The musical chairs model in the UK

Free Exchange has a post showing that the musical chairs model doesn’t work as well for the UK as for the US.  Here’s the graph for the UK:

Screen Shot 2015-02-11 at 3.02.22 PM

It does explain the rise in the unemployment rate during the 2008-09 recession, and the fall over the past 18 months, but not the flat (8%) unemployment rate in between.  Free Exchange comments:

Why did unemployment remain stubbornly high? One explanation could be a negative supply-side shock: commodity prices increased sharply in 2011, which might have caused additional structural unemployment. Another could be the swathes of public sector redundancies overseen by the coalition government. If public sector workers find it hard to move to the private sector, this might interfere with the predictions of the model.

Supply shocks should not cause any problem for the musical chairs model, as what matters is NGDP, not the P/Y split.  Instead I think there are two main areas it might fail, one of more concern than the other:

1.  The musical chairs model might fail to explain shifts in hours worked, due to a changing share of national income going to labor.  Or wages that are not sticky.

2.  The model might fail if changes in hours worked failed to explain the unemployment rate.  I would regard this as a lesser problem, as hours worked are arguably just as valid a business cycle indicator as the unemployment rate.

Fortunately the discrepancy between hours and unemployment seems to have been the issue.  Over the past few years I’ve seen many articles talking about how the UK was creating an amazing number of jobs, despite low GDP growth and stubborn unemployment.  This was partly due to strong growth in the labor force, which is why the unemployment rate only began falling recently. Here’s a typical article (from The Economist, in June 2014):

LOOKING at Britain’s latest jobs data, published last week, it seems Britons have almost never had it so good. In the three months to the end of April, the number of people in work rose at its fastest level on record. Unemployment fell to its lowest level in five years. Participation in the workforce is now within a whisker of its all-time high. George Osborne, Britain’s Chancellor, concerned about his party’s ratings in the run up to next year’s election, has done his best to try and take credit for this remarkable performance. At his annual Mansion House speech last week, he told the City of London’s top brass that Britain is “growing faster than any advanced economy in the world”, with “a record number of people at work” due to his policies. But Britain’s jobful recovery””to some extent””is as much due to the failure of government initiatives as to their success.

America’s actually done better than the UK in terms of unemployment, but far worse in terms of employment.  Our workforce participation is far below the all-time high.  So Britain created lots of jobs, lots of hours worked (as the musical chairs model predicts), but this has not had much impact on the unemployment rate, until recently.

Here’s a graph showing hours worked in the UK, which has been rising ever since early 2010:

Screen Shot 2015-02-11 at 3.15.16 PM

So the musical chairs model seems to explain British hours worked during the recovery, but hours worked doesn’t seem to have explained the unemployment rate, until the past 18 months, when unemployment has finally started declining.

PS.  I hope Britmouse will chime in, as he has a much better grasp of the British economy than I do.

Update:  As expected, Britmouse adds some useful perspective.  He also provides graphs using NGDP net of VATs, as well as aggregate nominal wages.



23 Responses to “The musical chairs model in the UK”

  1. Gravatar of leon leon
    11. February 2015 at 13:31

    Would the changes to retirement age in 2011 be a factor. They made it easier to keep working after 65 which would increase the workforce. I haven’t seen any data on how many people have made use of this, or of any discussion of the effect this’ll have on unemployment.

  2. Gravatar of ssumner ssumner
    11. February 2015 at 14:58

    leon, That might be a factor, is there data on workforce participation by the elderly?

  3. Gravatar of benjamin cole benjamin cole
    11. February 2015 at 15:28

    Interesting blogging. I just put up a chart at Marcus Nunes blog—total hours worked in USA now same as 2009…and 1999. FRED chart.

  4. Gravatar of Saturos Saturos
    11. February 2015 at 20:52

    What it’s like to be assimilated by the FedBorg (Claudia Sahm):

  5. Gravatar of Kenneth Duda Kenneth Duda
    11. February 2015 at 23:40

    > total hours worked in USA now same as 2009…and 1999. FRED chart.

    Wow, Benjamin, I did not realize that. That seems really sad. Clearly there is more work to do to get NGDP on track.


  6. Gravatar of Vivian Darkbloom Vivian Darkbloom
    12. February 2015 at 01:01

    Greg Ip demonstrates why the line between monetary and fiscal policy is not always clear:

  7. Gravatar of Salem Salem
    12. February 2015 at 01:34

    You are right that strong growth in the labour force caused static unemployment despite rising jobs numbers. But I also think that supply shocks have played a role in making the (NGDP/’working age pop’) number look unfairly good to the BoE. If you look at the actual NGDP numbers, you will see that UK NGDP growth has been sub-4% (and fluctuating quite a lot) for most of the past 5 years. So some of the shortfall was also demand-side, although I think there is now very little of that left.

