Unemployment: The Lesson to Be Learned from Obama's Plan

In 2010, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to the fathers of “search market theories” as applied to the labor market.

According to these theories, unemployment is caused mainly by the difficulty in “matching” an employer and a job-seeker. The Nobel committee noted that “the higher the unemployment benefit, the higher the rate of unemployment and the longer the job search time.”

These theories have become increasingly popular because they offer an alternative to the Marxian vision of unemployment as capitalism’s “reserve army” and to the Keynesian vision of an imbalance caused by insufficient offers of employment, and because they can be used to influence political policy.

They have been particularly popular in France, underlying many of the employment policies used there in recent years. Labor Minister Xavier Bertrand’s comments at the beginning of September — “The real problem is that our benefits system does not necessarily encourage a return to work” — embody this trend.

However, the 2010 Nobel Prize was awarded paradoxically at the very moment this theory was undermined by the reality — because if unemployment is caused mainly by the mechanics of “matching,” it should not be experiencing such a steady increase in the country with supposedly the most “flexible” labor market in the world, the United States.

An answer that reconciles the current theory and the reality has been suggested: The recent subprime bonds crisis freezes the housing market and prevents workers from buying and selling their homes, while the slightest labor immobility impairs the “matching” of employers and job-seekers.

Hypothesis Invalidated

But a year later, this hypothesis has been invalidated: The recent work of economists — for example, “Locked In The House: Do Underwater Mortgages Reduce Labor Market Mobility?” by Colleen Donovan (Freddie Mac) and Calvin Schnur (National Association of Real Estate Investment Trusts), published in August 2011 — shows that the U.S. housing crisis is not adversely affecting mobility from one labor pool to another.

Meanwhile, other studies show that it is the job losses directly caused by the bursting of the housing bubble that have had a long-lasting effect on the U.S. economy. The real estate collapse affects construction, but also many other services — decorators, realtors — and other industries that remain in the United States — windows, custom-made kitchens, etc.

And despite the flexibility, there is no reallocation of jobs to other sectors. The absence of unemployment before the crisis was caused, therefore, by the existence of a real estate market based on a bubble, and not by an ideally functioning labor market.

Hence the return to a simple diagnosis: The U.S. economy is, quite simply, lacking “jobs.”

The Obama plan of Sept. 8, the “American Jobs Act,” may seem bizarre after this summer’s dithering on the subject of the debt ceiling and tends toward just as simple a response: direct creation of jobs for teachers, firefighters and police officers; job sharing, renovating schools, building infrastructure and increasing purchasing power.

In this last respect, Mr. Obama’s choice is similar to that of President Reagan 30 years ago: major cuts, but this time in jobs rather than in compulsory taxes.

€1000 More

Although small gains in purchasing power may result in the consumption of low-cost imported goods, large gains offer some hope for the consumption of U.S. goods and services, from renovating the bathroom to dental care.

In 2012, an average family of two earners will receive €1,000 [$1,345] more, if the plan is passed by Congress.

So what lessons can Europe learn from Obama’s plan?

In a country like Spain, which also has suffered the bursting of the housing bubble and rising unemployment, the path, dictated by the markets — of a tightening of public spending and reforms to make the labor market more “flexible” — could be a dead end.

And in a country like France, which has never been able to escape mass unemployment, the simple suggestion of using public money to create jobs rather than rehashing an everlasting discourse about the umpteenth “necessary structural reforms” is perhaps not so dated after all.

Philippe Askenazy is Director of Research at CNRS, Paris School of Economics.