Category Archive for: Unemployment [Return to Main]

Thursday, July 21, 2011

Got Jobs?

Casey Mulligan's claim that the unemployment problem is largely due to lack of motivation among younger workers ("the degree to which people would like to have a job"), and that this disproves Keynesian economics, prompts a shrill response from Arin Dube:

Searching for jobs: good thing Casey Mulligan doesn’t need to, by Arin Dube: Tearing down Casey Mulligan’s “discoveries” of evidence against Keynesianism is probably ill-advised: these are not serious arguments, and rebutting them may dull one’s acumen.  Nevertheless, once again I will sacrifice some brain cells and bite the bullet—consider it the provision of a minor public good.
OK, so in his most recent post, Mulligan claims that the differential trends in employment among older and younger workers over the Great Recession shows that Keynesian arguments are wrong.  He says:
Many elderly people, for example, saw the market values of their homes and retirement assets plummet in 2008 and feel they can no longer afford to be retired. Naturally, many of them react by looking for work. The blue and green lines in the chart show that the elderly have been much more successful than the general population at obtaining and retaining jobs. These findings contradict the Keynesian narrative of the labor market, in which the marketplace fails to recognize the degree to which people would like to have a job.
Except that they do no such thing. Being in a Keynesian demand-constrained equilibrium, where there are less jobs (say N) than people looking for them (say L), says nothing about who gets those jobs.  If older people are finding it harder to retire due to the bursting of the housing bubble and hence stay in the labor force, that adds to L. If everyone searching for a job has an equal chance of getting one, this will mechanically increase the employment-to-population rates among the elderly, even while the total number of jobs stays constant at N. It just means that someone else didn’t get that job, which tends to push down the employment rates of non-elderly.
If further the elderly search more intensely due to retirement asset losses, then they will be even more likely to find jobs and will be even more likely to displace others looking for jobs, even as the total number of jobs remains constant at N. Comparing trends in employment across different groups cannot help us understand if the total number of jobs is rationed. There is literally nothing in any of the “findings” that Mulligan reports in that post that has any bearing on whether we are in a demand constrained equilibrium. 
Along with Mulligan’s fallacious use of seasonality to detect the power of labor supply in deep recessions, this constitutes the set of variation that is orthogonal to what’s required for credible identification of job rationing. Less technically, Mulligan is hating on Keynes in all the wrong places.
By the way, there are serious researchers who have looked at rationing versus other types of unemployment (like search frictions) in the labor market, and characterized equilbria that differ by the phase of the business cycle. An important paper is by Emmanuel Saez and coauthors, who show why unemployment insurance should be countercyclical because jobs tend to be rationed during recessions—one person’s getting a job means another person not getting one—while during booms that is not the case. 

Is the problem, as Mulligan claims, that there are plenty of jobs for motivated, workers, but workers aren't willing to work? Or is it that workers are willing to work, but no jobs are available?

Workers were plenty willing to work before the economy crashed, and despite claims that unemployment insurance and other social insurance programs have somehow eroded the will to work, the evidence points overwhelmingly to lack of demand as the fundamental problem. Telling workers it's their own fault, they aren't trying hard enough, puts blame where it doesn't belong and misdirects attention from the true problem. When the jobs return -- sooner with the help of job creation programs or later without -- people will take them.

Thursday, July 14, 2011

Seasonal Adjustment and New Unemployment Insurance Claims

Brad DeLong makes a good point about interpreting this morning's news that new claims for unemployment insurance fell a bit to 405,000 (though last week's number was revised upward):

Economagic Economic Chart Dispenser

New Unemployment Insurance Claims, by Brad DeLong: In both July 2009 and July 2010 the BLS's seasonal adjustment algorithm overestimated the extent of the seasonal jump in new unemployment insurance claims in July. Thus both in 2009 and 2010 the seasonally-adjusted series "saw" a July fall in unemployment insurance claims that was not really there.

Is the same thing happening this year? Perhaps. Thus I am not as pleased with this week's decline in seasonally-adjusted UI claims as I would be normally...

Leaving the microphone in Brad's hands, in another post he notes that:

worrying about deficit reduction right now stops us from worrying about things we could do something about--like high unemployment, idle capacity, slow growth, and crumbling infrastructure.

But instead of doing anything about it, the Fed watches and waits -- by Bernanke's own admission -- and hope's that, unlike all the other times it watched and waited to see if things got better and they didn't, this time is different (Bernanke said today that "We are uncertain about the near-term developments in the economy. We’d like to see if, in fact, the economy does pick up, as we are projecting."). And Congress is all but hopeless -- they'll be lucky if they don't wreck the economy over the debt ceiling, let alone take steps to improve it.

Tuesday, July 12, 2011

Why Has the Reducing the Deficit Trumped Unemployment?

Why aren't politicians more concerned with the unemployed?:

Unemployment? Who Cares?: ...Why isn’t unemployment reduction front and center on the policy agenda? More specifically, why has the debate over deficit reduction shoved it aside?
Here are three possible reasons. First, unemployment is concentrated among the less educated, blacks and Hispanics who lack political or economic clout.
Second, high unemployment is not hurting overall business profits, which have soared to historic heights. ... Today, our largest corporations and richest investors are well positioned to take advantage of growing demand in emerging markets far from our shores...
Third, the jobless individuals, public employees and small-business owners who could, in theory, form a strong political coalition to support more active job creation are constantly subjected to a barrage of arguments that we should do nothing but cut government spending and hope for the best. ...
A conspicuously large repertoire of more targeted job-creation proposals could significantly lower unemployment... But political interest is low...

Monday, July 11, 2011

Paul Krugman: No, We Can’t? Or Won’t?

Excuses, excuses:

No, We Can’t? Or Won’t?, by Paul Krugman, Commentary, NY Times: ...The ... United States economy has been stuck in a rut for a year and a half. Yet a destructive passivity has overtaken our discourse. Turn on your TV and you’ll see some self-satisfied pundit declaring that nothing much can be done about the economy’s short-run problems..., that we should focus on the long run instead.
This gets things exactly wrong. ... Our failure to create jobs is a choice, not a necessity — a choice rationalized by an ever-shifting set of excuses.
Excuse No. 1: Just around the corner, there’s a rainbow in the sky.
Remember “green shoots”? Remember the “summer of recovery”? Policy makers keep declaring that the economy is on the mend — and ... these delusions of recovery have been an excuse for doing nothing as the jobs crisis festers.
Excuse No. 2: Fear the bond market.
Two years ago The Wall Street Journal declared that interest rates on United States debt would soon soar unless Washington stopped trying to fight the economic slump. Ever since, warnings about the imminent attack of the “bond vigilantes” have been used to attack any spending on job creation.
But basic economics said that rates would stay low as long as the economy was depressed — and basic economics was right. ...
Excuse No. 3: It’s the workers’ fault.
Unemployment soared during the financial crisis and its aftermath. So it seems bizarre to argue that the real problem lies with the workers — that the millions of Americans who were working four years ago ... somehow lack the skills the economy needs...: high unemployment is “structural,” they say, and requires long-term solutions (which means, in practice, doing nothing).
Well, if there really was a mismatch..., workers who do have the right skills ... should be getting big wage increases. They aren’t. ...
Excuse No. 4: We tried to stimulate the economy, and it didn’t work.
Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.
Think about it: Where are the big public works projects? Where are the armies of government workers? There are actually half a million fewer government employees now than there were when Mr. Obama took office. ... This ... wasn’t the kind of job-creation program we could and should have had. ...
It’s also worth noting that in another area where government could make a big difference — help for troubled homeowners — almost nothing has been done. ...
Listening to what supposedly serious people say about the economy, you’d think the problem was “no, we can’t.” But the reality is “no, we won’t.” And every pundit who reinforces that destructive passivity is part of the problem.

Sunday, July 10, 2011

Historical Patterns, Okun's Law, and the Great Recession

Arin Dube shows that estimates of Okun's law are inconsistent with the assertion that most of the unemployment problem is structural rather than cyclical:

Historical Patterns, Okun's Law, and the Great Recession, by Arin Dube: After reading Paul Krugman's post today, I decided to follow up by actually estimating out-of-sample unemployment rate change forecasts during the Great Recession based on a pre-2007 Okun's law relationship (i.e., a regression of change in the unemployment rate on percentage change in real GDP).
As a starting point, let's estimate the pre-2007 Okun's Law relationship using data from 1948 to 2006. (I use 2007 instead of 2008 just because the unemployment rate started rising in 2007 - but as you will see, this makes no real difference for any of the conclusions below.)


As expected, it shows that you need GDP growth above 2 percent or so to bring down the unemployment rate.
So what happens if we use this historical Okun's law to predict unemployment rate changes in the 2007-2011 period? In the next graph I plot the actual unemployment change by quarter with the predicted amount. The red line is just the 45 degree line to help us see what the actual change in unemployment would be if it behaved exactly according to the historical Okun's Law relationship. (The labels are a little bit off here: "01jan2010" really means "2010q1," "01apr2010" means "2010q2," etc.) I think this chart shows quite clearly what's going on:


Several things jump out:
1. First of all, note that over this period, during 9 quarters the historical forecast underpredicted the change in the unemployment rate, while during 8 quarters it overpredicted it. The forecast error ranged from -0.85 to 0.73, with a mean of 0.03. So there is absolutely no evidence that the unemployment rate stands at a much higher level than would be predicted by movements in GDP.
2. In fact, during the past 6 quarters, the actual reduction in unemployment rate has been greater than what would be predicted by real GDP growth--i.e., the forecast errors have been negative.
3. However, it is also the case that during the initial downturn (especially 2008-2009), the unemployment change was greater than would have been predicted by GDP reduction - i.e., positive forecast errors. (You can also see that the inclusion of 2007 makes very little difference here - as those data points are quite close to the predictions.)
4. Overall, the main conclusion is that based on a historical Okun's Law and actual GDP growth, at least as of 2011q1, both the initial rise in unemployment and the subsequent reduction had been more amplified. This not the signature of structural unemployment. A structural unemployment scenario would show an asymmetry: a growth in unemployment that is near or even above the norm based on GDP slowdown, but a reduction in unemployment that is muted in comparison to the GDP growth. This is not what we see. The point is made even more sharply in the next graph which simply plots the same red 45 degree line along with the in-sample linear fit (with data from 2007 forward).


The blue in-sample linear regression line has a slope of around 1.96 - in other words, the sensitivity of the unemployment rate to GDP growth during the Great Recession seems to have been twice as large as compared to historical norms - and this is true both in the downturn and the "expansion." (Split sample regressions confirm this point, which is also clearly shown in the earlier scatterplot.)
Now what is behind the "excess sensitivity" of unemployment rate to GDP growth? This is indeed an interesting question - and deserves to be studied further. It's possible that financial accelerators played a role early on, and as the financial markets stabilized, this effect unwound - leaving (normal) aggregate demand as the main constraint. This of course is just speculation, and I myself have some doubts about this story. However, what is not in question is that growth has been anemic, and that this anemic growth can more than explain the unemployment trajectory during the "expansion." Structural unemployment? Not so much. Reality-sensitive economists (and dare we say politicians?) should digest this simple fact.
Data Source:
The two data series are UNRATE and GDPC1

Friday, July 08, 2011

Fed Watch: Grim

Tim Duy:

The employment report polishes off what was already a depressing week. The turn of events in the budget negotiations was deeply distressing. It just seemed like it should be impossible to imagine that budget cutting is the order of the day when unemployment is over 9%, 10-year Treasuries hover near 3%, and a Democrat is in the White House. Yet possible it is.

The extent to which our leadership seems determined to follow in the path of the Japanese is absolutely stunning. My impression of the last two decades is that Japanese policymakers were never able to keep their eyes on the weak economy, instead always eager to turn their attention back to "normalizing" policy – raising interest rates, raising taxes, cutting spending. Our leadership suffers from the same obsession.

The employment report should be a wake up call. A slap in the face. A bucket of cold water poured over your head. But it won’t. I suspect it will be seen as further evidence that stimulus is pointless, that austerity is the only solution.

