unambiguously cheerful, and that The Economist’s anonymous author doesn’t have all his facts straight.

But let’s be generous. Let’s presume (though it isn’t true) that “unemployment hit 4.1% in America, the lowest level the nation has seen in thirty years”, that “there is little evidence that job security has declined in the last twenty-five years”, and “[o]verall, globalisation doesn’t seem to have had much effect on job security”.

The magazine is called The Economist right? And doesn’t economics teach us that it is meaningless to talk about the quantity demanded without also talking about the price?

What has happened to the price of labor over the last several years in the United States? Productivity adjusted, the price of labor has been falling. A dollar’s worth of labor produces something between 8% and 12% more output than it did six years ago. So the quantity of labor demanded should be increasing, if the demand schedule for labor has not changed. Instead, the broadest measure of employment, employment to population ratio, has unambiguously fallen.

It’s the mystery of the dog that didn’t bark. If The Economist is right, then job security has remained stable despite a growing economy and falling output-adjusted labor costs. But job security ought to be improving under these conditions, dramatically. Labor has grown cheaper in the US, and fewer people are working. The last thing those who do have a job right now should have to worry about is losing it!

It’s a complicated world. There is a supply-side to consider as well as a demand side. The population is aging. People may prefer education, hobbies, or leisure to employment. But these factors can’t account for what we’re seeing. During an alleged economic expansion, broad employment in the United States is falling. Where there ought to be labor shortages and firms bidding up the price of labor, the output-adjusted price of labor has fallen. If the explanation for the drop in employment were an increase in retirements relative to new entrants to the labor pool, or of it were a matter of people opting out, that would provoke bidding wars and higher wages for remaining workers.

Something else must be going on to explain these facts. Either the supply of labor must be increasing, or the demand for labor must be decreasing, or the bargaining power of labor must be falling. Now we can’t say for sure, but it’s reasonable to suspect that the ongoing infusion of around 2 billion new workers into the global market economy would have all these effects: The supply of labor available to firms (quantity at a given price) increases; The demand for domestic labor (quantity at price) diminishes, as firms can outsource; and the bargaining power of domestic labor falls as capital can look elsewhere to meet its manpower needs.

There may be other explanations. But if Sherlock Holmes were alive today (and if he were, like, real), I think he would pronounce globalization the culprit in this, the mystery of the labor boom that wasn’t.


2 Responses to “Employment, Price, and the Quantity Demanded: The Mystery of the Labor Boom That Wasn’t”

  1. Aaron Krowne writes:

    Good piece. My direct experience leaves no room to doubt the effect of globalization.

    Headline unemployment is a major bee in my bonnet. It amazes me how so many otherwise bright analysts look at a number that meshes with few other economic observables and declare that the number must be correct; rather, it is the rest of the world that is wrong.

    It will be interesting to see how this headline number weathers the housing-related downturn.

    Bringing things full circle, apparently “strong employment” has been a major support for low risk premiums in that sector. Hmmm…

  2. Headline unemployment sure is slippery. If it goes up, does that mean people are out of work, or people who previously didn’t want to work suddenly want to? If it goes down, does that mean there are more jobs, or more dropouts? And of course the data is hard to measure and make sense of, with a lot of very subjective, fuzzy lines collapsed into a hard “clear” number. I don’t think it’s a very sensible series for analysis… employment to population is much clearer. One can control for obvious issues like population aging easily enough. The subjective “are you looking for a job?” is stupid, because ones answer is not “exogenous”. People drop in and out of the labor force for reasons, and those reasons should count. Headline unemployment pretends that ones interest in finding a job is like a personal idiosyncracy, and if everyone who doesn’t have a gig stops looking, hey, everybody’s happy, right?