Saturday, December 19, 2009

recession question

So we're all used to hearing about how dynamic the US economy is, and we all learn in our intro economics classes how the labor market is supposed to function more or less like a free market. Even though no one really thinks that's true, I've been wondering why the labor market is seemingly so dysfuctional.

I read a reader's complaint on Andrew Sullivan's blog recently about how impossible it is for so many college graduates entering the labor market to find work (any work!) right now. I don't really understand why so many people are out of work when so many of the college graduates I know actually work more hours than they would like. I have one friend who works over 50 hours a week, doesn't like his job and is planning on quitting soon. He would be considerably less miserable if he worked fewer hours for less money. Why doesn't his employer hire more workers to work fewer hours at lower wages when there's so much excess labor out there? This would save them money and leave them with happier, more productive workers.

If his work were the highly skilled or training intensive type, this arrangement wouldn't make much sense, but it's the type of work plenty of college graduates are capable of doing. Maybe there are other things about the job that I don't understand, but this type of situation seems pretty common. So what's the deal? Why doesn't the economy naturally adjust to this type of situation more easily? I understand that firms tend to hold excess labor during recessions in anticipation of recovery, but this seems to go deeper than that. Most of the people in my friend's position, for instance, are only looking to work for the length of the current recession anyway.


  1. Well, I'm not even close to an economist, but I bet the extra cost of finding and training new (not to mention qualified/productive) workers is a strong incentive just to get your current workers to work more hours. Especially in the white-collar type of jobs I assume your college-graduate friends have. These costs aren't just time and lost productivity, but a HUGE investment in benefits.

  2. i have to say i don't quite buy it (except for maybe the point about benefits). by that same logic every white-collar employee in the country should be working 80 hours a week to minimize the amount of hiring and training employers have to do. at least for the firm in question, since their turnover is relatively high anyway, the costs of finding and training extra new employees should be relatively low, and the resulting savings should outweigh them easily.

  3. Another potential factor:
    you can probably get away with working your employees longer & harder in a tough-job market because they have less bargaining power and are less likely to bounce. A lot of what I've seen with friends is surrounding layoffs, with resulting increases in workload to the remaining people, just because the company can.

    As for lowering wages- they could probably get away with it and save money, but to me the primary reason to have competitive ("efficiency") wages is to increase loyalty and productivity because employees feel fairly compensated (and better compensated than they might get for equivalent work elsewhere). But- this seems to be a great reason to hire NEW people in a down market. Who would be more appreciative & loyal?