Weakness spread far and wide throughout the report. No way to put lipstick on this pig. As others have noted, the labor force fell, the participation rate fell, the employment to population ratio fell, the number of employed plummeted, and the number of unemployed climbed. Private nonfarm payrolls gains a paltry 57k, and the drag from government cutbacks pulled the overall jobs gain to just 18k. Far short of the numbers needed to even hold unemployment steady.

And wages fell. Just a penny an hour, to be sure. But that penny is meaningful given the desperate fears of inflation that appeared to take hold on Constitution Ave. Without sharply rising wages, those fears are simply unfounded. This was the lesson of the post-1984 period. Why monetary policymakers are fixated on the pre-1984 period is a mystery.

What I noticed was the number of short-term unemployed:


A sharp rise in the number of people thrown into unemployment is definitely a red flag. The overall data picture is not pointing at recession yet, but this number reeks of something bad.

We can only hope some of the downward pressure on growth is relieved as the tsunami related disruptions fade and, more importantly in my mind, the sharp rise in oil prices has been arrested, at least for the moment. But even as these restraints lift, what remains? Oil prices have not plummeted like in 2008 to provide a big positive boost to real spending. And interest rates are no longer falling to provide and opportunity for a refinancing boom. So at best we return to trend growth, maybe a little above? Trend growth that was never sufficient in the first place?

Moreover, we still face significant headwinds in the second half of the year. The Europeans are determined to avoid resolution in their ongoing debt crisis. The ECB is determined to raise interest rates. And Congress and the White House are determined to pursue a path of fiscal austerity.

Bottom Line: Simply a weak report – unbelievably weak given the “recovery” is two years old. Weak enough – especially given falling wages – that it should prompt Bernanke & Co. to revisit their commitment to end large scale asset purchases. The next round of Fedspeak will be very interesting. Watch closely for the focus on “temporary” factors - code for watch and wait. At this juncture, they are still out of the game. I think the Fed will need to see another quarter of data before they begin to take seriously the possibility that they once again erred with a premature policy shift.

A Day Away (Update: And Some Comments on the Employment Report)

I was on the road most of Thursday (I'm in Dallas), have commitments almost all of today, and then travel back to Oregon Friday night. So not sure if I'll have the time to say much. (I haven't missed a day posting since I started doing this, but I can't say that all days have been equally productive.)

Let me know how the jobs report comes out, or whatever else is on your mind.

Update: Wow (the bad kind of wow) -- The economy added only 18,000 jobs in June and the unemployment rate rose to 9.2% (and previous months were revised downward):

Jobs Data Dim Recovery Hopes, WSJ: Nonfarm payrolls rose 18,000 last month... Payrolls data for the previous two months were revised down by a total 44,000 to show increases of only 25,000 jobs in May and 217,000 in April.

The jobless rate, which is obtained from a separate household survey, increased for the third straight month to 9.2% in June, from 9.1% in May. ...

Friday's report showed private-sector employers, which account for about 70% of the workforce, added only 57,000 jobs in June, down from 73,000 in May. The weakness was broad-based.

Manufacturing employment remained weak, adding only 6,000 jobs. Economists were expecting a bounce back as disruptions to manufacturing production stemming from Japan's earthquake should be easing by now. Employment in the battered construction sector was broadly unchanged. The housing sector remains a big drag on the economy.

Employment in professional and business services, which had shown strong gains in previous months, rose by only 12,000.

Government employment fell by 39,000, the eighth drop in a row, following declines in all levels of government struggling to close budget gaps.

Remembering that we need around 100,000 to 150,000 jobs per month just to keep up with population growth, this represents a net reduction in employment.

We have 14.1 million unemployed according to the report, with 6.3 million out of work for six months or longer. Wages fell slightly.

Why, again, are we spending so much legislative time trying to figure out how to cut the deficit in the short-run -- which will make things even worse -- instead of focusing on job creation? We do need to get the budget under control in the long-run, but deficit reduction can wait until the economy is on better footing. We need more help for job markets right now, not the creation of additional headwinds that work against the recovery.

[Echoed at Moneywatch.]

Only Further Stimulus Can Tackle America’s Jobless, Wage-Less Recovery

Brad DeLong says to go read Laura Tyson. So why, oh why don't you? That is all.

Thursday, June 30, 2011

Fed Watch: The Lost Jobs Opportunity

Tim Duy:

The Lost Jobs Opportunity, by Tim Duy: This kind of chart has always bothered me:

It is not the content or format that worries me. And, to be sure, the magnitude of the labor market damage wrought by the recession weighs heavily on my mind. Moreover, the length of time to recovery seems immense. And, on top of both of these, we effectively reduce our expectations of "recovery" with this chart - recovery should be about capturing the previous trend, not the previous peak.

Despite all this, it has always seemed to me that I was missing some even darker point. I think I finally identified that issue. Consider that the US economy remains about 7 million jobs shy of the previous peak of nonfarm payrolls. At 200k jobs a month - a seemingly optimistic forecast at this point - we regain the peak in about 35 months. We are already (believe it or not) 23 months into the expansion, which means that we recover the jobs lost in this cycle after a 57 month expansion.

Now consider this: The average post-WWII expansion is only 59 months.

If this expansion is typical, then we can expect just 2 months of job growth beyond the previous peak before the next recession hits.

Now suppose that job growth limps along at a monthly average of 150k a month. Then we are 46 months away from the payroll peak, or an expansion time of 69 months. Ten months shorter than the post-WWII average. In other words, even without resorting to an immediate double-dip scenario, we could very well be in recession prior to regaining the jobs peak.

Perhaps we should take some comfort in the fact that the average of the past three expansions is 95 months - which provides some room to grow jobs beyond the peak, but not much in historical perspective. Moreover, given the likelihood that the Fed begins a tightening cycle well before the payroll peak is in sight, and that fiscal policy looks poised to turn contractionary very soon, I have trouble thinking this recovery will be more like the past three (one of which included massive technological change) than the entire post-WWII average. That said, hope springs eternal.

The very real possibility that we will slip into recession prior to regaining the previous jobs peak casts the current situation in an even darker light than that of Federal Reserve Governor Sarah Raskin. Not only is the depth and duration of the unemployment crisis immense, but so too are the long-term consequences. The failure to design a coordinated package of monetary and fiscal policy to engineer a V-shaped employment recovery looks increasingly like a massive lost opportunity. And with that opportunity now lost, a return to even something sort of like the pre-recession jobs trend seems essentially impossible.

Saturday, June 25, 2011

We Need to Bury the "Shovel-Ready" Objection to Infrastructure Spending

Robert Frank joins the chorus calling for something to be done about unemployment:

The Payroll Tax Needs a Vacation, by Robert Frank, Commentary, NY Times: The federal budget deficit is a distraction. It’s important, yes, and must be addressed. But by a wide margin, it’s not the nation’s most pressing economic problem. That would be the widespread and persistent joblessness...
Almost 14 million people ... were officially counted as unemployed last month. But that’s just the tip of the iceberg. There were almost 9 million part-time workers who wanted, but couldn’t find, full-time jobs; 28 million in jobs they would have quit under normal conditions; and an additional 2.2 million who wanted work but couldn’t find any and dropped out of the labor force.
If the economy could generate jobs at the median wage for even half of these people, national income would grow by more than 10 times the total interest cost of the 2011 deficit (which was less than $40 billion). So anyone who says that reducing the deficit is more urgent than reducing unemployment is saying, in effect, that we should burn hundreds of billions of dollars worth of goods and services in a national bonfire.
We ought to be tackling both problems at once. But in today’s fractious political climate, many promising dual-purpose remedies — like infrastructure investments that would generate large and rapid returns — are called unthinkable...
We need to keep posing hard questions to deficit hawks who argue that we shouldn’t be hiring unemployed workers to maintain our crumbling roads and bridges, even though postponing such projects will make them much more expensive in the future. These projects don’t impoverish our grandchildren. They enrich them.
The important point is that bringing down federal deficits is a long-run problem... But our immediate concern must be getting people back to work.

He also talks about, and favors, a payroll tax as one of the few politically viable options. About that, if we go the payroll tax reduction route, we need to design the policy in a way that protects Social Security financing. Many conservatives will try to make the payroll tax reduction permanent, and then use it to starve the Social Security program. From a previous post:

...for those who want to scale back or eliminate Social Security, this would be seen as an opportunity to starve Social Security of finances, create a crisis, then argue for cutbacks. But there are ways to do this that don't involve cutting the payroll tax per se, so the political optics are different yet amount to the same thing. For example, continue collecting Social Security taxes as before, but give workers a temporary rebate that is clearly designated as temporary, and is independent of Social Security taxes. I'm sure there are better ways to do it, but the point is that we can help workers without interrupting the usual payroll tax flow and putting Social Security at risk.

But back to infrastructure. I can't help but think about all of those people who objected to putting more infrastructure spending into the stimulus package back in late 2008 and the early months of 2009. The argument was that there weren't enough shovel ready projects available. If we tried to do too much of this type of stimulus, the economy would already be recovering by the time we put those projects into place, and it would cause the economy to become overheated. 

Of course it turned out that we actually needed to provide sustained stimulus, the forecasts for a quick end to the recession were way off.

Presently, the spending is ending and creating a drag just as the economy is struggling to turn upward. The forecasts for a quick end to the recession were wrong, and a larger, more sustained stimulus effort was needed (as many of us argued at the time). Having additional projects coming online now would have been very helpful to the recovery effort.

However, when infrastructure projects are suggested now as a way to help the unemployed and our crumbling infrastrucutre at the same time, the same voices tell us that the first round of stimulus spending showed there aren't enough shovel ready projects available. There's no way to get these projects going in time to do much good.

The best response to that argument  -- besides the fact that they were wrong about this before, there was plenty of time to develop projects, and they are wrong again -- is this graph:

Fed Forecast of the Unemployment Rate


There's plenty of time, plenty of unemployed resources, and interest costs are as low as they'll ever be. And, of course, there's plenty of need for investment in infrastructure so there are large benefits from this type of spending.

But we're too pennywise for this.

[Also posted at MoneyWatch]

Thursday, June 23, 2011

Weekly Initial Unemployment Claims Increase to 429,000

Quick note, and not a good one:

Weekly Initial Unemployment Claims Increase to 429,000

[Update: Graph and a few comments here.]

Wednesday, June 22, 2011

The Costs of War

One of the costs of war is higher unemployment:

Gender Values: The Costs of War, by Susan Feiner: At ten years and counting, the wars in Iraq and Afghanistan are the longest in U.S. history. Not surprisingly, they are the most expensive, with total war spending poised to top two trillion dollars early this summer. ... The U.S. government's spent over $2,000 per capita on all aspects and accouterments of war. ...
Spending on the military counts for a huge share -- 58 percent -- of U.S. discretionary federal spending. If military funding were redirected to meet critically important social needs, the nation as a whole would reap enormous benefits. ...[gives examples]
This military spending has yet another negative economic impact, and that's on the labor market. The largest share of military spending goes to weapons procurement, not to pay soldiers or other military personnel. The consequence of this is that it closes off employment opportunities in fields where women are most likely to earn decent salaries.
Dollars spent on the military and dollars spent on domestic programs like health care and education call very different jobs into existence. According to an important study by the Political Economy Research Institute (PERI),... one billion dollars spent on education or health care would create many more jobs than does spending the same amount on military projects. When the nation spends one billion dollars on the military, 11,600 jobs are created. If that billion dollars was spent instead on education 29,100 jobs would be created. And if it were spent on health care almost 20,000 jobs would be created. The military currently rips through more than $600 billion per year. If ... $300 billion were spent instead on education and health care, the employment picture would shift dramatically. The sum of $150 billion spent on education would create over four million jobs. Spending another $150 billion on health care would create about three million jobs. Adding the two sets of new jobs together, and subtracting out the military jobs that are lost, yields 3.8 million new jobs,... driving the unemployment rate to down from the current level of nine percent to under seven percent.
The positive benefits of such a change for women can't be understated. ...