  8. Gravatar of Musical Chairs in Britain, Revisited | uneconomical Musical Chairs in Britain, Revisited | uneconomical
    12. February 2015 at 04:11

    […] post discussing Scott’s “musical chairs” model and British unemployment.  Scott also comments.  Here is my curve-fitting […]

  9. Gravatar of Britmouse Britmouse
    12. February 2015 at 04:13

    Here you go!

  10. Gravatar of Britmouse Britmouse
    12. February 2015 at 04:47

    The employment rate for the 65+ group has risen strongly over the last decade, up from 5% in 2002 to 10% today. I graphed economic activity but employment and activity are the almost identical for this group:

  11. Gravatar of collin collin
    12. February 2015 at 07:26

    How much of this ’employment’ growth of the Brits vs. The US is dependent on housing prices in the economy. In Britian housing is returning to pre-Crisis level which is both a job creator and keeps the labor supply high. In the US, outside of NY, Wash & SF, prices have not returned to pre-crisis levels so this both controlling the job creation (esp. wages in the US) and limits the supply of labor. (Meaning US married couples are working to a over-priced house and an early grave.)

    Overall I with Dean Baker the slow bounce of the US housing prices is going to better in the long run.

  12. Gravatar of TravisV TravisV
    12. February 2015 at 07:48

    Tyler Cowen says the public official he admires most is Ben Bernanke:

    Arnold Kling commented on this on his blog…..

  13. Gravatar of Jim Glass Jim Glass
    12. February 2015 at 08:33

    The good people at the St Louis Fed review the effects of QE…

    “Quantitative Easing: Lessons We’ve Learned”

  14. Gravatar of am am
    12. February 2015 at 09:14

    The employment rate for the USA 65+ has also risen substantially over the last years. Is it suggested that this is keeping wages down in the UK but not the USA.

  15. Gravatar of ssumner ssumner
    12. February 2015 at 10:57

    Ben, That’s depressing. It might be slightly better with non-business employees added, but not much.

    Saturos, Now we know!

    Thanks for the link.

    Salem, Good points. Wages have moderated quite a bit in the UK, and the areas with falling NGDP (such as oil and banking) are far less labor intensive than the parts of NGDP that are rising.

    Britmouse, Thanks, I added a link.

    Collin, I don’t think the UK has much home building. Perhaps it affected things in other ways.

    am, Good point.

  16. Gravatar of Blue Eyes Blue Eyes
    12. February 2015 at 11:11

    At the risk of sounding obtuse, how are “hours worked” measured?

    Everyone I know works a 35 hour week, on paper. I know that I have recently become accustomed to working nearly double that.

    How would that affect anything?

  17. Gravatar of collin collin
    12. February 2015 at 11:41

    What a housing price increase does is increases National Incomes a lot even if the impact immediate is jobs limited. Now you have higher commissioned real estate agents, and the sellers of the houses are making a huge profit. So there is a lot more money following in the economy.

    I seem remember in 2004 – 2007 there was a push to show GDI(ncome) versus GDP as a true measure of the economy.

  18. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. February 2015 at 12:20

    Greek necessity fathers invention;

    ‘Yanis Varoufakis, Greece’s new finance minister…. is pushing for part of his country’s debt to be swapped for bonds linked to gross domestic product so Athens’ obligations vary according to how well the Greek economy performs. GDP-linked bonds have long been discussed by economists. But so have “sovereign coco” bonds “” and their proponents argue they could prevent high-stakes Greece-like crises from erupting in the first place.

    ‘In March 2011, Axel Weber, then president of Germany’s Bundesbank, proposed clauses in eurozone government bonds which would automatically extend their maturity by three years if a country had to be bailed out by European institutions. Bank of England economists have made similar proposals, suggesting sovereign cocos that “pop” when the International Monetary Fund is called in.’

    Seems the Eurobankers have taken Charles Calomiris idea to heart. They’ve issued $288 billion of CoCos since 2009.

  19. Gravatar of ssumner ssumner
    13. February 2015 at 06:15

    Blue eyes, It includes part time jobs, people working overtime, etc.

    Collin, Some think the NGDI figures are more accurate.

    Patrick, Yes, I saw that too.

  20. Gravatar of Charlie Jamieson Charlie Jamieson
    13. February 2015 at 06:25

    Patrick, the motivation there is to find another way to pretend that Greece can pay its debts. Greece must be subsidized by the EU to maintain its current standard of living and will say and do anything to keep the loans coming.

