Random thoughts on hysteresis

by on March 27, 2012 at 2:42 pm in Economics | Permalink

Let’s say you believe labor market unemployment hysteresis is strong, and you also believe that for political reasons (for better or worse) further monetary or fiscal stimulus is unlikely.  Which policies should you be more likely to support?  Should one be more inclined to limit unemployment insurance, ax the minimum wage, expand EITC, and in general decrease labor market regulation and mandates?  Should one be more likely to favor direct government hiring of the unemployed, if only at “make work” tasks at low wages, and less likely to favor projects run through third-party intermediaries, which may or may not focus on hiring the unemployed?  Let’s abolish Davis-Bacon, yes?  Let’s move away from European models, yes?

I thank J. for a useful comment on this matter.

Eli March 27, 2012 at 2:57 pm

Depends on whether measured hysteresis is in fact skill atrophy or signaling…

Karl Smith March 27, 2012 at 3:03 pm

A lot of depends on what the cause of hysteresis is. It is far from clear to me that disconnection with the labor market is key here.

I am much more likely to attribute hysteresis to a combination of atrophying of sector specific capital and an increase in rent seeking associated with a zero-sum economy.

In short if the Central Bank will not allow nominal expansion then getting more of the nominal pie at the expense of others pays off more and so informal hiring networks, insider-outsider problems, kick-backs in construction and other sectors which have high time costs and thus exorbitant real returns under tight money.

Floccina March 27, 2012 at 3:10 pm

How about a cut (or elimination of) the employer part of the SS tax.

Matthew Dutton March 29, 2012 at 1:12 am

Why the employer side?

will March 27, 2012 at 3:27 pm

Decrease labor market mandates and regulations, provide tax credits to employers who send fresh employees to training programs for hard-labor skills.

Mike March 27, 2012 at 5:19 pm

The devil is in the details. How do you define fresh employees, training programs, and hard-labor skills? Will you just be paying people to do training they’d do anyway? You aren’t necessarily targeting anything at the margin, but it’ll be costly.

DanC March 27, 2012 at 3:38 pm

If they are unemployed it is because of a disconnect between the wages they can get and the wages they are willing to accept. For many older workers, and many younger minority workers, that means that the wages that employers are willing to pay has fallen very low – perhaps to a level below what employers can legally offer. Not to mention the increased risk to employers from lawsuits filed by protected groups – which also lowers the risk adjusted wage employers are willing to pay.

These unemployed groups will only get hired when everybody else has been hired and employers lack good substitutes. Only when the country has a strong economy, spurred by highly productive workers and highly productive capital, will these groups see an increased opportunities.

msgkings March 27, 2012 at 4:33 pm

So per your last sentence, should we try to make workers highly productive? And is that even possible?

MC March 27, 2012 at 5:50 pm

Maybe it isn’t possible to make workers more highly productive, but it is possible to stop importing workers who are less highly productive.

will March 27, 2012 at 6:25 pm

err… is that really what you’re advocating?

MC March 27, 2012 at 8:24 pm

Yeah. Why not?

will March 27, 2012 at 9:19 pm

Well, while you’re at it, we can stop importing all foreign goods so those industries develop domestically. That should lower the unemployment rate too.

MC March 28, 2012 at 6:01 pm

“Well, while you’re at it, we can stop importing all foreign goods so those industries develop domestically. That should lower the unemployment rate too.”

Foreign goods don’t receive government benefits or compete with American citizens for non-exportable low skill service jobs. They also don’t vote for Marxist redistribution schemes.

the spam robots are getting better and better March 27, 2012 at 8:57 pm

Because obviously if this crisis has shown one thing in the employment numbers it was that only white guys are unaffected by the crisis because they obviously cant sue employers as a protected group. Brilliant!

DanC March 28, 2012 at 8:44 am

A few points
Older workers regardless of color or gender can sue and this group is facing historically high unemployment for long periods.

We can look at regulations and tax policies that prevent the economy from reaching full potential growth.

Simply there are structural problems in the economy

Dan Weber March 27, 2012 at 4:45 pm

I’m surprised to write it but direct hiring for useless projects might be the least-bad solution. The instant you try and make them do anything useful you are going to start stomping on some existing interests’ toes.

I still wonder how it would look on a resume. If anyone can show up and can’t be fired, it won’t be very good. But how do the managers have any skin in the game to care about who they fire?

Dan Weber March 27, 2012 at 4:49 pm

I probably should add that I assume the problem with jobs is a temporary loss of demand, and if you can keep the workers’ skills at their current level they will eventually be valuable enough to be hired on their own. If it’s a permanent recalculation as buggy-whip workers find the plants closing, this won’t work as well.

Bob Knaus March 27, 2012 at 5:07 pm

It’s been done. When I was much younger, I heard an old guy tell the story of his work on a WPA project. He worked every other day. His crew learned how to assemble a small house. They completed it in one day. The alternate crew carefully disassembled it. They did this for several weeks. They learned carpentry skills, saved on building materials, and did not contribute to the excess housing stock that drove down rents and prices during the Great Depression.

Neat, huh?

