"Luck and Unemployment Rates"

I'll let Richard Baldwin introduce this one. From Free exchange:

Luck and unemployment rates, by Richard Baldwin: Remember when unemployment rates over 10% were normal in Europe? Now the average for the EU is under 7%, with only two members in double-digit range (Spain and Slovakia). Sixteen of the 27 have rates at 6% or less, nine with 5% or less and three have rates that would make America jealous (Cyprus, the Netherlands and Denmark). The full list is here.

What happened? Liberal market economists would love to argue that their persistent clamour for more flexible labour market policies is finally bearing fruit. But on Vox today, Patrick Minford and his co-authors make a more subtle argument that I find rings true.

Mr Minford and his colleagues start from the assumption that distortionary big government policies are the source of the sort of equilibrium unemployment Europe has now. The trick then is to explain why these distortionary policies fluctuate according to very long waves that let us think of the 1970s and 1980s as high unemployment decades and the current decade as one of low unemployment.

Good and bad luck magnified by special interest group policies is their argument.

Prolonged high and low unemployment periods are supported by supply-side changes driven indirectly by shocks to the economy. Negative shocks generate political economy pressure which yields reinforcing distortionary supply-side responses such as increased political demands for social protection. These distortions produce a high unemployment equilibrium underpinned by distortionary policies that enjoy political support due to the high unemployment rate.

Similarly, a string of good shocks produces a more liberal supply-side policy as voters and pressure groups are less concerned about unemployment. A self-reinforcing political process favours supply-side reform that keeps the economy in a virtuous circle of low-unemployment, high-output and pro-market policies.

The result? The economy has two stable equilibria. One like the 1980s. One like the current decade.

Here's the full article:

Vicious and Virtuous cycles – the political economy of unemployment in interwar UK and US, by Kent Matthews, Patrick Minford, and  Ruthira Naraidoo

Comments

[Bob]

The unemployment data in the united states is completely worthless now thanks to Bush's Birth Death model which he used to cook his pathetic job creation numbers since 2001.

A few people are trying to get this message across but the mainstream media is still covering it up.
____________________________________

Scroll down to

Birth/Death Model From Alternate Universe

http://globaleconomicanalysis.blogspot.com/2008/07
/jobs-decline-6th-consecutive-months.html

clip -

This was a very weak jobs report. And once again the Birth/Death Model assumptions are from outer space.

Every month I say the same nearly the same thing. The only difference is the numbers change slightly. Here it is again: The BLS should be embarrassed to report this data. Its model suggests that there was 29,000 jobs coming from new construction businesses, 22,000 jobs coming from professional services, and a whopping 177,000 jobs in total coming from net new business creation. The economy has slowed to a standstill and the BLS model still has the economy expanding quite rapidly.

Repeating what I have been saying for months now, virtually no one can possibly believe this data. The data is so bad, I doubt those at the BLS even believe it.

[Bob]

More on the phony Birth Death model
_______________________________________

Beware the Birth/Death Jobs Hedonics

http://bigpicture.typepad.com/comments
/2004/10/beware_the_birt.html

clip -

What makes Crudele's columns so intriguing is that he is one of the few (if only) mainstream business journalists who have been calling the BLS out on their Birth/Death adjustment. Here's the money quote:

[...]

This adjustment has proven to be the best indicator of monthly job growth so far this year. In fact, it looks suspiciously like these guesses may account for almost all the growth achieved in some months.

Take May, for example. That month the government announced the creation of 192,000 jobs. But it added 195,000 jobs to its count because of its Birth/Death Adjustment calculation. So, all the jobs came from generous assumptions rather than actual surveys.

[kharris]

Seems to me the conclusion that there are two stable equilibria depends entirely on the notion that shocks cluster - good shocks come in a bunch and bad shocks come in a bunch. The political response is seen as fortifying good and bad news, leading to two equilibria. Why should we believe that good news comes in chunks? The story seems to fall apart if shocks are random in their goodness. Absent evidence that shocks come in bunches, we are looking at the wrong mechanism. It may well be that policy leads to stable equilibria, but that is entirely apart from the assumptions, which look to me like somebody's favorite real-business-cycle poney. (Have I identified the right breed of pony?)