[Also see Stiglitz and Bilmes.]

Wednesday, June 15, 2011

Structural Unemployment or Not, Jobs, Jobs, Jobs is Part of the Answer

I don't think the idea that the unemployment problem is mostly structural stands up to the evidence, see here for example, but for the sake of argument suppose it is. How should we respond? There are several choices:

1. Do nothing to help. Even though the problems facing the unemployed were created by events out of their control -- they did nothing to deserve unemployment and the struggles that come with it -- and even though those who did cause the problem have received lots of help from bailouts, unemployed workers should not get anything from the government. They're on their own.

2. Provide government help in the form of transfer payments (i.e. cash or the equivalent, e.g. food stamps, from the government), but don't expect anything useful in return. Just send checks and vouchers.

3. Provide the same amount of support as under 2, or better yet even more support, in return for jobs that do useful things for the community. That is, bridge the time while structural adjustments are underway with useful employment for those waiting for the structural changes to be completed.

4. Provide job retraining, use tax incentives to promote better matching by inducing workers and firms to move, and implement tax and other incentives that encourage more business investment and hence faster adjustment from firms.

Importantly, with cyclical unemployment there is also a fifth option, increasing aggregate demand, that does not exist when the problem is structural. But if we cannot increase aggregate demand sufficiently due to political or technical reasons, we also need to bridge the gap while demand recovers by providing jobs for those who will not be able to find employment no matter how hard they try.

To me, the choice is easy. For long-term structural unemployment, 3 is best. There is an argument for 2, we want workers to have the resources they need to search for jobs that suit them best, so we shouldn't eliminate this type of help. But the structurally unemployed will not be able to find a job easily even with an extended, dedicated search supported by unemployment compensation. They need jobs to provide income for their households and to keep them connected to the labor market.

But there is one potential caveat to a jobs program for the structurally unemployed -- it might reduce labor mobility. Workers who might have been inclined to move to take a new job will be less inclined to do so if they have a temporary, community value enhancing job from the government. I don't think that's a significant worry even when the problem is largely structural, but it's worth noting. (Remember that I am assuming structural unemployment for the sake of argument. If the problem is mostly cyclical, as I think it is, this isn't an issue.)

But even if reduced mobility is an issue (and, again, I don't think it is), there is an important offsetting effect. Long-term unemployment, the type that occurs with slow structural adjustment, has long-term negative consequences for the economy (and this is true for both the cyclically and structurally unemployed). The longer people are unemployed, the higher the chance of them dropping out of the labor market permanently. Workers close to retirement will find a way to hang on for a few years by living with family, doing odd jobs, etc., and their experience and skills will go to waste. Younger workers tend to drop out, or work in the underground job market, e.g. doing construction outside of the formal job market. Or they take whatever job they can get and then buy a car, a house, have a kid, etc. and get stuck in a job that does not make full use of their capabilities. They are part of the long-term under-employed. We are all worse off when this happens. The point is that long-term unemployment causes the labor force to erode in both numbers and skill, and that is costly to society. Simply keeping workers connected to the labor market with a job of any type -- doing things the community needs for example -- avoids the erosion of the workforce and the negative consequences (lower economic growth rate) that come with it.

Thus, contrary to what you sometimes hear, we can help the structurally unemployed through job creation. Those who insist, contrary to the evidence, that the problem we face right now is mostly structural cannot use this to argue against a job creation program. In fact, since increasing demand is unlikely to work in the case of structural unemployment in the way it will for a cyclical problem, there is a sense in which the argument for job creation to bridge the long adjustment gap is even more compelling when the problem is structural.

So it doesn't matter whether the problem is the inability to offset the slow recovery of demand through monetary and fiscal policy due to political or technical problems, or long-term structural adjustment, we need jobs, jobs, jobs.

Kash Mansori: Has the Bad Housing Market Reduced Labor Mobility?

Kash Mansori:

Has the Bad Housing Market Reduced Labor Mobility?, by Kash Mansori: Economists Colleen Donovan and Calvin Schnure have written an interesting new paper examining whether the fall in house prices since 2007 in the US -- which has left many home-owners owing more on their house than it is worth -- created a lock-in effect that depressed labor mobility. ...

The evidence presented in this paper indicates that the fall in house prices has indeed caused a "lock-in" effect, but has not significantly impacted labor market efficiency. Here's the abstract:

Locked in the House: Do Underwater Mortgages Reduce Labor Mobility?: The collapse of the housing boom led to an unprecedented number of homeowners who are “underwater”... These homeowners cannot move without incurring significant losses on their homes, possibly causing a “lock-in” effect reducing geographic mobility. This raises concerns that a reduction in labor market mobility may hamper the ability to move to accept employment in another geographic market, degrading labor market efficiency and contributing to higher structural unemployment.

This paper ... finds significant evidence of a lock-in effect. The lock-in, however, results almost entirely from a decline in within-county moves. As local moves are generally within the same geographic job market, this decline is not likely to affect labor market matching. In contrast, moves out-of-state, which are more likely to be in response to new employment opportunities, show no decline, and in fact are higher in counties with greater house price declines. Housing market lock-in does not appear to have degraded the efficiency of the labor market and does not appear to have contributed to a higher unemployment rate.

This is a significant piece of evidence against the "structural unemployment" explanation for the US's high and persistent unemployment rate... [T]he underwater mortgage "lock-in" phenomenon that has been cited as the primary reason why the US's labor market suddenly got so much worse starting in 2008 simply does not match the evidence. As a result, if we want to understand why unemployment has been so persistently high in the US since 2008, we have to look beyond "structural" or supply-side explanations. Once again, the far simpler explanation seems to better match the evidence: there's just not enough demand, so businesses aren't hiring, and people remain unemployed.

If the problem is structural, there's not a lot that policy can do to help in the short-run. Social insurance can ease the pain. Government can provide short-term employment to tide workers over, create incentives for both workers and firms to relocate, provide retraining, etc., but these problems take time to work themselves out. However, if the problem is lack of demand, then there is much more that policymakers can do to help the economy get back on its feet. The key is to offset the fall in demand through monetary and fiscal policy measures so that businesses will be willing to hire people again.

Tuesday, June 14, 2011

Jobs Program?

Robert Reich visits Washington D.C. and asks about a jobs program:

... I made the rounds of Washington Democrats, repeatedly asking why no bold jobs plan is emerging. Here’s a sample of their responses:
“Dead in the water. We’ll be lucky if we get votes to raise the debt ceiling without major spending cuts this year and next.”
“Are you kidding? It’s all budget deficit, budget deficit, budget deficit. Nobody’s thinking about anything else.”
“Republicans beat us up so bad over the first stimulus there’s no way we’re gonna try for a second.”
“We got [Republicans] cornered on Medicare. Now they want to change the subject to jobs. Forget it.”
“No need. We’ll see job growth in the second half of the year.”
“The President doesn’t want to put anything on the table he can’t get through Congress.”
And so it went. Not a shred of urgency. ...

Karl Smith: Capital vs. Labor

Karl Smith makes a good point:

Capital vs. Labor, by Karl Smith: Catherine Rampell is exploring a thesis about the hiring practices. A sample

On Friday, I wrote about how equipment and software prices are getting rapidly cheaper while the cost of labor has been getting more expensive, making capital a more attractive investment to companies than people. Tax incentives that encourage earlier capital investment may be helping, too.

Importantly this only makes sense if capital and labor are substitutes in production. Typically we think of them as complements.

Lets take some obvious examples. Suppose to create welded metal I need both a welder and welding torch. The welding torch goes down in price. That means that its actually cheaper to create each piece of welded metal. This will allow me as a factory owner to either lower my price, sell more welded metal while maintaining my profit margin.

However, to do this I will need more welders. So a fall in the price of welding torches, increases the demand for welders.

On the other hand suppose that I am an airline considering whether to have more booking agents or whether to invest in more sophisticated booking software. Specialized software can run well into the multi-millions but if it gets just cheap enough it might actually be a better deal than new agents.

So the falling price of capital alone isn’t enough. It depends on how the capital interacts with the workers. Moreover, it would take some fancy math to show this, but until capital can do everything labor can do – that is until the singularity – some types of jobs must be complements to capital.

Those jobs will always be in more demand as capital get cheaper. The question is how much skill you need to do those jobs. This is the whole issue of skill-biased technological change.

Let me add that within this framing of the question, one fear is that technology is producing more and more substitutes for labor than ever before, digital technology in particular, and there is uncertainty about what that means for the future.

Saturday, June 11, 2011

Are All Labor Market Matching Problems Structural?

I had a radio interview not too long ago on cyclical versus structural unemployment, and in rereading some old posts on the topic I came across this statement from Brad DeLong:

Let us remember what structural unemployment looks like. The economy is depressed and unemployment is high not because of slack aggregate demand generated by a collapse in spending, but instead because “structural” factors have produced a mismatch between the skills of the labor force and the distribution of demand.

That reminded me of a point I've been meaning to make. With all the talk about whether our unemployment problem is cyclical or structural (it's mostly cyclical), many people are looking at measures of mismatches to assess how much of the problem is structural. But care needs to be taken in the interpretation of mismatch numbers. Here's why.

Suppose that you run a business in Town A and you need someone to run a complicated piece of equipment. Unfortunately, the size of your town is relatively moderate, and there are no qualified job applicants available. You have advertised the job for weeks, but no takers. This sounds like a classic case of structural unemployment -- there is a need for workers with a different skill set -- but it may not be a structural problem.

Suppose also that the economy is in a recession, and business has not been good. Because of that, you can't offer a very high wage. It turns out that in the very next town, Town B, there is a qualified worker who was laid off due to a business failure caused by the recession, but at the wage you are offering the worker is not willing to move. The worker has a job and is surviving, though the pay is much less than before and the worker is underemployed -- the worker is mismatched -- but the family is getting by.

However, if things were better -- if the economy was humming away at full employment -- the employer in Town A could offer a higher wage and induce the worker in Town B to move. If so, then this unemployment is cyclical, not structural. There is a mismatch, but the mismatch is driven by lack of demand.

The point is that when we talk about structural unemployment, we assume aggregate demand is not the problem. Thus, structural unemployment must be measured under an assumption that demand is sufficient to return us to full employment. Structural unemployment is driven by changes in tastes, technology, etc. that produce geographic, skill, or other mismatches that prevent reemployment. For example, if there is a change in tastes that causes the demand for hula hoops to fall and the demand for skateboards to increase, or a change in technology that causes the demand for typewriters to fall and the demand for word processing software to increase, then we have to move workers and other resources out of hula hoop and typewriter production and into the skateboard and word processing businesses. That will take time if there are geographic, training, or other barriers that prevent the quick translation of resources from one use or one place to another. Note, however, that the problem is not lack of demand. People want more skateboards and word processors than they currently have, so that unlike the example above where higher demand and the higher wages that come with it cause the worker to move and eliminate the mismatch, an increase in demand won't fix the problem. If an increase in demand will fix the problem, as in the example above, then it's not a structural problem.

The bottom line is that to measure structural unemployment in a recession, it's not enough to simply survey the labor market and count the mismatches. You have to know if those mismatches would persist at a level of demand consistent with full employment. To the extent that the mismatch problem is due to lack of demand, and wages and prices that are too low to induce resource movements to their best use, the problem is cyclical, not structural.

Friday, June 10, 2011

Fed Watch: More on Geithner, Deficit Reduction, and Expenditure Switching

Tim Duy:

More on Geithner, Deficit Reduction, and Expenditure Switching, by Tim Duy: Zach Goldfarb’s profile on Treasury Secretary Timothy Geithner ignited a firestorm among bloggers with the money quote:

The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

Reactions on the shift to a deficit-reduction strategy come from Ryan Avent, Felix Salmon, and Mike Konzcal, among others. The general view is that Geithner has pushed the Administration into an economically dangerous position, guaranteeing millions remain unemployed, for absolutely no good reason. The yield on the 10-year Treasury is mired at 3%. Where is this loss of confidence that is so feared in Washington?