Bill Stepp March 27, 2012 at 7:02 pm

Let’s not forget that in a free market (which means free banking and no Fed) unemployment would be 4-5%.
The difference between that level of unemployment and the currrent one is due entirely to government intervention in money and banking coupled with other state inverventions, such as taxation in various forms, and regulation.
So much for the “hysteresis” nonsense.

GiT March 27, 2012 at 7:45 pm

In nomine Patris, et Filii, et Spiritūs Sancti, Amen.

Now, let us turn to this weeks Liturgy, selected from ‘Free to Choose’…

Bender Bending Rodriguez March 28, 2012 at 4:11 am

If we’re nominating hymns, how about “In the Garden of Eden” by I. Ron Butterfly?

kb March 28, 2012 at 7:57 pm

game well played bbr

Nathan Smith March 27, 2012 at 7:32 pm

For the sake of political feasibility, how about this. Temporarily suspend the minimum wage, and at the same time, expand the EITC. That way, some of the neediest people will be able to get at least some money from the government, while getting skills that make them more employable later.

Bill March 27, 2012 at 7:43 pm

I like the fase choice: ASSUME “for political reasons (better or worse) that further monetary or fiscal policy is unlikely”.

OK, assume that the patient has curable cancer and that the doctor won’t operate to remove it.

Should we amputate the arm or let the patient die.

When you assume people will not act in their own interest, you get phoney and non-optimal choices.

Why not argue for fiscal and monetary policies that don’t involve amputation or death?

Bill March 27, 2012 at 7:48 pm

Instead of ‘fase”, that should be “false choice”.

TmC March 28, 2012 at 9:34 am

“OK, assume that the patient has curable cancer and that the doctor won’t operate to remove it.”

Or we can assume we’re going to remove the pillow from his face, and see if he feels better.

Bill March 28, 2012 at 9:54 am

TmC: If you believe min wage, etc. is responsible for this, then it was responsible for the good times as well. You can’t pick a constant policy over large periods of time and claim that THIS policy is the one that is the pillow over the face, when the patient was healthy at a time when that policy was also in effect.

dwb March 27, 2012 at 8:08 pm

having given a lot of thought to the “puzzle” of 2% inflation in the face of high unemployment I think it has a remarkably simple explanation.

Right now, ten of millions of employees in the service sector are getting their annual merit raises (about 1/5-2%). CFOs have approved these increases because thats about what they think inflation is going to be. I am sure they saw it in a bank or economist presentation somewhere.

They saw it in a presentation because the Fed has a 2% inflation target.

The wonder of a highly credible inflation target set by the Fed is that you get it, even in the face of high employment.

Its not hysteresis or a decline in potential output. Its expectations, pure and simple.

Dredd March 27, 2012 at 8:38 pm

I don’t know whether old market dynamics in a world alien to them will work, so we should not bow down to Saint Ayn just yet.

Bill March 27, 2012 at 8:41 pm

The medicine should match the disease.

If the problem is aggregate demand, even though the effect is hystersis, you should address the problem.

Quoting from Bernanke’s recent speech:

“Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand, or of structural changes, such as a worsening mismatch between workers’ skills and employers’ requirements? … I will argue today that … the continued weakness in aggregate demand is likely the predominant factor.”

Daniel Dostal March 27, 2012 at 11:39 pm

What troubles me is that no one is able to speak to either case without a lot of hand-waving.

The Other Jim March 27, 2012 at 9:12 pm

Yes, all that, except there is no need to axe the minimum wage. You could talk me into allowing exceptions to the min wage for new hires, but I doubt it matters much. Also you don’t need useless “make work” jobs for Government hires — there is more than enough trash collection, graffiti erasing and general beautification work to keep us at full employment thru 2025. Not to mention tutoring, as if the unions would ever tolerate that.

But you left out things that are absolutely critical, such as repealing the Obamacare disaster; ending the absurd tax on foreign income that essentially forces US companies to keep their profits out of the country; a significant cut in the corporate tax rate itself; and an exuberant embrace of domestic oil and gas production. For bonus points, ban public sector unions.

It’s not complicated, people. Impossible? Yes. But very simple.

msgkings March 27, 2012 at 9:32 pm

LOL. How much are the Koch brothers paying you?

Cliff March 28, 2012 at 1:45 am

Exactly: nothing

msgkings March 28, 2012 at 10:32 am

He could do better.

TommyVee March 28, 2012 at 8:10 pm

” For bonus points, ban public sector unions.”

The first amendment clearly give US citizens the right to peaceably assemble.
“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

So how would you implement your ban?
Fining or imprisoning public sector employees who choose to “freely assemble” in a union would clearly violate the Constitution.

Of course governments are never obligated to participate in collective bargaining with public sector unions.
But banning their very existence is clearly unconstitutional.

http://en.wikipedia.org/wiki/Freedom_of_association
“While the United States Constitution’s First Amendment identifies the rights to assemble and to petition the government, the text of the First Amendment does not make specific mention of a right to association. Nevertheless, the United States Supreme Court held in NAACP v. Alabama that the freedom of association is an essential part of the Freedom of Speech because, in many cases, people can engage in effective speech only when they join with others.”

