"The Survival of the Safest"

Robert Shiller:

The Survival of the Safest, by Robert J. Shiller, Commentary, NY Times: Corporate managers struggling to preserve their companies and protect their core employees have inadvertently contributed to a vicious cycle of rising unemployment and plummeting national morale. If we are to break out of this downward spiral, we first need to understand the problem, then deal with it on a huge scale. ...

Why doesn’t the labor market “clear”? If demand falls in markets for other productive factors — say, wheat...— the price usually drops until the excess supply is mostly gone. What is unusual about ... labor is that excess supply, which shows up as unemployment, can be prominent and persistent.

Why? In short, the difference is morale. Factors of production like wheat or trucks or pumps don’t have morale issues. Human beings do. ... Keeping all employees relatively idle while reducing their pay or cutting their working hours will hurt everyone. Managers say they usually consider it better to protect the crucial workers — and ... to clear out the less essential people ... quickly so their complaining doesn’t spoil the atmosphere. ...

Those relegated to unemployment can’t directly “poison the atmosphere” in their former workplaces. But they remain friends and neighbors of the employed, and their anger and distress, repeated in thousands of communities, contribute to a poisoning of the atmosphere of the entire nation.

Moreover,... employees who hold onto jobs often suffer “survivors’ guilt.” They are genuinely pained, experiencing empathy with the less fortunate. In this troubled state, they don’t think about taking extravagant vacations, or buying new houses or fancy new cars. And this frugality detracts from demand that might produce jobs for others.

Similar thinking underlies the relatively low level of business expenditures today on buildings, equipment and software. Lower-level managers won’t ask ... for such things, because those items look like luxuries to fellow employees, who worry that there won’t be enough in the company budget for them to keep their jobs. ...

Of course, while that reticence may preserve jobs in one’s own company, it works against job growth elsewhere. A result is a loss of vigor in the aggregate economy, and the sapping of the very kind of creativity that might spur a recovery. ...

Sometimes the private sector needs help from the government, and this is one of those times. We need to break the cycle of protracted unemployment and sagging morale through big government programs to create millions of jobs.