Salmon gets to the heart of Geithner’s thinking here:

Geithner cut his teeth in a world of bond vigilantes, an era when James Carville said that he would like to be reincarnated as the bond market, because then he could intimidate everybody. And after that, Geithner dealt with a series of international sovereign-debt crises where countries found themselves hammered by enormous bond spreads.

I suspect - guessing, really - that Geithner is very much concerned the US is uncomfortably close to a currency crisis. Indeed, I think that we were closer to such a crisis in 2008 than many realize:


That kind of shift in asset flows is sort of difficult to dismiss as irrelevant. The only thing that pulled us out of the fire was the willingness of foreign central banks to accumulate dollar assets to compensate for private outflows, no strings attached (of course, those banks arguably had no choice, as their accumulation of dollars helped support the imbalances that made a currency crisis possible). If the IMF had been called upon, they surely would have wanted strings attached, and one such string would almost certainly have been a deficit reduction program.

Crazy, you say? Look to Greece.

That’s all ancient history. Now, the goal is to prevent it from happening again. And that is where Geithner is trying to engineer what a massive expenditure switching program. That program was thoroughly described by New York Federal Reserve President William Dudley in a speech that was lost in excitement surrounding Federal Reserve Chairman Ben Bernanke’s latest assessment of the US economy. Greg Ip gives the short version:

To get the federal deficit from its current 10% of GDP to a more manageable 3% will require America to generate additional consumption, investment and net exports equal to 7% of GDP. Since it already consumes too much, that leaves business investment and net exports.

Monetary policy can help achieve this by accommodating the shift in relative prices that rebalancing requires. Mr Dudley notes that surging EME growth has driven up prices of both commodities and their own exports as domestic wages rise. That has driven up headline inflation in America. But Mr Dudley makes the crucial point that this represents a deterioration in America’s terms of trade and thus its standard of living. It is not a generalised inflation problem unless it leads to second-round wage and price catch-up, of which there is no sign. Not only does such a terms of trade shock not call for tighter monetary policy, it is essential to rebalancing. As foreign prices rise relative to American prices, America will export more and import less.

(Note also that Yves Smith linked to the Dudley topic even sooner). I have tended to think in similar terms – that, over time, the US economy needs to shift away from reliance on consumer spending toward nonresidential investment. Absent the US consumer, where, you ask, will the demand come from to support such investment? Increased exports and import competition, both of which are facilitated by a weaker dollar.

Would such a decline become disorderly? That is probably what Geithner fears, and his response is that it is less likely to occur, and more easily managed should it occur, if the US fiscal position is stabilized, the sooner the better. Others, particularly China, must participate as well – hence the push to revalue the yuan.

Obviously, the conundrum here is that this process involves structural adjustment, which involves – you guessed it – structural unemployment. Which, understandably, raises the ire of left-leaning economists and bloggers. And we go full circle – how can we accept high unemployment when interest rates are so low?

I am a bit stuck on this issue. Most mornings I wake up and think the Administration’s focus on deficits is insane. There have been predictions of a dollar collapse for a decade. Should we deny employment opportunities to millions for another decade on the basis of such failed predictions?

A few months ago, I rushed back to Eugene from a Portland Business Alliance meeting where I was given a lapel pin that read “JOBS.” While picking up my son from soccer practice, another parent noticed the pin and said “Nice pin. I wish I had one of those.” “A pin,” I replied, thinking I have another in my pocket. Duhhh – dumb economist. “No, a job,” was the response. Those are the times you think, yes more stimulus, lots more, now.

And, admittedly, at other times I think the costs of a currency crisis would be very, very high, with a rapid imposition of massive structural adjustment. Given the possibility of such an outcome, which, I reiterate, was not inconceivable during the recent financial crisis, don’t policymakers have a responsibility to work toward a more balanced pattern of growth?

In addition to clearly differentiating between the short and long run deficits, I think if you want to meld these to positions into a consistent policy framework, the objective is to support deficit reduction via higher taxes on upper-income groups, those least impacted by the structural adjustment away from consumer spending, while maintaining spending on the social safety net. Whether this ultimately occurs, or if instead the weight of deficit reduction falls most on those negatively impacted by structural adjustment, remains to be seen.

Thursday, June 09, 2011

The Unemployment Crisis Continues...

New claims for unemployment insurance remain elevated:

In the week ending June 4, the advance figure for seasonally adjusted initial claims was 427,000, an increase of 1,000 from the previous week's revised figure of 426,000. The 4-week moving average was 424,000, a decrease of 2,750 from the previous week's revised average of 426,750.


There is finally talk of doing something, but Robert Reich isn't happy that the president's discussions are focused on supply-side initiatives (I've argued that the administration's focus on supply-side policies has hurt the ability of policymakers to help employment recover):

Why the President Must Come Up With Demand-Side Solutions, And Not Go Over to the Supply Side, by Robert Reich: “I am concerned about the fact that the recovery that we’re on is not producing jobs as fast as I want it to happen,” President Obama said Tuesday, amid the flood of bad economic news...
Does this mean we’re about to see a bold package of ideas from the White House for spurring growth of jobs and wages? Sadly, it doesn’t seem so.
Obama says he’s interested in exploring with Republicans extending some of the measures that were part of that tax-cut package “to make sure that we get this recovery up and running in a robust way.”
Accordingly, the White House is mulling a temporary cut in the payroll taxes businesses pay on wages. White House advisors figure this may appeal to Republican lawmakers who have been discussing the same idea. ...
Other ideas under consideration at the White House include a corporate tax cut, accompanied by the closing of some corporate tax loopholes.
Can we get real for a moment? ... The problem isn’t on the supply side. It’s on the demand side. Businesses are reluctant to spend more and create more jobs because there aren’t enough consumers out there able and willing to buy what businesses have to sell. ...
All this translates into a continuing crisis on the demand side. ... How to get jobs back, then? By reigniting demand. Put more money in consumers’ pockets and help them renegotiate their mortgage loans.
For example: Enlarge the payroll tax break for workers — not just for employers. ... Create a WPA for the long-term unemployed. Allow distressed homeowners to declare bankruptcy on their primary residence, thereby giving them more clout with lenders to reorganize their mortgage loans. Lend federal money to (rather than bail out) states and cities that are now firing platoons of teachers, fire fighters, and other workers because state and local coffers are empty.
But we’re not hearing any of these sorts of demand-side solutions from the White House. In seeking Republican votes, Obama is putting forth Republican supply-side ideas – lowering the employer costs of hiring, cutting corporate taxes – that have nothing to do with this demand-side crisis. ...
Supply-side economics doesn’t work ... when our continuing economic crisis is so palpably being driven by inadequate demand...

At this point I'll take what I can get, and practically it's probably true that Republicans won't support anything that is inconsistent with their supply-side beliefs. However, that doesn't mean the president has to accept these constraints when he proposes policies. He doesn't have to limit himself to business tax cuts in one form or the other. He should put forth the policies he thinks are best for stimulating employment, including direct job creation initiatives. Then, he should use his bully pulpit to make it absolutely clear that Republican allegiance to the business sector couched as supply-side policies is standing in the way of doing what's best for the unemployed. He may very well end up with the policies described above in order to get something done, but it should be with great reluctance if he thinks another path would be better, and it should extract a political price from the other side.

Of course, Obama and his advisors mayd believe supply-side polices are optimal at this point, in which case I just want to throw up my hands and give up. And he may believe that negotiation over the policies would simply delay getting needed help to the unemployed without changing the policy in the end. On the last point, the fact that the administration waited until there was little time to negotiate when so many people were urging them to tackle the unemployment crisis months, if not years ago is their own fault (and the time crunch seems to be more about getting re-elected than helping struggling families anyway). Perhaps if the administration hadn't wasted so much time figuring out how to cut make the emplyment problem worse by cutting the deficit and had targeted unemployment instead, they would have had the time to negotiate properly.

As I said, I'll take what I can get at this point, and at least they're finally talking about the problem. It's just too bad the administration seems so willing to go along with policies that enable Republicans to achieve their ideological goals regarding taxes, the size of government, and the nature of government policy.

Update: See also Will a Payroll Tax Cut Stimulate the Economy?

Fed Watch: Output Has Not Fully Recovered

Tim Duy:

Output Has Not Fully Recovered, by Tim Duy: Kathleen Madigan at the Wall Street Journal claims:

In a speech given Tuesday, the chairman discussed the aggregate hours of production workers, which had fallen by nearly 10% from the beginning of the recent recession through October 2009. “Although hours of work have increased during the expansion,” he said, “this measure still remains about 6 1/2% below its pre-recession level.” In other words, labor markets are nowhere near where they were before the financial collapse and recession.

Output, on the other hand, is fully recovered. Real gross domestic product — which at its worst had shrunk 4.1% — surpassed its 2007 peak at the end of 2010 and expanded further in the first quarter of 2011.

True, output has surpassed its previous peak, but this in no way should be the measure by which we determine if output has fully recovered. Full output recovery would require that activity return to potential output, and by that measure, output recovery remains little more than a fantasy:


See also Mark Thoma's link to Justin Wolfers. Madigan continues:

The gap between output and jobs is why the economy is in an expansion cycle by economists’ standards — but it doesn’t feel even close to recovery mode for the average consumer.

No, because if the economy were in fact fully recovered, unemployment rates would be at normal levels. Again, just because output regains its previous peak does not mean the economy has recovered. More:

Output has surged ahead of labor because of strong productivity. Robust productivity gains are good for profits and inflation outlook, but bad for workers and consumer spending.

This shouldn’t be true – higher productivity is absolutely not supposed to be bad for workers. It is supposed to allow for higher real wages, higher standards of living. But when aggregate demand falls short of that necessary to compensate for productivity growth, the economy remains mired in persistent disinflationary state, with high levels of unemployment. To solve this, something needs to boost aggregate demand. Not the Federal Reserve, claims Madigan:

Although the Fed is tasked with promoting full employment, there isn’t much the central bank can do at this point to push private businesses to hire.

It’s not that policymakers have no appetite for a third round of quantitative easing. It’s that another round probably isn’t going to help.

The Fed is not powerless, even at this juncture. Arguably, they have not even attempted to ease in line with that required to boost activity further. As Jim Hamilton points out, the numbers involved in QE2 should have been expected to have only a modest impact. The Fed could also raise inflation expectations. And I have always felt the Fed’s repeated insistence that their actions were only temporary helps ensure their policy will be less effectual than would otherwise be the case. Why should banks expand lending when they know the Fed is only going to mop up excess reserves and jerk up the short end of the yield curve the first chance they get?

That the Fed chooses to not take a more aggressive stance should not be confused with the inability to offer additional economic support. And by no means should we trick ourselves into believing that output is fully recovered.

The graph in the article essentially draws a horizontal line through the 2007 peak in the graph shown above:


Notice that if you allow for a trend, output has not fully recovered --Tim's point -- and the employment problem is even worse than this graph makes it seem.

Wednesday, June 08, 2011

Is the Summer Surge All about Labor Supply?

Arin Dube rebuts Casey Mulligan's contention that "supply is the primary reason that jobs are created during the summer" (Mulligan is *trying* to counter this post from Tim Duy):

Sweating over Seasonality: Is the Summer Surge all about Labor Supply? In a series of blog posts (most recently here), Casey Mulligan has argued rise in summer employment when school is out shows that labor supply always matters, even in a recession. Mulligan states that “[t]he economy creates jobs in the summer — even during the last several years, when our economy supposedly suffered from a lack of demand — because millions of people become willing and available to work,” and that even today “greater labor supply remains one route to higher employment.” However, as I show in this note, drawing this policy implication from seasonality, however, is a highly problematic exercise.

Most generally, production decisions over the whole year are planned knowing the greater availability of teens and young adults during the summer months. For example, some businesses and households plan to wait for the summer months to hire painters or landscapers. Second, demand for some types of work like camp counselors and babysitters rise during the summer months precisely because that’s when school is out.  For both these reasons, employment changes in the summer can easily reflect higher demand during these months as well as an increase in labor supply.  Some of this increased demand comes from inter-temporal substitution across months (the first example), while other part of this reflects a higher net demand (the second example).

