Mike Konczal explains it all
Check out this post.
I detect a cameo role for market monetarism. The third to the last video shows the reaction in the blogosphere to our ideas.
BTW, the Konczal post mentions Ed Lazear. I did the following post a week ago, but never got around to posting it:
Jim Glass sent me a new paper by Ed Lazear and James Spletzer. Here’s the abstract:
The recession of 2007-09 witnessed high rates of unemployment that have been slow to recede. This has led many to conclude that structural changes have occurred in the labor market and that the economy will not return to the low rates of unemployment that prevailed in the recent past. Is this true? The question is important because central banks may be able to reduce unemployment that is cyclic in nature, but not that which is structural. An analysis of labor market data suggests that there are no structural changes that can explain movements in unemployment rates over recent years. Neither industrial nor demographic shifts nor a mismatch of skills with job vacancies is behind the increased rates of unemployment. Although mismatch increased during the recession, it retreated at the same rate. The patterns observed are consistent with unemployment being caused by cyclic phenomena that are more pronounced during the current recession than in prior recessions.
And this is from the conclusion:
During the recent recession, unemployment rates rose to very high levels and then started to retreat. At the same time, some industries, like construction, manufacturing, and retailing, experienced disproportionately large increases in unemployment. But the patterns observed on the way up were mirrored on the way down. Those industries that contributed much to the increase in unemployment between 2007 and 2009 were the same that accounted for decreases in unemployment since 2009.
The same is true for mismatch, which measures the difference between vacancies and unemployed in an industry, occupation, or location. Industrial mismatch rose substantially during the recent recession, but retreated just as quickly even as unemployment rates have remained high. What happened on the way up happened symmetrically on the way down.
Additionally, the current recession does not appear fundamentally different from prior ones, except that it is worse. One exception is that the ratio of long-term unemployed to total unemployed is higher than it was in prior recessions including recessions with comparable unemployment rates. However, this is not due to any observed structural change, but rather to the depth of the current recession.
I actually think structural factors are slightly more important that they do. In particular, I believe the 40% jump in the minimum wage and the unusually long extension of unemployment benefits play a modest role on boosting unemployment. But the evidence strongly suggests that the main problem was (and is) cyclical.
HT: Bill Ellis
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11. September 2012 at 09:06
I’ve been sending around this Rortybomb post today. Great fodder for my compatriots who glaze over reading normal economics fare.
You should probably also take note that George Soros is now advocating a NGDP target.
11. September 2012 at 10:23
This 2011 Calomiris, et al., paper might give some hint of what Bernanke has been thinking;
http://research.stlouisfed.org/wp/2011/2011-002.pdf
————quote———–
There are important lessons from the experience of the mid-1930s for monetary policy today. U.S. banks now hold huge amounts of excess reserves. Total excess reserves in the banking system total roughly a trillion dollars, and the largest four banks alone account for a quarter of that amount. As in the 1930s, these reserves are not superfluous” balances; rather, they are held intentionally by banks as ways of stabilizing their asset portfolios, reducing their risk and improving their liquidity.
As bank profits and loan opportunities increase, and as macroeconomic risks recede, banks will reduce excess reserves to finance loan expansion. Still, the shedding of excess reserves is unlikely to be uniform across the banking system; just as in the 1930s, changes in reserve preferences likely will display substantial heterogeneity across banks. Without an understanding of the microeconomic foundations of the shifting demand for reserves, policy makers may be caught flat-footed when the demand for reserves changes. A major reduction in reserve demand for even two of the largest banks in the system could imply substantial expansion of money and credit.
Some Fed officials have advocated raising interest payments on excess reserves to prevent too rapid a contraction of excess reserves and increase in lending as reserve-demand preferences shift. That approach may work, but its efficacy is limited by the ability of the Fed to gauge the interest elasticity of reserve demand and raise interest rates accordingly. And, of course, the extent of feasible interest rate increases on reserves may be limited by the Fed’s need to maintain its own solvency. Clearly, the ability to understand and anticipate changes in reserve demand preferences will be key to the successful
implementation of monetary policy in the coming years.
———–endquote———-
11. September 2012 at 10:39
There are about 2 million additional workers at or below minimum wage compared to pre-crisis. There are more than 2 million workers on extended unemployment insurance.
Whether one agrees with them or not, if these two policies had not been in place, it seems reasonable to expect that:
1) GDP growth would have been higher.
2) The unemployment rate, through either attrition out of the labor force or through employment, would have dropped, and we might be several months into sub 7% rates.
Those slight changes in the context of the economy would have altered the conversation, and outlooks would have been more positive by now.