NAME REDACTED March 27, 2012 at 9:40 pm

I’d remove health insurance employer mandates. That is probably the greatest source of reparable labour market problems.

msgkings March 27, 2012 at 9:42 pm

Agreed, but you might create a bigger problem re: health care provision.

It would be nice if the jury-rigged system we have in this country where health coverage is basically tied to employment was able to be reversed.

YetanotherTom March 27, 2012 at 10:42 pm

Legalize Hemp. We import a ton from from Canada but can’t grow it here.
Let the online poker companies open back up too.

msgkings March 27, 2012 at 10:49 pm

+1 on both. But that wouldn’t make a dent.

Andrew Cady March 27, 2012 at 11:09 pm

Lowering the minimum wage won’t help, because the minimum wage is already so low that workers deteriorate if they have no other income. If their income reduces further, their ability to work will also be reduced. Thus a cycle develops, which ends when the worker dies of overwork.

Daniel Dostal March 27, 2012 at 11:41 pm

Better than no job at all?

Andrew Cady March 28, 2012 at 5:44 pm

The minimum wage is currently better than no job at all, certainly. But at a certain wage point, the cost of working to the health of the physical organism is greater than the benefit to the organism of the consumption enabled by the income of working. There is also the opportunity cost of working. For example, homeless workers will may have more time to seek illicit shelter if they are unemployed. Thus, employment would increase the chances of imprisonment or death from exposure.

Andrew Cady March 28, 2012 at 6:12 pm

Just to add, the key price point on wages is probably that which would enable payment of monthly rent for shelter (probably on a couch) plus sufficient food and medicine to prevent rapid deterioration of health. At exactly this price point (which would vary between individuals), working may still _appear_ to offer a better deal than more risky (probably criminal) entrepreneurial strategies, but since working in that case is long-term unsustainable (since inevitably some expense would arise and result in eviction) the riskier strategy is the correct choice.

There is also an important price point at which imprisonment offers a healthier or otherwise superior lifestyle to working. This will also vary according to individual preferences, abilities, and needs. Some people would rather starve than go to prison, whereas others (probably including me) would prefer a leisurely imprisonment to 80 hours of weekly physical labor.

Andrew Cady March 28, 2012 at 6:24 pm

And one final comment: I don’t mean to write a Dickens novel here. In reality, the best strategy when available wages are biologically insufficient to sustain the worker, (and government benefits exhausted) is of course to sponge off some other worker who has sufficient pay. Only people without “social capital” (and/or “sexual capital”) would actually face such dire choices.

Pat MacAuley March 27, 2012 at 11:14 pm

A glaring ommission from the list is to crack down on hiring illegal aliens.

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chuck martel March 28, 2012 at 12:36 am

Lots of older folks would be happy to go to work as butlers, waiters, etc. for room, board and a small salary but the feds have so many requirements on employers that not even the filthy rich are willing to put up with it.

joan March 28, 2012 at 12:55 am

Europe has 35 a hour work week and 5 weeks vacations, before moving away form their model maybe we should try it. We have had a high unemployment rate compared to the post WWII years ever since women joined the work force in large numbers. If there is no work to be done that is productive enough to pay a living wage, working less and consuming more leasure seem a better solution than some people working harder to pay the taxes needed to subsidized the people who work at non productive jobs whether they are in the public sector or the private sector.

Bender Bending Rodriguez March 28, 2012 at 4:22 am

_France_ imposed a 35 hour workweek in 2000 and didn’t see anything worth writing home about.
At the time the law was enacted, unemployment was 9.6%. Two years later, they bottomed out at 9.1% Unemployment didn’t get back to that (ahem) low until late 2005.

The EU, via Directive 2003/88/EC, imposes a 48-hour maximum workweek, with the UK allowing workers to voluntarily exceed the 48 hour workweek.

So, you were saying…?

Andrew Cady March 28, 2012 at 6:18 pm

A 4 hour reduction in the work-week (39 to 35) is not that significant. It’s less than one hour per day per worker. Meanwhile, computers continue to increase productivity of workers.

A reduction to a 3 day work week, at 6 hours per day, would surely create the necessary labor shortage.

mulp March 28, 2012 at 4:28 am

Why are so many businesses calling on government to supply them with workers with the right skills to do the jobs that are open?

Take machinist jobs for example. People were laid off from machining jobs over the past decades and those people gave up their tools, got further and further out of date on technology and in skill, so they aren’t any more qualified than a high school drop out at age 18, so even laid off machinists aren’t qualified.

Ditto for lots of other manufacturing jobs: welding, casting, injection molding, …

When I was in high school, half my male class mates were going into manufacturing or the trades in one way or another, so while all of us got shop in 7, 8, 9th grades, the non-college track took shop or trade or apprentice or intern programs and the guys on the “dummy track” were driving new cars by their senior year paid for by their high wage jobs in the summer and their school apprentice jobs. I didn’t earn as much as a programmer for years after I started and their was no formal training yet.

Today, high schools are trying to restart those old programs in some places, but the costs in equipment and educators is huge.

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