Mulligan’s main evidence that summer is all about labor supply and not demand is that for teens and young adults, unemployment rises and average wages fall. However, this is not a great test – as there is likely to be systematic differences in the composition of both workers and jobs between the school year and the summer – precisely because a lot more youth work during the summer. Then there are data related challenges, like how to deal with unpaid (or barely paid) internships. For these reasons, looking at changes in average wages between summer and non-summer months for youth is problematic.

However, there is one simple way of assessing the claim that the summer surge in employment is only about labor supply – and that is to look at job vacancies.  If summer is mainly a time of a big labor supply shock, we should not see any systematic seasonal patterns in job openings. Moreover, we should expect to see a lot of labor market slack – which economists typically measure using the “unemployment-to-vacancy” (U-to-V) ratio. The higher is the ratio, the more unemployed workers there are for a given job opening: if Mulligan is correct we should see the rise in employment (and unemployment rate) be matched by a parallel sharp rise in the U-to-V ratio, while vacancies should be stable.

To test this, I obtained the seasonally unadjusted monthly “job openings” rate from BLS between 2001 and 2010 (this comes from the JOLTS data). For the same years, I also obtained the seasonally-unadjusted monthly unemployment and employment-to-population (EPOP) rates between 2001 and 2010 for ages 16 or greater. To construct the average seasonality measure for a variable x, I first calculate the deviation of x from its annual mean, i.e., x(month,year) – x(year).  Next I average the mean deviated values across the years. This is a standard measure – in technical terms, it measures the “month fixed effects” after taking out “year fixed effects.”  It represents the “excess value of x” in a given month from its annual average.

Below I plot the monthly excesses of EPOP, unemployment, vacancy and U-to-V rates.

Dube1 Dube2
Dube3 Dube4

The top two graphs confirm that the summer months of June and July see an increase in employment (roughly 0.5 percentage point), accompanied by an increase in unemployment rate (roughly 0.2 percentage point). These two pieces of evidence would be consistent with a “labor supply only” story. However it turns out that job openings also increase over those months (by roughly 0.1 percentage point). This is particularly true for July, when the unemployment and vacancy rates move up by roughly equal amounts.  As a result, the overall unemployment-to-vacancy rates show much less seasonality during the summer than the unemployment rate. Averaged together, June and July do not look like a period with particularly high amount of slack in the labor market as measured by the U-to-V ratio – which would have been the case if the only thing changing in the summer were labor supply. While there is a big “summer excess” in employment and also some in unemployment, it is much less true for the unemployment-to-vacancy rate – because job vacancies also tend to rise. That should be a big flashing warning sign to anyone wanting to attribute the summer surge to only labor supply factors.

So what does this tell us about the efficacy of Keynesian demand management? Nothing really, and that’s the point. For that, you’d have to look elsewhere – in whatever season.

Arindrajit Dube
Assistant Professor
Dept of Economics
University of Massachusetts-Amherst

Romer versus Geithner

Geithner is the only economic advisor I can think of that's been there from the start, and with the departure of others his influence has likely increased. If you are unemployed, that's not good news:

Geithner: Stimulus is ‘sugar’ for the economy, by Ezra Klein: From Zach Goldfarb’s excellent profile of Treasury Secretary Timothy Geithner’s success inside the Obama administration:

The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as [then chairwoman of the Council of Economic Advisers Christina] Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.

So Geithner argued against job creation and for deficit reduction? Quoting from a tweet from Andy Harless on a different topic (Bernanke's speech), "depressing (pun intended)."

Tuesday, June 07, 2011

Trading Tax Cuts and Wars for Working Class Misery

We are, as they say, live:

Trading Tax Cuts for Working Class Misery

I explain that:

What we did, in essence, was trade tax cuts for the wealthy and spending on wars for increased working class misery – higher unemployment, insufficient social service support, and a slower recovery from the recession.

Sunday, June 05, 2011

Austan Goolsbee: It’s Now Up to the Private Sector

Scarecrow is unhappy. As you read this, remember that the administration has been seeing green shoots just around the corner for some time now, and using this to argue against taking action on the unemployment problem:

Scarecrow’s Nightmare: Austan Goolsbee Defends President Romney’s Economic Plan, by Scarecrow: If I’d been asleep for the last decade and woke up to ABC This Week’s interview of Presidential economic advisor Austan Goolsbee, I would assume that Mitt Romney won the 2008 election, that he was predictably following Republican dogma about how to recover from a severe financial collapse and recession...
Goolsbee correctly told us that a smart economist wouldn’t get overly excited about one month’s jobs and growth numbers but would instead look at the overall trend. Of course what he wouldn’t want to concede is that GDP grew at a meager annual rate of 1.8 percent over the first three months of 2011 and ... the overall trend for job growth was still not enough to make a serious dent in unemployment unless you believe taking 5-10 years to get back to full employment is okay. ...
When Amanpour asked him what the Administration could or should be doing to improve conditions, he ticked off items you’d expect to hear from a typical GOP Presidential adviser: we’ve got to get the debt under control; we have a White House effort to identify and get rid of governmental regulations that are preventing the private sector from growing the economy; we should pass “free trade” agreements backed by the Chamber of Commerce; and we should leverage limited public dollars to release billions in private funding for investments.
Goolsbee’s bottom line: “It’s now up to the private sector.” That’s exactly what you’d expect from President Romney’s economic adviser.
It took Paul Krugman and Chrystia Freeland, over the absurd denials by Martin Regalia of the Chamber of Commerce, to remind ABC’s audience that business confidence and concerns about taxes and regulations aren’t the problem... Demand is weak because the recession and the housing market crash depleted consumers’ wealth and they’re worried about losing their homes and jobs. ...

Policymakers have been telling us to have patience for some time now, but patience ran thin long ago. We need action, not excuses to do nothing based upon Republican talking points. We have millions of people out of work, we face the prospect of a five to ten year recovery for employment, yet the administration has no plans to even try to push Congress to do more. I understand that Congress is unlikely to go along, but at least people would realize whose side the administration is on. Because right now -- as the above makes clear -- it's hard to conclude that the unemployed are anywhere near the top of the list.

Saturday, June 04, 2011

The Post Goes Negative on the Economy

This is somewhat surprising. Dean Baker takes the Washington Post to task for being too pessimistic about the economy:

The Post Goes Negative on the Economy, by Dean Baker: The May jobs report was bad news, but it was not as bad as the Washington Post and many other news outlets made it seem. When we get monthly data it is always important to remember that we are pulling out a snapshot from a longer period of time. ...
For this reason it is important to take the 54,000 jobs created in May against the backdrop of 234,000 jobs added in April. Employers who hired many workers in April were likely to add few or none in May. ...
It is more likely that the April numbers overstated the underlying rate of job growth in the economy and the May numbers understate it, than there was some huge shift in the economy between the two months. Still, the average rate of job growth over the last three months was just 160,000.
It takes roughly 90,000 jobs a month to keep even with the rate of growth of the labor force. This means that if the economy stayed on this growth path, it would take almost a decade to get back to normal levels of unemployment. Furthermore, with house prices falling again and another round of state and local cutbacks kicking in next month, it is more likely that the job growth will be slowing than speeding up in the months ahead.

It's "not as bad as the Washington Post and many other news outlets made it seem"? The prospect of "almost a decade to get back to normal levels of unemployment" is very bad news. I don't usually disagree with Dean, but my reading of the article is that it is a fairly accurate picture of the problems now, and the potential pitfalls ahead. If the Post wants to help us try to goad legislators into action by admitting the economic recovery is faltering, great, welcome aboard (the article doesn't actually call for government action, but at least it doesn't dismiss the signs of weakness as transitory).

Here's a bit from the article:

Job creation withers in May as doubt reigns, by Brady Dennis, Washington Post: Behind the hard numbers in Friday’s dismal report on the job market are scared small-business owners, slashed state budgets, dried-up federal stimulus funds and a lingering uncertainty that has taken hold from corporate boardrooms to factory floors around the country. ...
It is the second time that growth has stumbled; a similar scenario played out last summer, reflecting the long, uneven process of clawing out of a recession spurred by a financial crisis.
Employers from coast to coast describe a situation in which tepid economic growth alone isn’t enough to prompt them to add to their payrolls. Sales have been rising, but slowly and tenuously. Doubts about the future have continued to chip away at confidence...
That standstill showed in the numbers released Friday, which revealed that the job market weakened across a wide range of industries in May. ... The largest job losses were in a public sector that is rapidly retrenching. Local governments have been cutting jobs in vast numbers — 28,000 in May — trying to eliminate their yawning budget gaps by dismissing public employees.
The public school district in Saginaw, Mich., for example, gave pink slips to 12 percent of its employees, including dozens of teachers, custodians and bus drivers. The reasons are familiar: Federal stimulus money is drying up; states are slashing their budgets, and cities and schools are following suit; and health care, fuel and other costs are rising. ...
In contrast with the previous three months, when the private sector was expanding its payrolls aggressively enough to maintain solid job growth despite the loss of government jobs, in May the private sector downshifted. Even as professional and business services and the health-care industry added thousands of jobs, gains in most other sectors slowed to a crawl or went backward. ...

Is that too negative?

Friday, June 03, 2011

Rogoff: The Euro's PIG-Headed Masters

Ken Rogoff syas it's hard to see how the Euro can survive much longer without "a far stronger fiscal union":

The Euro’s PIG-Headed Masters, by Kenneth Rogoff, Commentary, Project Syndicate: Europe is in constitutional crisis. No one seems to have the power to impose a sensible resolution of its peripheral countries’ debt crisis. Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions. Unfortunately, they are not just “kicking the can down the road,” but pushing a snowball down a mountain.
True, for the moment, the problem is still economically manageable.... But by stubbornly arguing that that these countries are facing a liquidity crisis, rather than a solvency problem, euro officials are putting entire system at risk. ...
Might Europe get lucky? Is there any chance that the snowball of debt, dysfunction, and doubt will fall apart harmlessly before it gathers more force?
Amidst so much uncertainty, anything is possible. ... Today’s strategy, however, is far more likely to lead to blowup and disorderly restructuring. ...
The endgame to any crisis is difficult to predict.... But it is hard to see how the single currency can survive much longer without a decisive move towards a far stronger fiscal union.

As I'm sure you've noticed, I've been pretty worried about the recovery of employment, in part because those who want to follow Europe's failed austerity policy may succeed and make things even worse. This group has certainly snubbed out any hope of more help for workers in need of jobs. But I don't think I've been putting enough weight on problems that might emerge in Europe and then spread, so the outlook may be even worse than I thought. I hope this term isn't too technical or wonkish, but yikes!

Why Policymakers Have Forgotten about the Unemployed

Why aren't we doing more to help the unemployed? Robert Reich mentions the elephant in the room:

The Silent Jobless?, By Robert B. Reich: ...The American economy is trapped in a vicious cycle. Those who are unemployed can't afford to buy much more than bare necessities, while people who are working are getting skimpier paychecks. ...
You'd think the American public would be demanding government action: a new WPA for the long-term unemployed, a second stimulus to make up for the shortfall in purchasing power, stronger safety nets. But we're not hearing much clamor for any of this. One reason is that those who remain unemployed have little or no political clout.
Who are they?
Women who lost their jobs are having a harder time getting back to work than men. Men took a bigger hit during the recession..., but manufacturing and transportation have picked up, so men are starting to be rehired. But women who fill the ranks of teachers, public health professionals and social workers are in bad shape. These jobs continue to be slashed by state and local governments. ... Women also tend to be real estate agents, appraisers and home decorators. Because the housing market is still in the dumps..., these jobs are also in short supply and are unlikely to come back anytime soon.
Unmarried mothers are having a particularly difficult time ... and ... blacks continue to be hard hit. ... The ranks of the unemployed also include many young people who have never been in the job market and are unable to land a first job. ... Even recent college graduates are having a much harder time than usual finding a job. ... Another group in trouble are those who have been out of work for six months or longer. Employers seem to assume they aren't as qualified or reliable as those who have been working more recently. ...
What do those who are jobless have in common? They lack the political connections and organizations that would otherwise demand policies to spur job growth. There's no National Assn. of Unemployed People with a platoon of Washington lobbyists...
As a result, too many are likely to remain unemployed for months if not years. That's bad news, not only for them but for America.

