"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

The Shameful Rate of Unemployment in the EMS 245
2) The first is the role of long-term unemployment. There certainly is much
more long-term unemployment in Europe than in the U.S. and the supply-siders
say that this makes a substantial contribution to the lower employment to labor
force ratio, because the long-term unemployed are the least desirable candidates
for jobs and because they reduce their search activity. But American experience
suggests that the causation is the other way around, i.e., that high and prolonged
unemployment generates a growing number of long-term unemployed. When a
responsible aggregate demand policy shrinks unemployment, the long-term rate
shrinks even more, until it goes back to physiological levels.
3) The other argument is that of “mismatch”: there are enough jobs to employ
the current labor force, but an important proportion of the labor force does not
possess the qualifications needed to fill the jobs. The evidence to support this contention
is that the rise in unemployment was accompanied by a disproportionate
rise in the unemployment rate of the less skilled and educated. This phenomenon
occurred and received a lot of attention in the U.S. in 1961, when overall unemployment
reached a postwar peak of 6.7 percent, from 4.1 percent in 1956. In a
relatively low-skill group like Blacks, the rate of unemployment reached 12.4
percent from 8 percent in 1956. These statistics were widely interpreted as evidence
of mismatch, arising from the new age of computers. But this interpretation
was given up when, with the expansion of demand from the Vietnam War,
black unemployment fell back to 4.5 percent. It was replaced by a quite different
explanation, namely that when unemployment rises, the loss of jobs is exacerbated
among the least qualified because they get bumped off by the newly
unemployed, with higher qualifications (and hence over-qualified). Thus, when
unemployment is high, it is especially high among the less qualified. But when
demand rises again, the over-qualified move back to the positions for which they
were qualified and release the lower jobs back to the less qualified.
In other words, the observed higher incidence of unemployment among the
least qualified is the effect rather than the cause of cyclically low employment.
4) Another very popular explanation is that developing countries are stealing
European jobs. This argument has long been known to be nonsense, reflecting
economic illiteracy. If foreigners are willing to sell us their goods at less than we
can produce them, that must improve our lot by improving our terms of trade.
Increased foreign competitiveness in foreign markets could deteriorate our terms
of trade but should not have much of an effect on employment.
5) Many other supposed supply factors are reviewed in Alogoskoufis (1995).
But in the end, there is only one whose negative effects on unemployment is not
in question, and that is the effect of minimum wages. To illustrate, suppose that
the larger size and growth of employment in the U.S. was due to industries with
low productivity and hence low real wages and relatively low growth, and that