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Jesse Rothstein: Low wages and lack of purchasing power the real structural problem, skills training and more education is not the critical solution

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

There’s a debate of sorts amongst economists and policymakers what’s the real cause of the sustained, long-term high unemployment. Well, some people argue that it’s because of lack of training. It’s lack of mobility–people aren’t willing to move to different parts of the country where the jobs are. It’s because of new technology, and people’s skill set don’t meet that new technology. And President Obama more or less articulated that in his State of the Union speech, where he called for more job training and such.

But there’s another argument that goes, no, it’s because people don’t have enough money to buy stuff; there’s not enough demand.

Now joining us to talk about this debate and give his point of view on it is Jesse Rothstein. He’s an associate professor of public policy and economics at Berkeley. He spent 2009 and 2010 first of all as a senior economist at the U.S. Council of Economic Advisers, and then as chief economist at the U.S. Department of Labor.

Thanks very much for joining us, Jesse.


JAY: So the argument is, you know, yes, there’s cyclical unemployment, but why there’s such long-term high unemployment now and not what we would normally see as cyclical–in other words, you start seeing recoveries in the stock market and you see some growth in the economy. In theory, cyclically, some people say, unemployment would be coming down more than it is. But there’s more structural stuff, as I mentioned, people’s skill sets and such. What do you make of the argument?

ROTHSTEIN: So people are arguing, basically, that the demand would be there, but that the problem is that there aren’t enough workers there to fill the demand. And so you can find some evidence of employers who say they’re having trouble finding workers to fill their jobs, and you can point to that and say, well, it must be that there aren’t workers to fill the jobs that are available, and if only we had workers with the right skills in the right places, we would be able to–we would be back to a high-performing economy.

I don’t make much of that argument. I think the main problem is that there aren’t enough people who want to hire workers, there’s not enough demand in the economy.

JAY: Okay. So what’s your evidence? Let’s go through some of the different arguments. Like, the big one is that, you know, workers aren’t skilled enough, that there’s lack of skilled labor and such. So what do you make of that?

ROTHSTEIN: There are a couple of different versions of the labor supply story. One is, as you said, skills that are–somehow the economy has changed, and we need more highly skilled workers. Workers’ skills haven’t kept up with the needs of the economy. Another version is geographic, that the jobs are showing up in some places, and the workers are in other places, and they’re not willing to move to where the jobs are, perhaps because they’re stuck with underwater mortgages or something like that. And then a third version is what Paul Krugman has called the great vacation hypothesis, that workers have just decided that now is a good time to not work so much and they’re not really interested in working, and while it looks like they’re unemployed, in fact it’s voluntary unemployment.

JAY: And this is partly to do because unemployment benefits are long–have been extended, and so people can stay home collecting the pogey.

ROTHSTEIN: Yeah, there have been various versions of it, either because unemployment benefits have been extended, or because it’s so nice to live on food stamps, or because you’re hoping to get mortgage relief and that the only way to get mortgage relief is to have a low family income, or something along these lines.

What all of these stories have in common is the claim that there’s really a shortage of workers out there, that there’s plenty of jobs but not enough workers. And what that claim should imply is that firms should be bidding up wages in order to find workers to fill the job, that there are five employers who all want the same worker, and they’re going to start offering more and more money to get the worker. And so what we should be seeing if these stories are true is that workers who do have jobs are seeing their wages go up. And there’s really no sign whatsoever of that in the data. And so I see that as prima facie evidence that the problem is not labor supply, the problem is labor demand.

JAY: And you can see it from the side of investment, too. Banks don’t want to loan money to businesses. I mean, it’s not because they don’t want to loan money, I wouldn’t think; it’s ’cause they don’t believe the businesses are going to have enough market for increasing their sales.

ROTHSTEIN: Exactly. Exactly. And you can see it in the GDP data, that while GDP is recovering, we’re still well below the trend of where we should have been. There’s still a big cyclical hole that we’re in. So while it’s been an unusually long time since the recession officially ended, but that’s because we’ve been in a very slow recovery and the economy really has not taken wing and taken off.

JAY: I was driving to New York once. I think we were going through New Hampshire and somewhere. We were driving from west to east. And we stopped to have some food. And we met with a guy who’s a general manager of a large factory. I think they have about 2,000, 3,000 workers. And he was complaining to me about how they can’t hire, and he didn’t understand why they weren’t able to hire workers in this kind of an economy. And I said, well, what are you paying? And he said, well, we used to pay $14, $15 an hour, but we’re down now–I think it was $8.50 for starting. And I said, well, do the math. I mean, if you’re collecting–you know, at $8.50, if you take your bus to work and take your bus back, and if you had to pay for daycare and everything, you’re probably not even breaking even, especially when you compare what you might get on unemployment insurance, ’cause he was complaining people would rather be on unemployment insurance than take the job. And I said, well, then raise your wages. I mean, why would any reasonable person not sit at home on unemployment insurance? I mean, if you want them, pay more. You can’t–you’re not going to–if you lower unemployment insurance, you’re asking people to starve.

