Tuesday, November 29, 2011

Fix labor markets first

Here are Cowen-Brynjolfsson (each evoking arguments in their recent books) debating whether technological change as we are now experiencing it is grounds for economic optimism or pessimism.  Cowen admits that we have some great new tech toys but one of his concerns (about 3.5 minutes into his opening statement) is that the associated new jobs are very few. In this New Yorker (gated) piece on Peter Thiel, he also complains that the information age has not created enough jobs.

The job creation rhetoric preoccupies politicians of both political parties. Trade agreements are always discussed in terms of jobs created, never in terms of lower product prices.  We live to work; not the other way around. But Randall Holcombe reminds us that this is backwards.  Labor is a cost; its product is the benefit.  "We need to drop the job creation rhetoric, because mistakenly characterizes a cost as a benefit. If someone tries to convince me that a solar energy project will add value to the economy, at least the argument is reasonable. If someone tries to convince me a project should be initiated because it will create jobs, the argument that this is a benefit is just plain wrong."

The most pithy phrase in econmics is Joseph Schumpeter's "creative destruction."  It goes to the heart of what occurs in a dynamic economy but it is near impossible for a politician to champion.  Production involves income opportunities as well as product.  But it is the income opportunities that people pay attention to.  OWS demonstrators and many others long for the post-WW II years and the idea of well paying and steady jobs.  The GM bailout was a bow in that direction.

It seems that, more then ever, labor markets are a weak link that requires attention. What do we know?  First, labor markets do not easily clear but politically popular policies (raising minimum wages, extending unemployment insurance) only make that situation even worse (Richard Epstein makes that case).  Second, education must keep up with technology.  Our educational system(s) are not up to the job.  Politicians see "monopoly" where it is not (prosecutions of IBM, Microsoft, Google, etc.), but are blind to innovation by these groups.  But the same powers that be also defend teacher's unions, monopolies that do get in the way of innovation and choice.

Finally, here is an interesting labor market innovation prompted by another set of bad policies (H/T Marginal Revolution).


I have not yet Alex Tabarrok's new book, but it sounds like a winner.