The people hurt most by our failure to address the jobs crises are those with the least amount of political power. It's the people with jobs, the "Very Serious People" who are doing fairly well, that are most concerned about the deficit.

The Disappointing Employment Report

I have a reaction to today's job report at MoneyWatch:

The Disappointing Employment Report

See also: Caluclated Risk, Dean Baker, Angry Bear, Free Exchange, Jared Bernstein, Robert Reich, Kash Mansori, Peter Coy, Andrew Leonard, NY Times, WSJ, FT.

Paul Krugman: The Mistake of 2010

Will we continue to repeat the mistakes of the past?

The Mistake of 2010, by Paul Krugman, Commentary, NY Times: Earlier this week, the Federal Reserve Bank of New York published a blog post about the “mistake of 1937,” the premature fiscal and monetary pullback that ... prolonged the Great Depression. As Gauti Eggertsson ... points out, economic conditions today — with output growing, some prices rising, but unemployment still very high — bear a strong resemblance to those in 1936-37. So are modern policy makers going to make the same mistake?
Mr. Eggertsson says no, that economists now know better. But I disagree. In fact, in important ways we have already repeated the mistake of 1937. Call it the mistake of 2010: a “pivot” away from jobs to other concerns, whose wrongheadedness has been highlighted by recent economic data. ...
Back when the original 2009 Obama stimulus was enacted, some of us warned that it was both too small and too short-lived. ... By the beginning of 2010, it was already obvious that these concerns had been justified. Yet somehow ... it became conventional wisdom that the deficit, not unemployment , was Public Enemy No. 1...
So, here we are, in the middle of 2011. How are things going?
Well, the bond vigilantes continue to exist only in the deficit hawks’ imagination. ... And the news has, indeed, been bad. As the stimulus has faded out, so have hopes of strong economic recovery. ... So, as I said, we have already repeated a version of the mistake of 1937, withdrawing fiscal support much too early and perpetuating high unemployment.
Yet worse things may soon happen.
On the fiscal side, Republicans are demanding immediate spending cuts as the price of raising the debt limit and avoiding a U.S. default. If this blackmail succeeds, it will put a further drag on an already weak economy.
Meanwhile, a loud chorus is demanding that the Fed ... raise interest rates to head off an alleged inflationary threat. As the New York Fed article points out,... underlying inflation remains low. ...
So the mistake of 2010 may yet be followed by an even bigger mistake. Even if that doesn’t happen, however, the fact is that the policy response to the crisis was and remains vastly inadequate.
Those who refuse to learn from history are condemned to repeat it; we did, and we are. What we’re experiencing may not be a full replay of the Great Depression, but that’s little consolation for the millions of American families suffering from a slump that just goes on and on.

Thursday, June 02, 2011

Weekly Initial Unemployment Claims Still Elevated

The latest report on new claims for unemployment insurance is discouraging. Though claims are down slightly from last week, they are still above the threshold where jobs are, on net, being created rather than lost. As Calculated Risk notes:

This is the eight straight week with initial claims above 400,000, and the 4-week average is at about the same the level as in January when there were fewer payroll jobs being added.

Jobs, jobs, jobs should be our first concern, but it isn't:

Back in early 2009 I thought that there was general agreement that it would be inappropriate to switch from concern about employment to concern about long-run fiscal deficits until the recovery was well-established or interest rates spiked.

How many times do I have to say that austerity in a depression makes the deficit worse, not better?

I would have also bet against policymakers turning their backs on the unemployed when the unemployment rate and other measures of labor market performance remain so dreary, and I would have lost. Even when policymakers were paying attention, they didn't do nearly enough to try to promote job creation.

How to Get Washington’s Attention

It's been awhile since we've checked in with Robert Reich:

How to Get Washington’s Attention, by Robert Reich: The current disconnect between Washington’s obsession with long-term budget deficits, on the one hand, and the frailty of the nation’s economy right now, is scary.
The question is whether today’s stock market wipe-out, coupled with the plunge in housing prices, discouraging news about economic growth, and what’s likely to be a paltry jobs report Friday, will be enough to force Washington to give up – or at least postpone – its games over the budget and debt ceiling, and take immediate action.
Maybe – especially now that Wall Street and big business have to face reality. The stock market is beginning to feel the effect of an American middle class at the end of its rope.
Even if Wall Street and big business don’t care about plummeting housing values, they do care about plunging stock prices. ... [T]hose who take a slightly longer view clearly worry the economy is running out of steam – and they’re right.
Never underestimate the power of Wall Street and big business to set the terms of the economic debate in Washington. Wall Street and big business pay the tab of politicians on both sides of the aisle.
If the leaders of Wall Street and big business begin to see that the troubles of the vast American middle class are pushing the American (and much of the world) economy back toward a deep recession, they’ll let Washington know.
Even if the middle class can’t get the attention our representatives in Washington, those who fund their campaigns can.

Unfortunately, I don't think Wall Street and big business will come to the conclusion that the problem with the economy is that workers need to be paid more. The solutions they'll promote will most likely be tax cuts for business and trickle down policies rather than policies targeted directly at middle class households.

Monday, May 30, 2011

Paul Krugman: Against Learned Helplessness

I first started worrying about the possibility of a slow recovery of unemployment long ago, e.g. I criticized policymakers in 2008 "for not anticipating the slow response of employment when putting the stimulus package into place." Ever since, I've tried to keep this issue alive here and in columns, reminding everyone at every opportunity that we need to do more about the unemployment problem, calling or jobs programs, more from the Fed, etc., etc. It's been frustrating. A year ago I gave up on policymakers, but promised "I'll still complain -- there's no reason to let policymakers off the hook." I've tried to do that, to the point where I've sometimes wondered if I'm overdoing it by making the same point again and again. I'm still pessimistic about anything being done to help the millions of unemployed -- I talked earlier this week about how "there seems to be no shortage of reasons to dismiss weakness in labor markets" -- but it's worth it to continue to try. So I'm  glad to see others making the case that we need to do far more than we are doing to help the unemployed:

Against Learned Helplessness, by Paul Krugman, Commentary, NY Times: Unemployment is a terrible scourge across much of the Western world. Almost 14 million Americans are jobless, and millions more are stuck with part-time work or jobs that fail to use their skills. ... Nor is the situation showing rapid improvement. This is a continuing tragedy, and in a rational world bringing an end to this tragedy would be our top economic priority.
Yet ... on both sides of the Atlantic a consensus has emerged among movers and shakers that nothing can or should be done about jobs. Instead..., one sees a proliferation of excuses for inaction, garbed in the language of wisdom and responsibility. ...
There’s nothing wrong with our workers — remember, just four years ago the unemployment rate was below 5 percent. The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years... Now that the bubble has burst, that debt is acting as a persistent drag on the economy, preventing any real recovery in employment. And once you realize that the overhang of private debt is the problem, you realize that there are a number of things that could be done about it.
For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt. We could have a serious program of mortgage modification, reducing the debts of troubled homeowners. We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt. ...
In pointing out that we could be doing much more about unemployment, I recognize, of course, the political obstacles to actually pursuing any of the policies that might work. In the United States, in particular, any effort to tackle unemployment will run into a stone wall of Republican opposition. Yet that’s not a reason to stop talking about the issue. In fact, looking back at my own writings over the past year or so, it’s clear that I too ... said far too little about what we really should be doing to deal with our most important problem.
As I see it, policy makers are sinking into a condition of learned helplessness on the jobs issue: the more they fail to do anything about the problem, the more they convince themselves that there’s nothing they could do. And those of us who know better should be doing all we can to break that vicious circle.

Sunday, May 29, 2011

Will Labor Costs Return to Trend?

Tim Duy:

Will Labor Costs Return to Trend?, by Tim Duy: Paul Krugman notices a Bloomberg story on accelerating wage growth:

First, Bloomberg reports on signs that wages may be accelerating. It’s worth bearing in mind that we’re talking about modest stuff — if the employment cost index accelerates to 2 percent, that’s still just productivity growth, and hardly a sign of runaway inflation. Still, this isn’t what I expected to see, and I will be watching developments.

Yes, 2 percent is hardly anything to be concerned about. As Krugman notes, this is just productivity growth. It is the next issue I struggle with – should we care if, at least in the short run, wages accelerate at a rate faster than productivity growth?

Note the path of unit labor costs since 1983:


Further note how far below trend we are:


Constrained unit labor costs probably have no small role in these kinds of stories:

“The bright side is that there’s a clear dichotomy between the health of corporate America and the economy,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $53 billion. “We’ve softened somewhat. Still, profits remain good and there’s M&A activity. That tells me that we’re not going to see a huge move in stocks in either direction.”

To return to trend, unit labor costs would need to accelerate at a rate greater than trends. That this might come at the expense of corporate profits does not upset me. It will, however, upset the Fed, who will tighten policy in response, as they will assume – not without reason – that profits will not suffer. Firms will simply pass on the wage gains in the form of higher prices. Which leaves me wondering again how income will be transferred back to employees? Under what circumstances might we expect unit labor costs to revert to trend? Especially if the Fed remains in a trigger-happy state of mind?

Saturday, May 28, 2011

Who Has Been "Eclipsed"?

Ronald Brownstein:

Eclipsed, by Ronald Brownstein, National Journal: From Revolutionary days through 2004, a majority of Americans fit two criteria. They were white. And they concluded their education before obtaining a four-year college degree. ... But as the country grew more diverse and better educated, the white working-class share of the adult population slipped to just under 50 percent in ... 2005... That number has since fallen below 48 percent.
The demographic eclipse of the white working class is likely an irreversible trend as the United States reconfigures itself yet again as a “world nation” reinvigorated by rising education levels and kaleidoscopic diversity. ...
Still, amid all of this change, whites without a four-year college degree remain the largest demographic bloc in the workforce. ... They are also, polls consistently tell us, the most pessimistic and alienated group in American society. ...
This worry is hardly irrational. As Massachusetts Institute of Technology economists Frank Levy and Tom Kochan report in a new paper, the average high-school-educated, middle-aged man earns almost 10 percent less than his counterpart did in 1980. Minorities haven’t been exempt from that trend: In fact, high-school-educated minority men have experienced even slower wage growth than their white counterparts over the past two decades, calculates Larry Mishel, president of the liberal Economic Policy Institute.
But for minorities, that squeeze has been partially offset by the sense that possibilities closed to their parents are becoming available to them as discrimination wanes. “The distinction is, these blue-collar whites see opportunities for people like them shrinking, whereas the African-Americans [and Hispanics] feel there are a set of long-term opportunities that are opening to them that were previously closed on the basis of race or ethnicity,” said Mark Mellman, a Democratic pollster...
By contrast, although it is difficult to precisely quantify, the sense of being eclipsed demographically is almost certainly compounding the white working class’s fear of losing ground economically. That huge bloc of Americans increasingly feels itself left behind—and lacks faith that either government or business cares much about its plight. Under these pressures, non-college whites are now experiencing rates of out-of-wedlock birth and single parenthood approaching the levels that triggered worries about the black family a generation ago. Alarm bells should be ringing now about the social and economic trends in the battered white working class and the piercing cry of distress rising from this latest survey.

Perhaps it's not what's intended, but this reads like: We don't have to pay as much attention to minorities as we do to disaffected whites because minority groups are benefiting from not being discriminated against as much as in the past (and making less noise than white groups) -- as though less of a bad thing somehow works out to be a net benefit. And that's seems to be what's happening. Loud groups of disaffected whites get all the press and attention from politicians, while minority households -- who have faced even higher costs due to the recession -- have received little notice. I'll leave trends in the sociology of the family to others, I don't know these data well enough to say whether the assertions in the article are valid, and if they are valid how worrisome they actually are. But one thing would surely help in any case -- jobs, jobs, jobs --- for middle class whites, for minorities, and for anyone else who needs one, and that's where policymakers ought to be focusing their attention.

