Sunday, 1 July 2012

Book Review: The Natural Survival of Work by Pierre Cahuc and Andre Zylberberg, MIT Press, 2006

(this book review was originally published in the SBE's Business Economist, 7 Jan 2008)

The primary messages of this engaging book are that economic growth necessitates job creation and destruction, and that the efficacy of many labour-market policies can now be assessed. Economists know more about best practices in creating jobs and fighting unemployment over the long term than ever before. The authors address some emotive issues surrounding unemployment and dispel some myths. They are critical of labour-market policies based on politics rather than economics, particularly in France. They cite the fact that 90,000 jobs are created every day in the US and a roughly equal number are destroyed. They assert that the process of globalisation is not the primary reason for these dynamics; but rather the very process of wealth creation – characterised by the permanent flux of technological innovations and changes in preferences, causing labour reallocations: “A market economy is a seething ebullition of trials and errors, successes and setbacks, creations and destructions.”

Empirical evidence is cited to counter the belief that reducing the amount of time spent at work creates more jobs, based on the mistaken ‘lump of labour’ idea that there exists a finite quantity of jobs or hours of work in an economy. This notion also underlies the belief that immigrants take jobs away from residents. Jobs, the authors say, are fragile: “They can bloom and wither very quickly and in very large numbers.” But if an economy is sufficiently adaptive (in its means of production and infrastructure), then variations in the size of the population have no more than a small impact on unemployment and wages, no matter how sudden or large. In Europe, especially, the higher the cost of redundancies and barriers to entry into goods and services markets, the greater the negative impact of immigration on employment. They demonstrate these points with examples of immigration to parts of the US and Europe and the shortened work-week in France.

The authors’ ‘15% rule’ states that at the national level, around 15% of jobs disappear every year and 15% are created, though job layoffs tend to make the headlines far more, with the accompanying human distress they bring. Job creation, however, is mostly diffused. Just as layoffs don’t occur only in declining sectors, jobs aren’t only created in expanding ones. Creations and destructions occur simultaneously within the same sectors. A larger discussion of the impact of globalisation[1] would have been helpful, though, looking at the migration of not just manufacturing jobs, but increasingly higher value-added service ones to developing countries. There is no discussion about offshoring, business process outsourcing or the transfer of higher value-added activities by multi­national corporations (such as R&D and logistics) to China and India.

The authors challenge the notion that an increase in minimum wage reduces employment, as this theory only holds in a world of perfect competition. The key to the impact of the minimum wage on employment is the conditions of an economy at the outset. If the minimum wage is low, an increase attracts new workers to those firms with an interest in hiring. If it is too high, every increase makes firms want to let go of those employees whose productivity has been overtaken by the new minimum wage. Examples of the former situation come from the US and of the latter from France.

The rest of the book looks at incentives and disincentives to work, the utility of unemployment, employment protection, the efficacy of education and training programmes and the tools available for evaluating public policies on employment. Their conclusions offer new ways of thinking about these issues. For example, they say that the process of looking for work is an economically useful activity, in fact one of the most profitable for society as a whole. In some European countries, however, an unemployed person is regarded more as someone “afflicted with a serious illness than a person who is still a participant in economic life.” Interestingly a very short job search (whereby benefits are curtailed too early) is not necessarily a sign of greater efficiency because the quality of the resulting matches may be low, as is reported to have occurred in the US in the 1990s.

Politicians tend to recite the mantra that the key to economic competitiveness lies in education. Evidence, though, suggests that most efficient use of public support for both education and training should be targeted primarily at young people and should be deployed, in part, outside the school system. Surprisingly, it is the least-skilled individuals who derive the smallest advantage from training programs. Coupled with the fact that these programs are usually costly, their net payoff is often negative. Furthermore, research has also shown that certain situations in a family setting, like having children of the same sex share a bedroom, can determine the developmental capacities of children and adolescents. This in turn can exert a significant influence on their success at school and their future.

The authors also evaluate public policies on employment by looking at the experiences of the US, Sweden, France, the UK and Switzerland. One forceful conclusion reached is that employment aid is more efficient the closer the job being aided is to a regular job and least efficient when it is for a temporary job in the public sector. In addition, neither generous nor stingy benefits for unemployed persons automatically guarantee a quick rehire. Other key findings are that the retirement of the baby boomers threatens to aggravate underemployment; that massive public-sector job creation does not soak up unemployment; and that taking a training course for several months does not significantly improve one’s occupational outlook. Employment should be protected through fiscal measures that give firms an incentive to assign more weight to the social value of jobs. And lastly, unemployment insurance should be grounded in a mutual commitment between the employment services and the unemployed person.

This book is short, non-technical and creatively written for the economist, but also accessible to the general reader, demonstrating a more evidence-based long-term approach to the subject of employment.

[1] See the IMF’s ‘The Globalization of Labor’, World Economic Outlook.

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