  21. Gravatar of SG SG
    13. February 2015 at 08:46


    Serious question: what’s the proper response to the hard money wing of the Republican Party? I’ll grant that the elder and younger Pauls are probably not open to persuasion. I love this David Henderson quote about Ron Paul:

    “But, and I do mean this as a criticism, Ron Paul is no Bayesian. He seems to have close to zero doubt about all his beliefs. I remember meeting with him in his office once and trying to persuade him that he was wrong in claiming that the Consumer Price Index understates inflation and that it’s just the opposite. I got nowhere. There was not even a “I’ll look into it.” He was just positive that he was right and the fact that I was a Ph.D. economist whose work he respected did not matter.”).

    But I’m pretty sure that smart guys like Mike Lee (and, more importantly, Mike Lee’s staffers) are open to persuasion.The question is how. Generally, this Scott Alexander post hits the nail on the head:

    When something technical (like monetary policy, or climate science) becomes political, your goal can’t just be to prove the “truth.” The goal is to frame the issue as a winning issue for Red Tribe.

    You’ve probably already thought of all of this, but here are my suggested talking points for trying to bring around persuadable conservatives (and I have a strange feeling I’m about to sound a lot like Morgan Warstler):

    1. Markets > Fed. The Fed’s acting like an idiot day trader by relying on its internal inflation forecasts when setting policies instead of relying on market signals. As Evan Solatas noted in his classic post, they end up looking like Little Orphan Annie constantly predicting recovery is only a day away (my how I miss Evan’s blog. Can we send him back to high school please?)

    2. No more bailouts. Stabilize the macro aggregates and screw the banks. (of course, stabilizing the macroeconomy will lead to fewer bank failures, but we don’t have to mantion that)

    3. No more fiscal stimulus. ‘Nuff said. Lots of red meat here.

    4. Stick to price level targeting, not NGDP. I know it’s suboptimal, but I feel like the only way that you can inoculate yourself against stupid questions about the p/y split (“what if 4.5% NGDPLT just leads to 4.5% inflation and no growth?! derp derp..”)is by just advocating price level targeting instead of NGDP. You’re a pragmatist, and I think this might be the concession that can get Republicans on board. It’s easy to see that PLT does a much better job than rate targeting of keeping the Fed accountable. Also, you can call your project “Monetary Reform” or some other vague notion so it’s not clear how you actually differ from the “End the Fed” types.

    5. Bash Bernanke/Yellen. This would be sort of playing dirty, but bashing the Fed sends the right signals (pun absolutely intended) to the republican base. Just keep referring to Ben Bernanke as “Bail-out Ben” and then once right-wingers know you’re on their side you can shift your criticism to the standard MM critique of central banks. You can say something like “Yes, QE is terrible! Look at Australia, they don’t do QE! If the Fed had adopted my policy of NGDPLT/PLT, we would never have had to worry about all this QE and the resulting distortions and interventions in financial markets” So the goal is to sound just like Ron Paul, but to actually say something completely different.

    6. Don’t demonize the base. Greg Mankiw learned this when he pulled the “charlatans and cranks” line about supply-siders from his textbook. It doesn’t make sense to antagonize people you’re trying to persuade. Acknowledge concerns, and frame your suggestions appropriately.

    Seriously Scott, right now Krugman’s got the podium to himself, and he’s just gleefully poisoning the well and positioning Blue Tribe as the party of monetary sanity, when we really know that when the chips are down Blue Tribe will go right back to claims of monetary impotence and fiscal stimulus to the rescue. He’s got to be stopped, and you have to stop him.

  22. Gravatar of ssumner ssumner
    14. February 2015 at 06:59

    SG, I already do many of those things in my presentation. On the other hand I have no intention of demonizing Bernanke. I sharply criticize the Bernanke Fed, but emphasize that it was an institutional problem. But you’d be surprised by how many of your suggestions are already in my PP presentation.

    The PLT idea is food for thought, especially in terms of core inflation. I’ll keep that in mind, although I obviously am not going to stop saying NGDPLT is my first choice.

  23. Gravatar of TallDave TallDave
    14. February 2015 at 21:27

    Serious question: what’s the proper response to the hard money wing of the Republican Party?

    I usually just try to explain market monetarism, it’s something the right should embrace once they take a moment to study it. I try to work Milton Friedman in there, and warn them the alternative is Krugman-style massive expansion of the state.

    For the right, the bogeyman is Zimbabwe-style deficit-driven moneyprinting. That’s why Krugman and his crowd keep crowing about the inflation hawks — they were so obviously wrong. Obviously there are only so many public goods and the marginal utility of fiscal spending drops off sharply in certain ranges of %GDP, but there’s ever a slavering horde looking to latch onto Levianthan’s teats (always with the best of intentions) and the right needs a better counter-narrative than the insubstantial spectre of high inflation.

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