Results for “unemployment”
674 found

The real unemployment rate?

Similar variations of this adjusted unemployment rate make headlines now and again. Our colleague Ed Luce, for instance, noted in December that “if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent”.

But what is striking about the broken line above isn’t where it now ends — at 10.3 per cent — but rather the lack of any meaningful, sustained improvement for more than two years.

This alternative measure has remained above 10 per cent since September 2009, and aside from a bit of skittishness (some of which is down to uncaptured seasonality) has mostly just moved sideways.

That is from Cardiff Garcia, here is more.

Youth unemployment across Europe

Here is more, hat tip goes to Greg Ip.

Addendum: Do read the excellent comment by Peter Whiteford, for instance:

The unemployment ratio – that is, the number of unemployed people over the population rather than the labor force is arguably a more consistent indicator across countries.

Have a look at http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Youth_unemployment_rates,_2008-2011Q3,_%28%25%29.png&filetimestamp=20120127135533

This shows that while in Greece for example, the unemployment rate for youth was around 46% the unemployment ratio was around 10% – nearly half of those in the labour force were unemployed, but only a little over 20% of all the people in the age group were in the labour force.

Why is Swiss unemployment so low?

Why does Switzerland have a low unemployment rate?

…is a question from Really Curious.  Here are some data, but right now it is at 3.1%.  I see a few factors:

1. The Swiss have few ZMPers, so their natural rate is fairly low to begin with.

2. The Swiss do not have the same kind of welfare state and labor legislation that you find say in France, which also lowers their natural rate, and which makes adjustment to negative shocks easier.  Unemployment benefits are not so generous and they pretty much force you to try to find work again.

3. In the past the Swiss have managed their immigration policy in accord with the domestic unemployment rate.  For instance if unemployment was rising they would send some Italian guest workers back home.  Immigration into Switzerland is now so substantial, however, and integrated into so many sectors, that this procedure has lost its potency.

4. Swiss jobs are relatively permanent, compared to the United States.  You will note that #4 interacts with #3; immigration is by no means always or even usually zero-sum with respect to the jobs in a country, but it can be for some well-defined pockets of manufacturing jobs in Switzerland.

5. The Swiss central bank does not hesitate to engage in sophisticated schemes of quantitative easing when an appreciating exchange rate is squeezing their export industries or they otherwise face unpleasant macroeconomic situations.

Here is a JSTOR piece on said question.  Here is a good paper on the overall topic (pdf).  I have never seen a good paper on why the Swiss unemployment rate rose somewhat in the early 1990s, falling again in 1996 or so I believe, but MR readers can help us out here.  I also do not have knowledge of exactly how the Swiss calculate their unemployment rate, though it is unlikely that the difference in rates is a mere statistical artifact.

On the theory of unemployment

This is from the NYT, about a farmer who tried to hire American workers rather than illegal immigrants:

Six hours was enough, between the 6 a.m. start time and noon lunch break, for the first wave of local workers to quit. Some simply never came back and gave no reason. Twenty-five of them said specifically, according to farm records, that the work was too hard. On the Harold farm, pickers walk the rows alongside a huge harvest vehicle called a mule train, plucking ears of corn and handing them up to workers on the mule who box them and lift the crates, each weighing 45 to 50 pounds.

The article is interesting throughout.  See also Alex’s earlier post, for some added interpretation.

A simple model of unemployment, wage stickiness and ZMP

Following up on yesterday’s discussion of wage stickiness for the unemployed and the employed (Tyler, Alex).

Imagine a farmer whose farm produces 100 bushels of wheat. He hires 10 workers to bring in the wheat, paying each of them 9 bushels. Thus, each worker carries 10 bushels, the wage is 9, the wage bill is 90, and the farmer earns 10.