Bob,

The birth/death model has to do with payroll jobs, and so has nothing at all to do with the jobless rate, which is taken from the household survey.

[paine]

pro corpate balder dash

irony
a secularly falling unemployment rate
and an icreasing participation rate
accompanied
the great north american wage swoon

do similar dance partners accompany
the falling euro rate ????

[donna]

Yeah, liberal policies can't possibly work, they just got lucky.

Love how conservatives argue. It all just makes so much sense....

[Dr. Steven J. Balassi]

I think this helps build the case for the U.S. to move a little more towards the European model (bigger government with more social insurance). It’s clear in some areas the U.S. model is going to fail (Social Security and our medical system). One of the big arguments against the Euro model was 10% unemployment. As ours goes up and theirs comes down, this argument is weakened. My prediction is an Obama Presidency along with more Democrats in Congress. Americans are finding out they do need some government help along with free markets.

[Forests and Trees]

Is it not apparent that we've enjoyed the greatest credit-driven liquidity bubble ever, much bigger than the roaring twenties? Ignoring that would make these partisan economic debates ludicrous, would it not?

[Ex-Worker]

Dr. Balassi,

I certainly hope you are right.

Having worked for around 10 years, it is quite a change to be on the unemployment dole, receiving rather than paying my "fair share". Before you pass judgement, please realize that I am a victim of "the man", specifically Ben Bernanke and wall street's easy-money-driven boom/bust cycle. It will likely be sometime (maybe 9 months) before I overcome my victimhood and find suitable employment. However, I spent some time in Paris last month and found their socialist ethos to be quite attractive in practice, though I can't see why they banned smoking cigarettes while jotting notes in a cafe during the day.

I do worry about running out of money someday, especially with the market the way it is. But then I'm reminded me of that colony of young Germans I encountered on a vacation to Thailand. They were a lot of fun to party with and were quite productive, as measured by their crazy electronic music and all night raves. I don't know the specific program they qualified for, but it supported quite a lavish lifestyle, at least on a Thai island.

Can we too can create such a program (without devaluing the $/Baht exchange). I say, "YES WE CAN!". My grandmother said that I'm always employed by God. This may be true, but if anyone knows of suitable work ($150k+ base, American style bonus/ option incentives, European style vacation/ benefits), you can find me at the club working on my tennis game, or trolling blogs in eager anticipation of a leftist resurgence.

Best regards,

Ex-Worker, formerly Worker
aka "The Forgotten Man"

[Lafayette]

From the Article in question: The model predicts that the size of the general redistributive programme reflects the preferences of the middle classes (the likely median voter) and is determined by their relative position on the income scale. According to Wright (1986), workers have different unemployment risks, and unemployment benefits play the role of insurance against adverse shocks. The median voter will optimally determine the better insurance benefits against the costs of higher distortionary policies. But the more exposed the median voter is to unemployment the stronger the support for higher unemployment benefits. However as noted by Saint-Paul (1996), in so far as higher unemployment benefits raise wages and destroy jobs, the higher exposure of the median voter to unemployment will increase the demand for protection in terms of higher unemployment benefits but at a diminishing rate.

I bothered to read the article before commenting.

It's basic assumption, in terms of political economy, seems a good one. That is, labor rates are due to economic policy that contributes to the formation or the deformation of employment. Unfortunately, they make no effort to prove it.

Therein lies the nub. Anyone can concoct a "model". The hard part is to defend the assumptions by which the model functions. They haven't.

It is therefore more plausible to believe, I submit, that long-term employment is more due to concrete economic policies undertaken by country politicians. And, there, I remain wedded to the notion that increased leisure time as well as enhanced benefits throughout the postwar period (once Europe was reconstructed) from 1960 to 1990 brought about a decline in productivity and particularly annual work-hours.

This factor proved to be influential when an historic "tipping point" came about in the mid-nineties -- GATT removed tariff barriers as the world's supply of labor almost doubled with the demise of the Iron Curtain.

The link between cycles in the US and the EU is pure fortuity. The EU is not yet a sufficiently homogeneous economic entity to compare to the US. It has had a common currency (the euros) for only ten years and a Central Bank for the same amount of time.

