More than you wanted to know about economic policy

November 18, 2010 at 4:53 pm | Posted in Uncategorized | Leave a comment

A recent article in the Guardian newspaper, published in London, focuses on the same questions that your students may be asking you:  “Why are so many people unemployed at the same time that there are a large number of job openings?”  Or perhaps, “How can economic policy affect unemployment?”

The winners of the 2010 Nobel Prize for economics have developed a theory to answer these questions, according to the Guardian. Their underlying research reveals that the “market inefficiencies or friction” can cause unemployment to remain higher than it should, take longer to turn around, and cost more to reduce. The U.S. economy currently faces two crucial markets that are deep in recession—housing  and labor. Unemployment nationally remains nearly 10%, and that figure disguises a far higher rate of real-life unemployment.

With U.S. unemployment unusually high and likely to remain stubbornly so over the next few years, economic policy-makers are faced with the difficult task of figuring out the right mix of responses. Is the rate of unemployment the result of seismic shifts in the U.S. economy and caused by a mismatch of skills and job openings – or is it a function of the recent sluggish growth, weak demand and nervous employers not wanting to take a risk? The answer to those questions could dictate very different policy responses.

In Elkhart, Indiana, where President  Obama talked up the economic recovery back in 2009, unemployment is 13.5%, compared with 4% before the recession hit, and job creation is being hampered by cyclical and structural forces. “A new firm making eco-friendly vans wasn’t hiring because it wasn’t selling its products. And a new electric car plant opening nearby wasn’t likely to hire many locals because they lacked the high-tech skills it needs,” reports the Guardian.

Although this information may be a bit depressing, it’s encouraging to know that the 2010 Nobel Prize winners may be able to effect policy changes that will improve the job market. If they can’t, it’s hard to imagine who can!


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