Also, as a side note, I have been reviewing labor force participation, and the decreasing level is perfectly within the long term range we would have expected due to the aging of the baby boomers. LFP rates, subdivided by age, are pretty stable. I think there was an unsustainable boom in LFP in 2005-2007 which was masked by the natural long term decline, and some of the recent decreases have simply been a convergence back to the long term trend. Expected monthly employment numbers should be adjusted down by about 50,000 to account for the demographic shift, and this has been the case for a decade. A lot of the doom and gloom about employment growth is overstated as a result.
11. September 2012 at 11:06
An analysis of labor market data suggests that there are no structural changes that can explain movements in unemployment rates over recent years. Neither industrial nor demographic shifts nor a mismatch of skills with job vacancies is behind the increased rates of unemployment. Although mismatch increased during the recession, it retreated at the same rate. The patterns observed are consistent with unemployment being caused by cyclic phenomena that are more pronounced during the current recession than in prior recessions.
And this is from the conclusion:
During the recent recession, unemployment rates rose to very high levels and then started to retreat. At the same time, some industries, like construction, manufacturing, and retailing, experienced disproportionately large increases in unemployment. But the patterns observed on the way up were mirrored on the way down. Those industries that contributed much to the increase in unemployment between 2007 and 2009 were the same that accounted for decreases in unemployment since 2009.
Lazear and Spletzer ignore the most important concept that enables an understanding of the meaning of “structural”. Their five definitions do not mention the structural concept of intertemporal coordination. They are using a foundation that abstracts away from it. Although to be fair, the authors did mention:
“The analysis below considers a variety of potentially structural explanations. The goal is to focus on those explanations that have already been put forward or those that appear most plausible. Surely, there are others that are omitted and, as a consequence, it is impossible to rule out all potential structural explanations.”
————-
The authors repeatedly emphasize a “symmetry” regarding the differential rises in unemployment between industries 2007-2009 being matched by similar differential decreases in unemployment between industries 2009-2012. With this point, they argue that the case for structural cause is weak, thus making way for a “cyclical” cause.
It is unfortunate that the authors do not go into detail regarding the labor participation rate, because as of Aug 2012, the labor force participation rate is at a 31 year low. It has fallen off a cliff since 2009. It seems the authors are concluding that the decrease in publicized unemployment rates can be taken at face value, when in reality a substantial number of unemployed workers have left the labor force altogether, thus making their numbers not count. The “symmetry” is superficial.
Indeed, this can be rather easily verified by looking at this chart that details the changes in rates of employment between industries, indexed at 100 for each industry starting January 2007.
As you can see, there has not been a “symmetry” between the increases in unemployment and decreases in unemployment in each industry. On the contrary, construction and non-durable goods have flatlined, while durable goods has risen somewhat, and trade and service industries have risen modestly. With the exception of service sector employment (which has only recently recovered back to its January 2007 level), all industries are below their January 2007 levels.
It’s quite easy to infer a “symmetry” between the increase and decrease in unemployment published rates when so many are leaving the labor force altogether!
——————–
ssumner:
I actually think structural factors are slightly more important that they do. In particular, I believe the 40% jump in the minimum wage and the unusually long extension of unemployment benefits play a modest role on boosting unemployment. But the evidence strongly suggests that the main problem was (and is) cyclical.
The evidence strongly suggests the exact opposite. If workers are going to be unemployed for YEARS on end, as has happened in the latest recession, the obvious question that has to be asked is “How in the heck are these workers supporting themselves?”
To believe that the 40% jump in minimum wage and the long extension of unemployment benefits plays only a “modest” role in increasing unemployment, we’d have to believe that it is possible for tens of millions of workers to be unemployed for years and be able to find the means to acquire food, clothing, medicine, shelter and other necessities without the assistance from the taxpayers. Yeah right!
OK, sure, some workers may be able to live off their modest savings, or live off their friends and family, but that would probably only be able to last a few months. In order to explain YEARS of unemployment, we have to go beyond these temporary reliefs, and accept the embarrassing truth that the government is actually financing unemployment, and for those unemployed who have been unemployed for a long time, the government is regulating them out of the workforce altogether through making their declining market value of their labor illegal (minimum wage). A skilled worker who has been out of work since 2010 cannot possibly earn the same wage they earned before. Their skills are outdated. We have to consider the possibility that these skilled workers’s labor now has a market value of less than the minimum wage. We have to change the view that minimum wage is only for burger flippers and janitors.
