My friend and colleague Arpit Gupta has written a very interesting post on unemployment that parallels some of my own recent thinking on the subject. Indeed, I was just writing something along similar lines, and I fear that Arpit has beaten me to the punch!

Though fewer workers are employed in the economy, each of them is now more productive than ever. Smith raises the example of the airline industry. Through consolidation of planes, firms like Delta have managed to recover their prior income, even while flying fewer planes.
An interesting explanation for this paradox comes from GMU economist Garett Jones, in a podcast with Russ Roberts. Jones notes that the transition to a service economy with a greater reliance on skilled workers complicates the unemployment picture. In the past, many workers produced final outputs. Today, many workers produce what Jones calls “organizational capital” – intermediary inputs in the form of human resources, data management, and other services. These workers can be laid off without necessarily lowering the final output that firms create.
An alternate explanation is that many workers performing auxiliary tasks can be replaced or their jobs made more efficient – as in the case of Delta. Greater productivity can be compatible with fewer workers.
This story is also consistent with the composition of the unemployed, as Tyler Cowen notes. Unemployment is high for unskilled (or old) workers, but is low for highly educated workers. Firms are highly efficient in their use of skilled workers, which they are using to produce observable gains in output and productivity. However, firms have managed to do so without necessarily drawing on unskilled workers, perhaps because employers are better able to hire workers on a “wait-and-see” basis. A group of Kansas Fed economists have also argued this point.

The implications of this shift are clear and potentially very disturbing: it could be that a large swathe of the labor force has seen its potential wages plummet. If true, we’d have to take major policy steps to avoid serious social dislocation, or perhaps we’d have to take serious policy steps to avoid major social dislocation. Either way, it’s not great news. Pace those who doubt that there is a structural unemployment problem, I’m increasingly convinced that we only masked these underlying challenges during the 1990s and 2000s.

Irving Wladawsky-Berger has more on the concept of organizational capital, which we used to call, back when I was a kid, capital productivity. (Not exactly, but you catch my drift.)