Thursday, May 26, 2011

Weekly Initial Unemployment Claims Increase to 424,000

New claims for unemployment insurance went back up last week, and historically claims at this level indicate job loss. Every time claims go up we hear about holidays falling at unusual times, seasonal adjustment problems, weather related problems -- there seems to be no shortage of reasons to dismiss weakness in labor markets. So I'll be interested to see what excuse policymakers come up with this time to ignore the unemployment crisis.

Wednesday, May 25, 2011

The Growth Test for Fiscal Policy

I have a new column:

The Growth Test for Fiscal Policy

The emphasis on growth above all else makes it harder for us to address the unemployment crisis.

Friday, May 20, 2011

"There is Something Very Wrong with This Picture"

I've been meaning to highlight this paper by Levy and Kochan, and still hope to do a bit more with it, but for now here's Dani Rodrik:

There is something very wrong with this picture, by Dani Rodrik: This graph is from a new paper by Frank Levy and Tom Kochan, showing trends in labor productivity and compensation since 1980:

Labor productivity increased by 78 percent between 1980 and 2009, but the median compensation (including fringe benefits) of 35-44 year-old males with high school (and no college) education declined by 10 percent in real terms.
Women have done in general better, but two-thirds of women still have seen their pay lag behind productivity.
Levy and Kochan call for a Social Compact to reverse these trends, and outline some of the steps necessary to get there. The paper is very well worth reading.

Policymakers need to focus on job creation much more than they are, but as this graph shows creating more jobs is only part of the solution to the problems that middle and lower class households have been experiencing. We also need to ensure that income is equitably shared, and the paper outlines the steps needed to move in this direction:

The broken link between productivity and wage growth reflects changes in markets, policies, and their enforcement, institutions, and organizational norms and practices that have been evolving for a long time (circa 1980). Given this history, it is clear that the solutions will also need to be multiple and systemic and sustained for a long time. They also will need to match the features of the contemporary economy. The prior Social Compact was well-suited to a production-based economy in which wage increases in manufacturing set the norm for other parts of the economy.

Today, manufacturing can no longer play this catalytic role. Instead, norms and institutions need to support an innovation-knowledge based economy. We outline below a potential combination of actions suited to this task. If the list seems formidable, recall that we are now facing a situation where the economy has stopped working for something between one-half and two-thirds of all American workers.

Many of us have been calling for a New New Deal. I've done so many times over the last several years and I'm far from alone. Unfortunately, there's very little evidence that this is anywhere near the top of the political agenda. So long as those with wealth and power get theirs (and keep filling campaign coffers), it's hard to see that changing.

Paul Krugman: Making Things in America

Ignoring the advice of "right-wingers — ideologues" has been an important component in the turnaround of manufacturing:

Making Things in America, by Paul Krugman, Commentary, NY Times: Some years ago, one of my neighbors, an émigré Russian engineer, offered an observation about his adopted country. “America seems very rich,” he said, “but I never see anyone actually making anything.”
That was a bit unfair, but not completely — and as time went by it became increasingly accurate. ... Manufacturing, once America’s greatest strength, seemed to be in terminal decline.
But that may be changing. Manufacturing is one of the bright spots of a generally disappointing recovery, and ... a sustained comeback may be under way. And there’s something else you should know: If right-wing critics of efforts to rescue the economy had gotten their way, this comeback wouldn’t be happening. ...
I don’t want to suggest that everything is wonderful about U.S. manufacturing. ... Still, better to have those jobs than none at all. Which brings me to those right-wing critics.
First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.
Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker. ...
And then there’s the matter of the auto industry, which probably would have imploded if President Obama hadn’t stepped in to rescue General Motors and Chrysler. ... And this ... would have undermined the rest of America’s auto industry, as essential suppliers went under, too. Hundreds of thousands of jobs were at stake.
Yet Mr. Obama was fiercely denounced for taking action. One Republican congressman declared the auto rescue part of the administration’s “war on capitalism.” Another insisted that when government gets involved in a company, “the disaster that follows is predictable.” Not so much, it turns out.
So while we still have a deeply troubled economy, one piece of good news is that Americans are, once again, starting to actually make things. And we’re doing that thanks, in large part, to the fact that the Fed and the Obama administration ignored very bad advice from right-wingers — ideologues who still, in the face of all the evidence, claim to know something about creating prosperity.

Thursday, May 19, 2011

Labor Market Policy in the Great Recession

John Schmitt of the CEPR has a new paper on what the US can learn about stabilizing employment from the recent experience of Denmark and Germany. Here's the executive summary:

Labor Market Policy in the Great Recession: This paper reviews labor-market performance of Denmark and Germany during the Great Recession. From the mid-1990s through the onset of the Great Recession, Denmark had what were arguably the most successful labor-market outcomes in the OECD, but the country has suffered in recent years. Germany, on the other hand, struggled with high unemployment, slow job growth, and rising wage inequality through much of the period between unification and the onset of the Great Recession, but has outperformed the rest of the OECD since. Labor-market institutions may explain the different experiences of the two economies. Danish institutions – built around numerically flexible employment levels and strong income security for workers – appear to perform well when the economy is at or near full employment. In good times, the country’s expensive active labor market policies work to connect unemployed workers to available jobs. In a severe downturn, however, where the overwhelming cause of unemployment is a lack of aggregate demand, institutions that encourage adjustment through employment are a liability and policies that seek to “activate” workers are not particularly effective. German labor-market institutions, which emphasize job security by keeping workers connected to their current employers, may have drawbacks when the economy is operating near full employment because they may discourage the efficient reallocation of workers from firms and industries where demand is falling to firms and industries where demand is on the rise. These same institutions, however, appear to have been well-suited for coping with the Great Recession because they encouraged firms to cut hours rather than workers, sharing the burden of the downturn more widely and helping firms keep their workforce in place and ready for the subsequent upturn.

He adds:

The positive lesson for the US is that we have a lot of scope to give employers incentives to cut hours rather than jobs, including improving and expanding "work-sharing" (part-time unemployment benefit) programs as well as implementing new direct tax credits to firms that expand paid time off (paid sick days, paid family leave, paid vacations, and other measures).

The negative lesson is that focusing on supply-side issues such as training, education, and improved job-matching for the unemployed --as much sense as they make in the long run-- is not likely to get us very far when the economy is at 9 percent unemployment. Denmark does far more than we could ever hope to accomplish along these lines and the unemployment there almost doubled between 2007 and 2010.

Saturday, May 14, 2011

"Our Problem is Unemployment"

Just another reminder that our focus ought to be "jobs, jobs, and jobs":

Inflation and Economic Hooliganism, by Paul Krugman, Commentary, NY Times: In a way, I miss the months that followed Lehman’s failure. O.K., not really — but if it was a time of terror, it was also a time of clarity. The whole world was going to hell in a handbasket, and policy makers everywhere shared a common goal: stopping the plunge.
Today, by contrast, the picture is full of seeming contradictions. Are we in a runaway boom, or is growth weak? Is inflation low, or is it spiraling out of control? The answer to all of these questions is yes. China, India and Brazil are growing much too fast for comfort; America, Europe and Japan remain depressed. Inflation is running high in the emerging world, while the prices of oil and food, which are determined in global markets and are largely driven by demand from those emerging nations, have soared; but underlying inflation in the wealthy nations remains low.
In short, at this point we’re living in a world that is characterized not so much by the sum of all fears as by some of all fears. ...
So it’s a mixed-up, crazy world... What are the dangers?
Well, as I see it, the biggest danger for the United States isn’t that there’s another financial crisis lurking out there, ready to pounce. It is instead that we’ll get confused by all the crisscrossing signals in the global economy and end up focusing on the problems we don’t have while ignoring the problems we do. Not to put too fine a point on it: I’m worried that Ben Bernanke may end up being bullied into raising interest rates when he should do no such thing. There will eventually come a day when the Federal Reserve Board should tighten — but that day is years away.
For while some countries have a problem with homegrown inflation, we don’t. Our problem is unemployment. And to deal with our job shortage, we need low interest rates and, yes, continuing budget deficits to keep our economy growing. ...
It’s a confusing world out there, and it’s a world that’s creating dilemmas for people like, say, Brazil’s finance minister. But here in America, we face no dilemma at all: our economic policy should be concerned with jobs, jobs and jobs.

Thursday, May 12, 2011

"Blinder Calls for More Fiscal Stimulus to Boost Jobs"

Nice to see that Alan Blinder agrees with the call for more fiscal stimulus to boost jobs (though I'd go beyond the "somewhat more" fiscal help he calls for to address the unemployment crisis), that there's no evidence of inflation, that the Fed should keep rates low and take other steps to stimulate job growth, and that we should address our long-run budget deficit, but not until the economy is is better shape:

Blinder Calls for More Fiscal Stimulus to Boost Jobs, Bloomberg: Former Federal Reserve Vice Chairman Alan Blinder, now a Princeton University economist, talks about the central bank's monetary policy and the need for "somewhat more" fiscal stimulus from Congress in order to boost employment even as it legislates "fiscal consolidation in the future." Blinder speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." David Blanchflower, a professor of economics at Dartmouth College and a former policy maker at the Bank of England, also speaks.

New Claims for Unemployment Insurance Remain Elevated

Unemployment insurance claims were over 400,000 for the fifth week in a row. There were 434,000 claims last week, and the elevated claims ought to be raising cautionary flags about the labor market recovery. We keep hearing that recovery is just around the corner, and all that is needed is more patience, but recent numbers don't support this optimism.

Whenever the data is at odds with the rosy predictions of good days ahead, predictions that take policymakers off the hook, we hear about problems with seasonal adjustment, holidays that distort the numbers, bad weather, etc., etc. -- there's always a reason to ignore the bad numbers and emphasize the good and this week is no exception. But after five months of elevated claims in a row, middling job creation numbers, and an unemployment rate that is far, far too high, it's time to quit looking for rationalizations, face the weakness in labor markets directly, and then take the necessary action.

Unfortunately, there's little chance that politicians will actually try to do something to help. In fact, if they could they'd make the employment problem worse by cutting the budget before the economy is on solid footing. So the best we can hope for at this point is that gridlock will stop politicians from doing things that make it even harder for the unemployed to find a job. [Also posted at MoneyWatch.]

Wednesday, May 11, 2011

Helping the Unemployed Also Helps the Economy

I know that policymakers have forgotten about the unemployed and moved on to other things, but I just can't help pointing out that's a big mistake:

The Job Delusion: Growth is Just Around the Corner, by Mark Thoma

The main point of the column is that the best way to cure our problems is economic growth, and putting people back to work is an essential part of growth maximization. As the column says, there's plenty we can do if we are willing to try.

Tuesday, May 10, 2011

Who Cares about the Long-Term Unemployed?

Republicans show how much they care about the long-term unemployed. Apparently, it's not all that much:

“Forward Funding” for Unemployment Insurance? Hardly, CBPP: House Ways and Means Committee Chairman Dave Camp and Senate Finance Committee Ranking Republican Orrin Hatch have introduced a bill that, they say, would improve the unemployment insurance (UI) system by “forward funding” federal UI payments to states. That sounds good and, in fact, “forward funding” is a worthy goal... But, their bill actually would let states take federal funds that are supposed to help the long-term unemployed and use them for other purposes.  That not only would hurt some of the most vulnerable Americans but also would slow the economic recovery. ...
The Camp-Hatch proposal would ... break a deal the President and Congressional leaders negotiated late last year in which lawmakers extended jobless benefits for one year for the long-term unemployed—those out of work for more than 26 weeks.  That assistance is especially important for the long-term unemployed because states’ unemployment benefits typically end after 26 weeks... — more than 4 in 10 unemployed workers are not able to find jobs within that time.
Under their bill, Camp and Hatch would let states use this money, which was supposed to pay benefits to the long-term unemployed, in various other ways, including to pay down loans they took from the federal government...
Because their bill would give money to states immediately instead of over the rest of the year, the two lawmakers say they are “forward funding” the money.  Actually, they’re just raiding benefits for the long-term unemployed.

