Jobless Recoveries and the Social Contract

Over the weekend, Kevin Drum blamed “jobless recoveries” on the collapse of the American social contract:

[I]n the past, holding onto workers through a recession was simply part of the social contract. Economically, it didn’t make any more sense in 1955 than it does today, but firms did it anyway because it was expected of them. In union-dominated industries, contracts demanded this kind of behavior. In non-union industries, corporations did it as a way of keeping unions at bay (since unions had a much easier time organizing industries that provided lousy benefits). And white collar industries didn’t feel that it was right to treat their workers worse than blue collar workers were treated. All of this conspired to create a social custom that bound workers and firms together.

This all evaporated in the 80s, of course, as younger workers largely got tired of dedicating themselves to a single company for life and corporations didn’t feel like they could compete with rivals who were more ruthless about downsizing. As a result, workers are now fired much more quickly during downturns and hired back more slowly during recoveries. It’s no coincidence that we first saw this pattern following the 1991 recession. It’s just one more example of economic behavior which is, technocratically speaking, more efficient, but in which the benefits of that efficiency flow pretty much entirely in only one direction.

Putting my neoliberal sellout hat on for a second, the case for flexibility that Drum’s leaving out would seem to be this. If you’re an employer who’s seen as having a social obligation to not let your workers go even if it’s economically rational to do so, this is going to make you more reluctant to add new workers even if it’s economically rational to do so. In the social contract between employers and employees, one party—the not-yet-employed—is cut out of the deal.

But then comes the punchline:

In the post-1980 policy regime, the business cycle has oscillated less frequently, but the depths of the recessions have seen higher-than-ever unemployment and the labor market peaks have become less impressive. And this, I think, is the real breakdown of the social contract. The idea of more flexible labor markets is that the “insiders” lose at the expense of the “outsiders” and the bosses only actually benefit in the short-term because profits tend to be competed away. But we have more outsiders than ever thanks to a Federal Reserve system that’s very good at preemptively choking off inflation but not so good at preventing recessions. As of 2007, the story was that we’d achieved a “Great Moderation” of the business cycle via this combination of flexible labor markets and cautious monetary policy, but obviously that’s not a viable characterization of the situation today.

Paul Krugman says the issue is in part that “engineering a recovery from postmodern recessions is much harder than engineering a recovery from a recession more or less deliberately inflicted by the Fed” but another way to put this might be that the Fed simply hasn’t been doing a very good job. There’s plenty of research out there, a fair amount of it by Krugman himself, about dealing with these “postmodern” recessions and the FOMC hasn’t really done what the research suggests is necessary.