Now suppose that due to climate change or a swarm of locusts the farm only produces 90 bushels of wheat. If wages were fully flexible then an equilibrium exists in which each worker is paid a wage of 8 leaving the farmer with 10 bushels as before. The farmer doesn’t want to reduce everyone’s wages, however, because that will reduce morale so he fires one worker leaving nine. Each worker now brings in 10 bushels, as before, and is paid a wage of 9, for a total wage bill of 81 leaving the farmer with 9 bushels. The unemployment rate is 10%.

The unemployed worker doesn’t want to be unemployed and offers to work for less, a lot less, say 5 bushels. Even at the lower wage, however, the farmer doesn’t want to hire the worker because the worker doesn’t generate enough additional output to justify even a low wage. In fact, in this scenario the worker has ZMP.

The best the farmer can do in response to the lower wage offer by the unemployed worker is to fire an employed worker and hire the unemployed worker at the lower wage. Eventually this will restore equilibrium but it takes time to cycle through enough firings and hirings to reach full employment. Note also that in this model the farmer only has a weak incentive to do this since in the equilibrium with 10% unemployment he earns 9, almost as much as before.  As an aside, also note that in my model the unemployed workers are simply unlucky (as I argued earlier). If they were to switch places with the employed, productivity would be just as high. The unemployed worker has ZMP but is not a ZMP worker.

Since the driving shock that lowers productivity in this model is a real factor (weather, locusts), this is a real business cycle model . That raises a very interesting point. The most that wage flexibility can do in this model is to restore full employment; wage flexibility cannot restore full output. Thus, the workers in this model have a very good reason to dislike wage flexibility. In the equilibrium in which wages fall the unemployed worker is better off by a lot but the 9 employed workers are all worse off than in the unemployment equilibrium.  In contrast, in a Keynesian model wage flexibility can restore full output not just full employment. Thus, and somewhat surprisingly, it’s easier to justify wage stickiness in an RBC model than in a Keynesian model since the gains from wage flexibility are so much higher in the latter!

Even in a Keynesian model along the lines of the Sweeney/Krugman babysitter model it will still be the case that lower wages by the unemployed don’t get you far enough to restore equilibrium–although as noted, we will need a coordination failure story in the Keynesian model since in principle everyone would be better off in that model with wage flexibility.

Sticky wages and unemployment

In my post ZMP vs. sticky wages I argued:

By the way, the problem of sticky wages is often misunderstood. The big problem is not that the wages of unemployed workers are sticky, the big problem is that the wages of employed workers are sticky. This is why stories of the unemployed being reemployed at far lower wages are entirely compatible with the macroeconomics of sticky wages.

At lunch with Tyler today discussing his recent post I expanded on this point arguing that since a large fraction of GDP is wages that a 5% cut in the wage bill is a very big number and that even a large cut in the wages of the unemployed just isn’t enough. Scott Sumner wasn’t at lunch but nails it with a simple example:

Nominal wages are fixed for the employed. NGDP falls 5%, and 5% of workers are laid off. Now the unemployed workers lower their wage demands by 20%. Why not by even more? Because of minimum wage laws, unemployment insurance, fear of loss of prestige, etc.

Suppose companies are not worried about workers making invidious comparisons (a big if, but I’ll grant this point to my opponents.) In the best case scenario firms lay off 4% percent of their workers and hire back the 5% who are unemployed at the same total wage bill. The excess unemployment is now 4% instead of 5%. The total unemployment rate falls from 10% to 9% (assuming 5% is the natural rate.) No big deal, we are still deep in recession. Thus wage flexibility among the unemployed doesn’t really help very much. If all employed workers accepted a 5% pay cut (or if the government ordered such a cut) and the Fed kept targeting inflation, we’d experience rapid economic growth.

See Scott’s post for more.

Note that this doesn’t mean that I think sticky wages are necessarily “the answer” or even the most important problem (sticky debt is an issue as well etc.) but the evidence for sticky wages for the employed is very strong and it certainly is a problem.

