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Thursday, June 06, 2013

'The Hidden Jobless Disaster'

Ed Lazear:

The Hidden Jobless Disaster, by Edward Lazear, Commentary, WSJ: The ... unemployment rate is not the best guide to the strength of the labor market, particularly during this recession and recovery. Instead, the Fed and the rest of us should be watching the employment rate. There are two reasons.
First, the better measure of a strong labor market is the proportion of the population that is working, not the proportion that isn't. ... By this measure, the labor market's health has barely changed over the past three years.
Second... Every time the unemployment rate changes, analysts and reporters try to determine whether unemployment changed because more people were actually working or because people simply dropped out of the labor market entirely, reducing the number actively seeking work. The employment rate—that is, the employment-to-population ratio—eliminates this issue by going straight to the bottom line...
While the unemployment rate has fallen over the past 3½ years, the employment-to-population ratio has stayed almost constant at about 58.5%, well below the prerecession peak. ...
The U.S. is not getting back many of the jobs that were lost during the recession. At the present slow pace of job growth, it will require more than a decade to get back to full employment defined by prerecession standards. ...

No problems so far, but  the next part goes off the rails:

Why have so many workers dropped out of the labor force and stopped actively seeking work? Partly this is due to sluggish economic growth. But research by the University of Chicago's Casey Mulligan has suggested that because government benefits are lost when income rises, some people forgo poor jobs in lieu of government benefits—unemployment insurance, food stamps and disability benefits among the most obvious. ...
These disincentives to seek work may also help explain the unusually high proportion of the unemployed who have been out of work for more than 26 weeks. ...

If the Mulligan story doesn't hold, then the conclusion about QE below doesn't hold either (notice the qualifier "may" in Lazear's statement "disincentives to seek work may also help explain the unusually high proportion of the unemployed")

The Fed may draw two inferences from the experience of the past few years. The first is that it may be a very long time before the labor market strengthens enough to declare that the slump is over. The lackluster job creation and hiring that is reflected in the low employment-to-population ratio has persisted for three years and shows no clear signs of improving.
The second is that the various programs of quantitative easing (and other fiscal and monetary policies) have not been particularly effective at stimulating job growth. Consequently, the Fed may want to reconsider its decision to maintain a loose-money policy until the unemployment rate dips to 6.5%.

We don't know what job growth would have been without fiscal policy and QE -- it could have been even worse (as many econometric examinations imply).

Why am I skeptical about the claim above? There's no evidence that I'm aware of that shows conclusively (or at all) that the supply of workers rather than the demand for workers is the problem. That is, with the ratio of the number of people seeking jobs to the number of available jobs so high, how is it that jobs are going unfilled due to social insurance programs? Do we see, for example, wages rising as firms have trouble finding workers (because they are all enjoying the meager benefits they get so much that there is a shortage)?

Maybe I'm missing something, but if no jobs are going unfilled, then how are social insurance programs holding back the recovery rather than making life a bit less miserable for those who cannot find work?

    Posted by on Thursday, June 6, 2013 at 02:08 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (104)


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