Thursday, August 16, 2012

Recovery


Take a look at the graph about about Industrial Production in the United States. What letter does this remind you of? A "V" perhaps? Well, this V is not for Vendetta. It's for getting people back to work. A V-shaped recovery. When there is a recession, machines can be turned off or turned down. When the recession begins to lift, then the switch can be flipped and they roar back to life. If our economy was based off of machines, then the employment would look a lot like the chart above. But it doesn't:


It's more like a U-shape. If you ever hear the US and most of the Western world be referred to a post-industrial society, this is what they are talking about. We no longer live in the 1950s. (I know its a shame, isn't it?! Look at those good-looking suits on Mad Men.) A service economy is a lot harder to turn on and off like machines. People just can't become doctors, lawyers, nurses, and so on overnight. This is what is referred to as a structural unemployment - a mismatch between skills supplied and skills demanded in the labor market.

Many economists don't believe that we are in a structural unemployment cycle and instead argue that the lack of aggregate demand is why unemployment is still so high. I am not as convinced. Mainly because I don't believe these are mutually exclusive problems. That is to say, I am of the belief that aggregate demand is too low AND there is a skills mismatch.

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