From the Richmond Fed, on structural unemployment

These results are related to what I sometimes call Zero Marginal Product workers:

…a significant part of the increase in long-term unemployment is indeed due to the inflow into unemployment of workers with relatively low job finding rates. We conclude by arguing that given the increased contribution to overall unemployment of unemployed workers with inherently low job finding rates, monetary policymakers may want to exercise caution in the use of policy to respond to the level of unemployment.

The authors are Andreas Hornstein and Thomas A. Lubik.  The entire study — full of useful information — is here, and for the pointer I thank Alex in Jerusalem (we await a report).

Via Scott Sumner, while this is not my favorite structural explanation, I read of this from Siemens:

Siemens had been forced to use more than 30 recruiters and hire staff from other companies to find the workers it needed for its expansion plans, even amid an unemployment rate of 9.1 percent

…a recent survey from Manpower, the employment agency, found that 52 percent of leading US companies reported difficulties in recruiting essential staff, up from 14 percent in 2010.

In manufacturing in particular there is evidence of a mismatch between workforce skills and available jobs: while employment has fallen since January 2009, the number of available job openings has risen from 98,000 to 230,000.

Via Felix Salmon (he pulls out excellent pictures), from the IMF, using cross-country data:

For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.

Unemployment, Recessions and Barter: A Test

Nick Rowe explains that the essence of New Keynesian/Monetarist theories of recessions is the excess demand for money (Paul Krugman’s classic babysitting coop story has the same lesson). Here’s Rowe:

The unemployed hairdresser wants her nails done. The unemployed manicurist wants a massage. The unemployed masseuse wants a haircut. If a 3-way barter deal were easy to arrange, they would do it, and would not be unemployed. There is a mutually advantageous exchange that is not happening. Keynesian unemployment assumes a short-run equilibrium with haircuts, massages, and manicures lying on the sidewalk going to waste. Why don’t they pick them up? It’s not that the unemployed don’t know where to buy what they want to buy.

If barter were easy, this couldn’t happen. All three would agree to the mutually-improving 3-way barter deal. Even sticky prices couldn’t stop this happening. If all three women have set their prices 10% too high, their relative prices are still exactly right for the barter deal. Each sells her overpriced services in exchange for the other’s overpriced services….

The unemployed hairdresser is more than willing to give up her labour in exchange for a manicure, at the set prices, but is not willing to give up her money in exchange for a manicure. Same for the other two unemployed women. That’s why they are unemployed. They won’t spend their money.

Keynesian unemployment makes sense in a monetary exchange economy…it makes no sense whatsoever in a barter economy, or where money is inessential.

Rowe’s explanation put me in mind of a test. Barter is a solution to Keynesian unemployment but not to “RBC unemployment” which, since it is based on real factors, would also occur in a barter economy. So does barter increase during recessions?

There was a huge increase in barter and exchange associations during the Great Depression with hundreds of spontaneously formed groups across the country such as California’s Unemployed Exchange Association (U.X.A.). These barter groups covered perhaps as many as a million workers at their peak.

In addition, I include with barter the growth of alternative currencies or local currencies such as Ithaca Hours or LETS systems. The monetization of non-traditional assets can alleviate demand shocks which is one reason why it’s good to have flexibility in the definition of and free entry into the field of money (a theme taken up by Cowen and Kroszner in Explorations in New Monetary Economics and also in the free banking literature.)

During the Great Depression there was a marked increase in alternative currencies or scrip, now called depression scrip. In fact, Irving Fisher wrote a now forgotten book called Stamp Scrip. Consider this passage and note how similar it is to Nick’s explanation:

If proof were needed that overproduction is not the cause of the depression, barter is the proof – or some of the proof. It shows goods not over-produced but dead-locked for want of a circulating transfer-belt called “money.”

