And the actuaries shall eat
In the debate on unemployment, Ryan Avent makes a common move (related post from Matt here, and Fabio here and Adam here), though I think an incorrect one:
It is remarkable to me how readily old, successful professionals dismiss the labour-market difficulties of young adults as the product of their poorly-chosen majors and general lack of ambition, and on what flimsy evidence they’re prepared to base these views. There are now 3.3m unemployed workers between the ages of 25 and 34. That’s more than twice the level in 2007. There are over 2m unemployed college graduates of all ages; nearly three times the level of 2007. There are many millions more that are underemployed—unwillingly working less than full-time or unwillingly working in a job outside their field which pays less than jobs in their field. As far as I know, the distribution of college majors didn’t swing dramatically from quantitative fields to art history over the past half decade.
The general form of the argument is: “only x changed, therefore x is the cause.” A supply and demand graph, with the shift of one curve, shows that argument to be false. The net effect of the shift will depend, for one thing, on the slope of the other curve, plus whether the other curve has been shifting (more slowly) all along.
A similar kind of argument is applied to the eurozone. Since “things were fine” in year ????, the current crisis can’t be about structural problems in the underlying European model, yet in part it is, for reasons of resiliency and robustness.
Going back to unemployment, labor market opportunities for college grads have been eroding — except for the elite — in absolute terms since 1997-2000, well before the collapse in AD. If those same grads are highly willing to be geographically mobile, highly willing to consider actuarial training, and highly willing to take tougher courses and study where the jobs are (doesn’t have to be tech subjects, some of those are failing too), the unemployment response to a given AD shock will be much lower. But they aren’t, so it isn’t. I’ve seen only small adjustments in the ambition and flexibility of college goers, not enough preaching about TGS I suppose.
In an era where both monetary and fiscal policies have underperformed, looking at both sides of the market is essential.
You can even give this all a Keynesian take (though I would prefer a TGS framework). Since 1997-2000, there is downward pressure on lots of wages, but morale matters and labor market incumbents retain a favored position. Though some wages fall, employers resist that downward pressure, and pass along a lot of the burden of adjustment to new job seekers. Even if that original downward pressure on wages is smallish, new job seekers have to make big adjustments in their career plans, majors, ambitions, etc. to get through the door at all. They didn’t.
That’s the same argument that Keynesians cite and indeed insist upon in other contexts. It is somewhat harder to see when you start with a slower erosion in real wage opportunities, rather than a sudden AD shock, but it doesn’t make sense for Keynesians to dismiss it.
The real issue, I suspect, is that many people are allergic to arguments which appear to “blame” the job seekers, rather than government inaction, but it’s not about blame one way or the other. It’s about the desire to have a fuller and better model, with richer causal chains, and to see through all the variations to a deeper level.
To put it rather immodestly, my arguments are a lot stronger than many people think!