An interview with Kailing Shen an ANU Labour Economist

Q: How does this recession differ from others?

The origin of the current surge of unemployment is very different in nature from any of previous recession/depression. It is not driven by economic factors/inefficiencies, etc. It is initiated by governments as a response to a public health event, thus, to a large extent, the current recession is “exogenously” driven.

Q: What labour market scenarios do you anticipate? Unemployment typically rises faster than it falls.

We do have two extreme scenarios. Scenario one, or H0, the economic system will revert back to the original steady state on the other side. Scenario two; H1, the economic system will transit to a new steady state on the other side, hypothetically more remote-access friendly, less physical contact intense. Of course, the reality might not be as extreme as the above two scenarios. Rather, it is more likely to lie somewhere in the middle.

At this point, it is much more sensible to focus on scenario one, H0. Since unemployment is not a “natural” consequence of labor market fundamentals, the unemployed workers will still be productive and demanded once the shutdown interventions are lifted.

Q: If they remain productive, why don’t they simply switch industries?

The unemployed workers might well be better off by working in other industries for the duration of the shutdown. But that will require that

1) workers incur substantial training costs, search costs;

2) firms incur training and search costs as well.

Given the demand is suppressed in most other industries in this short run, it is unclear whether or not these investments 1) and 2) will pay themselves off. Also, it is not obvious these temporary job matches will be efficient.

I think it is much more efficient in the long run if governments can provide some safety net during this temporary period, to keep the human capital and maintain the bonding between firms and workers. After all, it will be very costly for firms to locate qualified workers if they lose them now. Also, if workers are forced into long term unemployment, it will also cost the government, the workers, their families hugely in the long run. These costs will be especially significant if firm-specific/industry-specific human capital is important.

Q: The Australian government thinks that the surge in unemployment will induce workers to acquire and learn new skills or train in new areas. What do you think?

Given I don’t think the current surge in unemployment is a signal of inefficiency in the economy or the matches between firms and workers, I would consider any artificial transition to new industries economically inefficient in the long run. But if there are substantial technology changes made by the firms, they might demand workers with an updated set of skills. This is largely what is happening after GFC in the US. Empirical evidence found that firms that were hit hardest by the recession tend to adopt more automation (Hershbein and Kahn, 2018). In such endogenous downturns, workers might need to be incentivised to update their skills, maybe funded by the firms and government to some extent.

Q: Should we be focusing on opportunities for up-skill amongst the lower income workers?

For workers in the developed economies, the return of up-skilling is mostly in terms of employment, rather than wages. This is examined in detail in Beaudry, Green and Sand (2016) both empirically and theoretically.

At this stage I am more worried about the current livelihood of low income workers. I worry about their psychological well being and about their families/children.

In the long run, I think there is still substantial return of up-skilling for workers. The return of up-skilling is both in terms of employment and wages. The problem is probably more about liquidity constraints.

References:

Beaudry, Paul, David Green and Ben Sand, 2016, “The Great Reversal in the Demand for Skills and Cognitive Tasks”. Journal of Labor Economics, 34(S1), 2016, 201–245.

Hershbein, Brad, and Lisa B. Kahn. 2018. “Do Recessions Accelerate Routine-Biased Technological Change? Evidence from Vacancy Postings.” American Economic Review, 108 (7): 1737–72.