Many a dealer sits down in puzzled exasperation, as he sees about him a market wanting his goods, and well stocked with other goods which he wants and with able-bodied and willing workers, but without work and therefore without buying power. Says A, “I could use some of B’s goods; but I have no cash to pay for them until someone with cash walks in here!” Says B, “I could buy some of C’s goods, but I’ve no cash to do it with till someone with cash walks in here.” Says the job hunter, “I’d gladly take my wages in trade if I could work them out with A and B and C who among them sell the entire range of what my family must eat and wear and burn for fuel – but neither A nor B nor C has need of me – much less could the three of them divide me up.” Then D comes on the scene, and says, “I could use that man! – if he’d really take his pay in trade; but he says he can’t play a trombone and that’s all I’ve got for him.”

“Very well,” cries Chic or Marie, “A’s boy is looking for a trombone and that solves the whole problem, and solves it without the use of a dollar.

In the real life of the twentieth century, the handicaps to barter on a large scale are practically insurmountable….

Therefore Chic or somebody organizes an Exchange Association… in the real life of this depression, and culminating apparently in 1933, precisely what I have just described has been taking place.

What about today? Unfortunately, the IRS doesn’t keep statistics on barter (although barterers are supposed to report the value of barter exchanges).  Google Trends shows an increase in searches for barter in 2008-2009 but the increase is small. Some reports say that barter is up but these are isolated, I don’t see the systematic increase we saw during the Great Depression. I find this somewhat surprising as the internet and barter algorithms have made barter easier.

In terms of alternative currencies, the best data that I can find shows that the growth of alternative currencies in the United States is small, sporadic and not obviously increasing with the recession. (Alternative currencies are better known in Germany and Argentina perhaps because of the lingering influence of Heinrich Rittershausen and Silvio Gesell).

In sum, the increase in barter and scrip during the Great Depression is supportive of the excess demand for cash explanation of that recession, even if these movements didn’t grow large enough, fast enough to solve the Great Depression. Today there seems to be less interest in barter and alternative currencies than expected, or at least than I expected, given an AD shock and the size of this recession. I don’t draw strong conclusions from this but look forward to further research on unemployment, recessions and barter.

Unemployment rates have doubled in most sectors — what does that mean?

Paul Krugman makes this observation, which I believe dates back to Rortybomb and perhaps earlier.  Rortybomb, Krugman, and others have cited it as evidence for demand-based, non-structural theories of unemployment.  I believe this is not exactly the correct inference.

Let's say you have the iPad sector, where unemployment is one percent (990 of 1000 are employed), and the typewriter sector, where unemployment is twenty percent (800 of 1000 are employed).  AD falls across the board, and that means there is in effect a proportional real wage mark-up, relative to what conditions justify, on both sectors.  Let's say that in both sectors real wages are suddenly five percent too high, again because of the whack to AD, which you can view as insufficient inflationary pressure.

To continue with this deliberately artificial example, let's also say we have equal and unitary labor demand elasticity in each sector.  So if the real wage is five percent too high because of the deflation, the quantity of labor demanded should fall by five percent.

In the iPad sector, employment falls five percent, or 49.5 workers, I will call it fifty even, to 940 workers employed, or the rate of unemployment goes up from one percent to six percent.

In the typewriter sector, employment falls by five percent, which leads to 760 employed out of 1000, or the rate of unemployment rises from twenty percent to twenty-four percent.

The two rates of unemployment, in the two sectors, do not go up proportionally or even close to proportionally.  It is harder to boost up the unemployment rate in the typewriter sector; the intuition is simple, namely that it is easier to double the unemployment rate when that rate is starting at the very low figure of one percent.  You can set this problem up in many different ways, but it's hard to avoid that core intuition.

If the rate of unemployment is going up proportionately in both sectors, it means the downturn is administering an especially strong shock to the weaker sectors.  It is a "final death blow tip them over the precipice kind of shock."  It does not signify AD irrelevance, but rather that negative AD shocks and preexisting structural problems somehow magnify each other.

Yet numerous times I have seen proportional changes in unemployment rates cited as evidence for a pure AD approach.  That does not follow.