Sunday, May 08, 2011

The Stagnant Employment-Population Ratio


When this ratio begins regaining lost ground consistently, I'll be more optimistic about the state of the labor market.

Saturday, May 07, 2011

"We Dare Not Let This Happen" (But Don't Support Doing Anything About It)

Dean Baker is frustrated with a Washington Post editorial telling the public there's nothing we can do about the unemployment problem, a problem it cannot even characterize correctly (see Dean on this point). Me too.

The editorial starts by noting that:

unemployment remains well above what it should be; the longer this persists, the more we risk a “new normal” of structural unemployment, which is a fancy term for elevated human suffering and snowballing economic waste. We dare not let this happen. The question, though, is how to generate the new jobs.

We dare not let that happen! We need to do something! Unless, according to the editorial, fear of what might happen if we try to help the unemployed gets in the way.

First, fiscal policy is ruled out as a solution to this urgent problem. As Dean Baker notes, "The Post tells readers that we can't try to create jobs through fiscal stimulus" because bond vigilantes might drive interest rates up. However, the "interest rate on 10-year Treasury notes is now 3.14 percent, much lower than it was in the budget surplus days of the late 90s" even though we've heard these warnings for some time now.

Well, if the problem is so urgent, certainly the editorial will support money policy instead? Nope. Here, the worry is inflation. But, as Greg Mankiw notes this morning, he agrees with Paul Krugman that "the price of labor does not show any significant inflationary pressures right now," and hence there is little to worry about in terms of inflation (and other signs of inflation are absent as well).

So what should we do about the unemployment problem given that (according to the Post, not me) both monetary and fiscal policy are off the table? The editorial concludes that businesses aren't the answer because of "a lack of attractive business opportunities" (without quite understanding how monetary and fiscal policy could help here). The only thing that is supported is increasing exports -- it's describes this as a "promising strategy." The editorial notes that lowering the value of the dollar would help, but gives no indication of how policy might achieve this goal (especially given its position against using monetary policy to try to help with the unemployment problem).

So, given that we "dare not let this happen," where "this" is high and persistent unemployment, what should we do?

"The costs, human and economic, of high unemployment are heartbreaking. But it will take a measure of patience as well as a sense of urgency to prevent it from becoming a permanent feature of the U.S. economic landscape."

A sense of urgency to do what? With both fiscal and monetary policy off the table, what, exactly, is the government supposed to do? Apparently, the millions and millions of people who are unemployed, some of whom won't be reemployed until years from now if we do nothing to help, are supposed to be patient because people with power over policy are worried about inflation and higher interest rates. But there's no evidence of these problems in the data, and if the problem is truly urgent -- and I agree it is -- then we need to take action. Yes, there are risks. I don't think they are large, but both inflation and interest rates could go higher as a result of more active policy. However, our willingness to take those risks depends upon who will be hurt if these problems do emerge (hint, it's not the unemployed) versus how much we care -- how much urgency there is -- about the unemployment problem. I think the potential benefits of trying to do something exceed the costs by a safe margin. But unfortunately for those who are told to be patient for a few more years why the economy works this out, the people with the power to set policy do not agree.

Thursday, May 05, 2011

"Unemployment Insurance Claims Jump"

Back on the road again later today (visiting my parents), but before heading out, Dean Baker says "this is news." Unfortunately, the news is not good:

Unemployment Insurance Claims Jump, This Is News, by Dean Baker: Weekly unemployment claims jumped to 474,000 last week, an increase of 43,000 from the level reported the previous week. This is seriously bad news about the state of the labor market. It seems that the numbers were inflated by unusual factors, most importantly the addition of 25,000 spring break related layoffs in New York to the rolls due to a changing vacation pattern, however even after adjusting for such factors, claims would still be above 400,000 for the fourth consecutive week.

Calculated Risk adds "Even without the special reasons, weekly claims have been increasing in recent weeks." I know the answer, but can't help asking yet again why we aren't doing more to address the unemployment crisis. We worry about things that might happen, maybe, perhaps, while real struggles of real people go unaddressed.

"Is Offshoring Behind U.S. Employment's Current Problems?"

David Altig says it is unlikely that the slow recovery of unemployment is due to offshoring:

Is offshoring behind U.S. employment's current problems?, by David Altig, macroblog: In a week loaded with important economic news, no piece of data will garner more justifiable attention than Friday's April employment report. ...

In February and March payrolls expanded by an average of 205,000 jobs each month, a pace that is probably sufficient to make progress toward reducing the still-elevated unemployment rate. But at that pace it will take about three years before we see the same number of jobs that existed as of December 2007.

The significant lag between gross domestic product recovery and employment recovery has been particularly extreme in the wake of the most recent recession, but this pattern was a characteristic of the previous two recessions as well. You know the facts: In the post-WWII recessions up to 1989, the average time it took to regain recession-generated job losses was 10 months. The recovery time expanded to 23 months and 38 months in the recoveries following the 1990–91 and 2001 recessions. And we are on track to shoot past those records this time around.

Explanations abound, but one popular belief is that the answer hides somewhere within the somewhat ambiguous phenomenon labeled "globalization." A few weeks back, David Wessel of the Wall Street Journal provided some pretty compelling facts:

"U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization's effect on the U.S. economy.
"The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That's a big switch from the 1990s, when they added jobs everywhere: 4.4 million in the U.S. and 2.7 million abroad."

Two obvious questions: What jobs are we talking about, and what is the meaning of the differential in job growth? Is this a story of "offshoring"—the shifting, if you will, of jobs to foreign locales for production that still fundamentally satisfies U.S. demand? Or is it more a reflection of the different pace of growth in foreign markets relative to U.S. markets?

It's difficult to come to definitive conclusions on these questions, but we do have some information about the types of jobs that underlie the aggregate job-growth picture drawn in Wessel's statistics. Here's what we know based on data from the U.S. Bureau of Economic Analysis's International Economic Accounts from 1999 to 2008:

A couple of things jump out. First, among U.S. multinational employers, some industries added U.S. employees, and some shed them. On net, these corporations lost 1.903 million U.S. jobs from 1999–2008. During this same period, manufacturing multinationals in the United States lost 1.938 million jobs (see the table). Also, foreign employment in manufacturing represented less than 13 percent of U.S. employment losses and only 10 percent of the total foreign employment gains generated by those multinationals.

By industry, the largest U.S. job losses after the manufacturing industries were created by finance and insurance firms. But, as the table shows, foreign employment in these types of firms also fell. In fact, there were only two types of industries listed above—manufacturing and information—in which foreign employment by U.S. multinationals grew while U.S. employment fell.

Finally, the largest category of foreign job gains was "other industries," which breaks down as follows:

Sixty-nine percent of the foreign employment growth by U.S. multinationals from 1999 to 2008 was in the "other industries" category, and 87 percent of that growth was in three types of industries: retail trade; administration, support, and waste management; and accommodation of food services. Some fraction of these jobs, no doubt, reflect "offshoring" in the usual sense. But it is also true that these are types of industries that are more likely than many others to represent production for local (or domestic) demand as opposed to production for export to the United States.

We certainly don't present this information as a definitive answer to the question about the role of offshoring in the slow U.S. jobs recovery. But if you forced us to choose between global or domestic factors as the place to look for solutions as we struggle with persistent underperformance in U.S. labor markets, we'd choose the latter.

Voters Dislike GOP Plan to Change Medicare

Republicans are starting to distance themselves from the Ryan plan to replace Medicare with a voucher system. I can't imagine why:

Voters Dislike GOP Plan to Change Medicare, Medicaid, by Patrick O'Connor, Washington Wire: ...Changes to Medicare and Medicaid remain wildly unpopular ... according to the latest Quinnipiac University poll.
More than twice as many voters oppose efforts to change Medicare than those who favor limiting benefits under the popular health-care program for seniors. And a distinct majority opposes new limits on Medicaid, the federal-state health program for the poor.
What’s worse for the GOP, the numbers don’t change much when voters were told how much federal spending Medicare and Medicaid consume. ... “So much for the idea that if the public only understood the budget numbers they would be much more amenable to reductions,” said Peter Brown, assistant director of polling at the Quinnipiac University Polling Institute. “Except for defense spending.” ...
In addition, 69% of the voters polled favor repealing Bush-era tax breaks on households than earn more than $250,000. ...

Tuesday, May 03, 2011

Footloose Firms and Social Services

Nancy Folbre argues that globalization undercuts support for spending on education, health care, and social insurance:

Super Sad True Jobs Story, by Nancy Folbre. NY Times: ...Once upon a time, economic recovery led to expanded employment of the United States population. Not anymore. The percentage of adults employed has declined sharply during the last two recessions and failed to increase much in their aftermath. ...
Concerns about the sputtering and laggard performance of the Great American Jobs Machine arose well before the Great Recession. ...
But the motives for multinational disinvestment in the United States seem far less important than the consequences. Globalization weakens the link between economic recovery, increased profits and job creation in the United States. ... As Deepankar Basu and Duncan Foley argued in a recent Political Economy Research Institute paper, the correlation between output growth and employment growth in the United States has declined in recent years.
Foreign-owned businesses may locate in the United States, helping compensate for declining investment by American multinationals. But as all businesses become more footloose, they have less incentive to support public spending on education, health, human services or social safety nets, including unemployment insurance.
Unneeded as workers, the unemployed also become superfluous as consumers and burdensome as citizens. Cutting unemployment benefits (as was just accomplished in Michigan and is well under way in Florida) becomes just another means of cutting losses. ...

An implicit assumption is that the interests of firms prevail over the interests of workers -- if firms don't support something it's far less likely to survive. It seems to me that's correct, and it's driven by campaign finance and the other ways that money enters politics. There was a time when unions were an effective countervailing political force, but those days are gone and there isn't anything on the horizon that will take their place. Instead, firms will continue to use globalization and the need to remain competitive as an excuse to cut private sector health and retirement benefits. And they will use an argument that taxes are high in the US relative to other countries as a reason to argue that taxes -- and by extension government spending on social programs -- need to be cut as well (and to keep personal taxes at the upper end of the income distribution low as well, they argue that most big firms begin as small firms that get their start through entrepreneurship, and raising taxes on the wealthy will stifle entrepreneurial activity).

We've all heard about the high corporate tax rate in the US, but all things considered, how high are corporate taxes relative to the rest of the world?:

U.S. Business Has High Tax Rates but Pays Less, by David Kocieniewski, NY Times: ...Topping out at 35 percent, America’s official corporate income tax rate trails that of only Japan, at 39.5 percent, which has said it plans to lower its rate. It is nearly triple Ireland’s and 10 percentage points higher than in Denmark, Austria or China. To help companies here stay competitive, many executives say, Congress should lower it.
But by taking advantage of myriad breaks and loopholes that other countries generally do not offer, United States corporations pay only slightly more on average than their counterparts in other industrial countries. And some American corporations use aggressive strategies to pay less — often far less — than their competitors abroad and at home. A Government Accountability Office study released in 2008 found that 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied.
The paradox of the United States tax code — high rates with a bounty of subsidies, shelters and special breaks — has made American multinationals “world leaders in tax avoidance”...
In addition to being complex and uneven, the United States corporate tax code is inefficient and has become a diminishing source of revenue. Corporate taxes accounted for about 9 percent of all federal revenue in 2010. ... “Whether the test is fairness or efficiency, the U.S. system gets really low marks,” said Michelle Hanlon, an M.I.T. professor...
Because some companies are so effective at minimizing taxes, the average works out to far less than the official rate. United States companies pay about a quarter of their profits in federal income taxes, a few percentage points higher than the rate paid by companies in most other major industrial countries, according to a number of studies and tax experts. ...

Overall, we are not a high tax country.