Unemployment is always about the supply side too

We document that unemployment is increasing with GDP per capita. Furthermore, we show that this fact is accounted for almost entirely by low-educated workers, whose unemployment rates are strongly increasing in GDP per capita, rather than by high-educated workers, whose unemployment rates are not correlated with income.

That is from Ying Feng, David Lagakos, and James E. Rauch.  In their core model, reallocating low-education workers to the formal sector makes them harder to reemploy at short notice, in contrast to the informal sector and self-employment.  An alternative view, not mutually exclusive, is that in poor societies low-education workers simply have to take jobs, due to extreme need.

You will on Twitter, and in blogs, see various attempts to mock supply-side theories by showing increasing employment, often accompanied by remarks such as “I didn’t know video games were getting so much worse.”  Such comments are a mistake and a misunderstanding.  Proper supply-side theories do not deny the relevance of the demand-side, and so nor should demand-side theories deny the relevance of the supply-side.  It is possible to believe both “supply-side factors made the labor market recovery slower than usual,” and “demand-side forces have at this moment overcome many of those problems.”  Just look at the disability rolls.  The ability to receive disability kept many people out of the labor force in earlier years, slowing down labor market recovery.  Yet it is also true that currently demand-side forces are creating jobs good enough that many of those same people finally are leaving the disability rolls.

The deeper lesson of course is that — outside of the short-run — demand-side forces are supply-side forces.  And right now we are out of the short run indeed, at least when it comes to macroeconomic shocks.


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