Then we have to take into account the extremely important point that inter-temporal preference market signals are no longer even somewhat in existence any more (as a result of the Fed’s ZIRP for as far as the eyes can see). How in the world can entrepreneurs and capitalists know how far into the future their economic plans should extend, when interest rates for so many maturities are kept down to record lows by the Fed? They’d have to be omniscient Gods to be able to see through this mess.
Liquidations, that dreaded word that weak moral minded people consider to be “unnecessary”, are needed before true recovery can take place. So many bad investments are being kept on life support with ZIRP. Contrary to the crocodile tears from the likes of those wanting to push their agenda of further monetary manipulation, we need to be honest and accept the truth that the mess the Fed and government created, has to be cleaned up by the market process. Only the market process can fix the market. This should be obvious.
The Fed is seriously preventing recovery because recovery requires market prices, including interest rates. Market rates would be, in today’s liquidity addicted economy, painful yes, but then so is taking someone off unsustainable dependency. Is short term pain a valid justification to keep people in a state of quasi-permanent relief with ZIRP? To politicians who only look to the next election, maybe. However, economists should be looking long term. As Hayek noted, economists should leave politics to the politicians, and look beyond the short term and explain how short term fixes have long term consequences.
Are there any economists in the house? Anyone? Hello? All I see are political strategists looking to push their political agendas.
11. September 2012 at 11:18
kebko, That’s why I focus on the unemployment rate, not the labor force participation rate.
11. September 2012 at 11:50
“I actually think structural factors are slightly more important that they do. In particular, I believe the 40% jump in the minimum wage and the unusually long extension of unemployment benefits play a modest role on boosting unemployment. ”
I agree, but that depends on how you define “structural”. Krugman has cited the Lazear paper very favorably (no wonder, he wants more fiscal stimulus) and has indicated that the Lazear paper has refuted research by Casey Mulligan, among others, that extended unemployment benefits and other disincentives to work are contributing to the problem.
But, I do not view the idea that the employment problem is not per se “structural” (Lazear) with the idea that disincentive effects of extended unemployment and other benefits are a drag on employment (Mulligan). If more persons were actively looking for work (not only in the sense of the BLS”s strict definition) then one should see more people competing for the same jobs and wages falling somewhat more quickly. This is a necessary labor market adjustment. The sooner that happens, the quicker employment levels will rise.
11. September 2012 at 13:17
Australia went through all this. Each business cycle from 1974 onwards, the levels of unemployment would cycle through higher levels than before. Until after the early 1990s recession; after that, the unemployment rate trended down as we did not have another recession.
There were some labour market reforms and they had some impact (so yes to supply side reforms). But it is amazing what continuous growth will do to your unemployment rate.
11. September 2012 at 13:18
Or, of course, the lack of it.
11. September 2012 at 13:24
It seem to me like a lot of these comments rest on the belief that making unemployed people miserable and desperate creates jobs.
No doubt there is a special case where making unemployed people too comfortable will keep unemployment too high when there is an adequate supply of jobs…But it is ridiculous to think the same mechanism is creating the bulk of unemployment when their is NOT an adequate supply of jobs.
11. September 2012 at 18:48
I think it was Scott himself that pointed this out, but things like UI are endogeneous to AD. When AD falls UI rises, and when AD is restored UI falls. Fix AD and you don’t have to worry about UI. (unless we made it permanent for some inexplicable reason)
11. September 2012 at 19:44
‘But it is ridiculous to think the same mechanism is creating the bulk of unemployment when their is NOT an adequate supply of jobs.’
There is always, and everywhere, a more than adequate supply of jobs. The problem is pricing those jobs so someone will be willing to do them.
11. September 2012 at 19:51
This is a magnificent post. (And for once I’m not talking about Scott or Nick.)
11. September 2012 at 21:20
10 million people are on disability, up more than 50% over the past decade. I bet that increase is more attributable to looser standards and more permissive judges, at federal and state levels, than to increase in population and increase in the disability. Plus, professional advisors to would be “disabled” have systemitized the process.
Food stamps requirements have been famously loosened, too, with aggressive outreach programs
12. September 2012 at 16:26
Bababooey, I think that explains some of the drop in labor force participation. Which is why I focus more on the unemployment rate.
12. September 2012 at 17:53
From Marcus Nunes (graph at post):
http://thefaintofheart.wordpress.com/2012/09/07/sometimes-a-drop-in-the-unemployment-rate-gives-bad-vibes/
“Just to get the “excuse” of “retiring Baby Boomers” out of the way, the chart shows that employment among those age 55 and over (a huge chunk of the Baby Boomers) never tanked and has chugged along at a steady pace. It doesn´t seem the group is contributing to a fall in the labor force!”