ROTHSTEIN: Exactly. So if you want them, pay more, offer the training that you used to offer. Increasingly you’re seeing manufacturers who used to pay everybody union wage and have in the last few years extracted concessions from the unions so that the new workers are paid a much lower wage than existing workers. They’ve gotten rid of training and now demand that workers have specific experience in the field, and they complain that they can’t find workers. Well, they’re offering a much different deal than they were before, and so it shouldn’t be a surprise that nobody wants to take that deal. That doesn’t tell you that nobody would take the deals they used to offer.

JAY: And so, I mean, your argument is if there was more demand in the economy, they would raise their offer of wages, because they figure they could make more money selling stuff. But it is chicken and egg, isn’t it, is that in terms of each individual enterprise, they want to, you know, keep wages as low as possible, and then somehow, magically, the economy’s supposed to bounce back, except everybody’s trying to keep their wages low as possible.

ROTHSTEIN: Right. This is what Keynes called the paradox of thrift, that when everybody wants to cut wages and cut spending, all of a sudden the economy falls apart. And what you need to do–there’s a fairly well worked out solution to this–is that you need the government to create some temporary demand, and it does that, and that brings us back to full employment, and then everybody wants to spend money, and that brings the private sector back.

JAY: But doesn’t it need to be more than that? And what I mean by that is let’s say you have some government stimulus–and we did have some stimulus. Some people argue it wasn’t enough. But doesn’t it–if you want to get to a structural argument–and not the structural argument that people aren’t trained well enough and such–but isn’t there a structural problem with unions being so weak? You know, workers have lost any–you know, their ability to, you know, fight and have higher wages. So, I mean, eventually the stimuluses kind of wear out, and if you don’t deal with this side that wages need to go up in a general way in some mechanism or another–and I don’t know what else it would be other than unionization or a significantly higher minimum wage or some combination thereof, but don’t you have to do something on that structural side?

I mean, President Obama was talking all about, you know, the Employee Free Choice Act, EFCA, in the first couple of years, and then nothing happened when the Democrats did–. Just for people that don’t know, EFCA was legislation that would make it easier for unions to organize unorganized workers. In the first two years, where in theory the Democrats could have passed it, they never really advanced it on the congressional agenda. And then, after they lost the House, those words were less and less spoken. And now–I actually just talked the other day to a legislative aide to a senator who does labor policy. She’s worked there about a year and a half. She didn’t know what EFCA was, meaning the unions have given up even lobbying senators for this legislation.

ROTHSTEIN: Right. Right. So I agree that more unionization, higher minimum wage, those would all be very helpful and those would all help to support wages. But at the end of the day I think there’s no substitute for full employment, that when the economy is strong and when employers are having trouble finding workers, then they can agree to higher union wages and they can hire workers despite a higher minimum wage, and people’s wages rise whether or not there are unions.

JAY: So if they make you economic czar tomorrow, what’s your plan? What does the stimulus program look like?

ROTHSTEIN: The first thing it involves is a lot of aid from the federal government to states, that over the last few years, states have laid off hundreds of thousands of teachers. That subtracts from demand, and it makes us poorer in the future because our students aren’t learning as much. And so the first thing you want to do is get back to the pre-recession class sizes and hire back all of the social workers and other people that you’ve laid off. There’s just no excuse for that right now.

Second thing you want to do, I would say, is put a lot of money into repairing infrastructure, fix all the bridges that need fixing, fix all of the roads and highways and parks and all of the other things that need fixing. You can think right now that essentially construction labor is on sale. And we know we’re going to need it in the next few years, and we should buy it now while it’s on sale and get that work done.

And then I would be thinking about other broader public employment programs, thinking about trying to ensure that anybody who is actively looking for work and is willing to work can get a job, and make sure there’s money in people’s pockets so that they can then spend it.

JAY: That means direct public works hiring, does it not,–


JAY: –and words which this administration or certainly a Republican administration seem to have no intention of doing.

ROTHSTEIN: Right. I agree. There’s no–if you don’t make me czar and also give me control of the Senate, then I don’t know what to do, because I don’t know what can get through the Senate that’s going to do any good.

JAY: Alright. Thanks for joining us, Jesse.

ROTHSTEIN: Thank you.

JAY: And thank you for joining us on The Real News Network.


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