European unemployment is on the mend, but only because disastrous political economy decisions constrained corporate ability to hire and fire at will according to business demands. Separation payments were highly onerous and therefore dissuasive. Consequently, at the first occasion, companies dislocated low skilled jobs abroad, maintaining local employment only in areas related to the local business need. This was particularly true in high-cost manufacturing countries, such as Germany, but much lower cost countries such as France suffered as well.

The elementary truth in the model proposed is that of work availability in terms of unemployment benefits. It is a common notion that if benefits are too high, then people will shun work. This is only partly true.

Studies in France have debunked this notion. It was very commonly thought here that French unemployment benefits were too generous and that people would especially not move to be employed in a country with a population highly set in its ways.

This is not generally the case. People will not necessarily be induced to chose idleness over work for the same amount of money -- and unemployment benefits rarely substitute for net income of employment. I'm not saying that, the sociological studies come to that conclusion. The human animal has a psychological need to interact within its social collectivity. Work provides that context.

Needless to say, historically Europe is past the "cradle to grave" phase of its economic development. It is slowly, slowly sinking in that if an economy is not a work it does not generate wealth.

After all, before an economy can share its wealth, by means of taxation and distribution, it must first create it. Europe knows how to share the wealth generated. The US does not, as any cursory examination of historical Gini-coefficients will attest.

Sharing the wealth generated shifts exaggerated riches from the top of the pyramid (where it is saved for reinvestment and not expended due to specific propensities) to the bottom of the pyramid where it it is typically spent (due specific propensities).

Spending sparks Demand which provokes Investment. This axiom should be self-evident.

[Lafayette]

Munch, munch, munch ...

Dr. B: It’s clear in some areas the U.S. model is going to fail (Social Security and our medical system).

Wrong on both counts.

The SS model cannot fail, it would be politically unacceptable. It will be tweaked into continuing to fly, even if like a lame duck.

The Health Care system HAS already failed ... Americans just don't realize it -- because they have had no comparative system that works better by which to judge.

Instate a European-style Public Service Health Care system and the advantages will become obvious overnight -- most people will flock to it. And, the rest can remain with the far more expensive Private Medicine, if they like and IF their company is willing to pay for it. (Which it won't -- and the AMA knows it.)

Apparently the concept that Preventive Health Care is priority over Remedial HC does not strike a respondent chord in the body politic. And so, for instance, couch-potato obesity tends to multiply. The US has a Health Care time-bomb in the making - whilst terrorized by a repeat of 9/11 that just wont happen.

Munch, munch, munch ... BADDA-BOOM!

[Real Person from the Real World]

I resent the term.... "Couch-potato obesity." More like, SWSDS - computer worker stuck at desk for 11 hours a day syndrome.

[Real Person from the Real World]

This was on another page but belongs here:

Employment in the US is problematic vs employment in Europe.

The mentality here is screen to weed out. Even people who are good fits for a job can be weeded out on flimsy factors (someone from MI, who worked for a big automotive company having been laid off and taken jobs beneath him/herself OR not in the same field - lack of "recent" experience).

We have these pseduo psych questions too, and personality tests. Do these REALLY predict future behavior or really identify people who will be a problem? See "The Cult of Personality" by Annie Murphy Paul.

This is out of the 60's when you had a few piddling law suites over age and racial discrimination. Employers decided to quash the trend and started putting in HR who started using these tactics, so if you don't get the job, they have some excuse to fall back on.

While the circumstantial facts might show discrimination or bias of some sort, the company can point to some obscure question.

The people with the power to hire hire who they want they want, not necessarily someone the first person who is qualified, and they do this with impunity. Meanwhile, we bring in visa folks, and their vendors try every trick in the book, including under the table pay and the buddy/spy network, to get their guys in somewhere. That doesn't mean the worker is bad, but it certainly is not fair to other job applicants.

Lately, there is a trend toward VMS, vendor management systems, or even hiring contractors to handle vendors. These guys have their own quirks, and the web based vendor management systems are a major pain in the butt. In a day and age when software can basically inhale a resume, why is someone stuck quizing their consultant to fill in webform after webform that sometimes is not working right or has incorrect information the managers cannot go in and fix? And has it's own process of discrimination.

The hiring system in the US sucks big time. Europe just hasn't caught up with us yet.