A labour market question

Labour is the new capital

Free exchange

JUSTIN FOX addresses one—why has unemployment risen so little relative to the Great Depression?

The initial sharp decline in the last few months of 1929 and first few months of 1930 was simply a reflection of how the labor market worked in those days—manufacturing made up a bigger share of the nonfarm workforce, job protections were fewer, government was smaller. The result was more volatility than we see today: When the economy hit a bump, the labor market impact was more dramatic. Nonfarm employment had dropped even more precipitously in 1921, but it bounced right back in 1922.

Another way of thinking about this is in terms of human capital. In a human capital intensive industry, recruiting and hiring appropriate workers is costly. Firms today are also more likely to invest in workers in generating firm-specific human capital. Workers today are more like physical capital was in the Depression, to be idled in a downturn and sold off (or sacked) only when things became very desperate. Workers in a low-skill manufacturing economy, however, are more like basic inputs—a variable cost that can be brought online or dispensed with as economic conditions change. So in the Depression, unemployment fell precipitously while today production of inputs—the various bits of the just-in-time supply chain has plummeted, while unemployment remains in single digits.

Mr Fox adds his take on the end of the Depression:

The Depression ended in the spring of 1933. What followed was a disappointingly anemic recovery, then a sharp recession in 1937-1938. But the Depression proper—the truly horrible years of plummeting employment, a shrinking economy, and sharp deflation—was over almost as soon as FDR took office in March 1933. Why? I think because he fixed, or at least restored confidence in, the banking system.

I actually don't think I'd call the recovery anemic—it didn't return output to trend, but then output was way below trend—and I wonder on what he's basing his banking-centered recovery hypothesis. A lot of things began happening in 1933, not the least of which were growth in the federal deficit and an influx of gold, both of which were expansionary. We also shouldn't forget the passage of time. The downturn was four years old in 1933. It would have taken continued bungling to keep conditions worsening. The Roosevelt did take some momentous steps to shore up the banking system, including deposit insurance, which certainly helped. But at best, that's one factor among many.

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