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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.

    Posted by on Thursday, July 21, 2011 at 12:33 AM in Economics, Unemployment | Permalink  Comments (37)


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