Friday, November 27, 2009

Structural Employment Changes In Recessions

My comment to a post by Arnold Kling, "The Great Depression as a Recalculation" of his summary of an interview with Bruce Greenwald by Robert Huebscher, "Bruce Greenwald on Structural Problems in the Economy and Unemployment" follows:
Bruce (by the way, he is far more intelligent and knowledgeable than I am) is talking about sector changes in employment. Whether or not his example of agriculture is correct, during times of economic retrenchments, some industries suffer more and reduce employment more than others. When the economy rebounds, the new economic growth does not entirely reverse an industry's previous employment and production declines and undo a particular industry's employment losses. The employment and production growth occur in different areas due to changes in demand, changes in production efficiency and capital investment that affect the need for labor.

Bruce and Arnold do not mention that there are also changes that occur within sectors. There is a constant churning of labor in the economy, which can result in significant changes in the characteristics of the labor force within an industry. As companies let employees go, companies hire new employees with different attributes.

In times of increasing unemployment and a slowing economy, there is an excess of employee applicants for jobs. Employers could lower salaries and benefits in response to the excess of available workers. Most of the time, it appears that wages and benefits do not decline (sticky wages). Instead, employers raise the requirements for their open positions. They are able to hire workers with more education and more experience at or slightly above the previous wage paid for the position, but at a lower wage than they would have paid before the economic slowdown. During recessions, there are often complaints of workers being overqualified and underutilized for positions they have, but it allows some companies to use the newly available unused talent within their business to achieve competitive advantages. During the Depression, some jobs added a high school degree as a new requirement.

As employers accumulate more experienced, more skilled, and more educated workers, the employers expand, restructure and modify jobs to increase efficiencies. Additionally, companies can use the workers' experience and unused skills to expand their institutional knowledge, focus on other aspects of the industry and reduce a competitor's advantage. The internal changes to the talent pool within an existing industry allow it to respond to competitive changes proactively, dynamically and flexibly.

It was the internal industry and employee skill changes during the recession Depression that allowed industries to grow post WWII.

One could argue that the rigidities of job definitions, job responsibilities, and hiring and firing rules caused by the unionization of the US auto industry prevented the auto industry from making the necessary internal structural job modifications, increase workers' experience and gain institutional skills in times of previous economic recessions and auto sales slowdowns. The inability of the auto industry to avail itself of cheap talent, without reducing wages, during recessionary times hindered its competitiveness and allowed new competitors to take away significant market share.

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