As a final point, please note that not all non-AD theories imply excess demand for labor in a significant number of sectors.  There are plenty of non-AD theories, such as an increase in the risk premium, where there is a big negative employment move pretty much across the board.  I continue to see this point misunderstood.

The Keynesian bloggers are correct to argue against AD denialists, but when it comes to their arsenal of counters they are overreaching.

When will people move away from pure AD theories of unemployment?

Commerce department figures on Friday showed that total sales in 2010 were up 6.8 per cent from 2009, marking the sharpest such increase in more than a decade…

Industrial output is up by 5.9 per cent year-on-year.

Yet the labor market is still "eh."  Here is more, but again note it is wrong to reject the AD factor altogether, though it seems to be becoming less relevant over time.  Arguably AD and AS are interacting in unusual and presumably deleterious ways.

I have read too many blog posts attacking a caricatured version of either RBC theory or a narrowly defined notion of "structural unemployment" which requires excess demand for labor in significant parts of the economy.  As Arnold Kling points out, the labor market shock can be asymmetric in its effects.

From a different direction, here is Scott Sumner criticizing the recalculation argument.  I read Scott as establishing the conclusion that both AD and AS must be at work.

How the Public Views the Inflation-Unemployment Tradeoff

The public really hates inflation, probably due to money illusion, which is one of the reasons we are in the current situation. Circa 1996 Robert Shiller asked a group of 113 randomly chosen responders the following questions:

Imagine that you faced a choice for the United States between the following two extreme possibilities, which would you choose?

1) The US would have in the next 10 years an inflation rate of only 2% a year, but an unemployment rate of 9%, thus about 12 million unemployed.

2) The US would have in the next ten years an inflation rate of 10% a month, but an unemployment rate of only 3%, thus about 4 million unemployed.

The results: 75% chose option 1, the low inflation, high unemployment option.

Similar results were found in Germany.

Addendum: The Brazilians, who have the most experience with high inflation, were the most likely to choose 2 (46%).

Two unemployment puzzles

The first puzzle about unemployment when thought about from within the search-matching framework is that unemployment rates are highest among the least skilled and most homogeneous skills, i.e. among those worker/jobs with the easiest matches.  It's hard to believe that it takes a year to match a construction worker to a job.  

Closely related is the issue of how much uncertainty is holding back employment. The case for uncertainty is that hiring a worker is like exercising an option–once you hire, there are sunk costs of hiring (and potentially firing) that go beyond the wage such as administrative and training costs.

Note that you may not need a lot of uncertainty (i.e. you may not need regime uncertainty) to reduce hiring because you don't have to explain why firms aren't hiring only why they aren't hiring this day.  Even if we assume, for example, that hiring would be profitable, all else equal, it doesn't take much uncertainty to make it worthwhile to delay hiring a little bit, to wait and see.  It's precisely when sales are low and unemployment is high that firms don't mind waiting because uncertainty may resolve in due course and the workers aren't going away.

Ok, that's the positive case for uncertainty but the second puzzle is that uncertainty should matter most when hiring and firing costs are high and once again these costs are lowest for those workers with the greatest unemployment rates.  It's one thing not to hire when you can't fire but when firing is easy what's the risk? Moreover, unemployment has increased more in the United States than in Europe even though hiring and firing costs are higher in Europe.

Search-matching models of unemployment have a lot to add but don't necessarily overthrow the importance of AD shocks, sticky wages and prices and other sources of unemployment.

A Prize for Unemployment

The 2010 Nobel Prize awarded to Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides can be thought of as a prize for unemployment theory.

A key breakthrough was to realize that the problem was not how to explain unemployment per se but rather how to explain hiring, firing, quits, vacancies and job search and to think of unemployment as the result of all of this underlying microeconomic behavior.  Notice that the underlying behavior involves not just workers looking for jobs but also employers looking for workers so explaining unemployment would require a theory of job search, worker search and matching and each aspect of the theory would have to be consistent with every other aspect; i.e. how much workers search depends on how much employers are searching (e.g. advertising) and vice-versa and also on the quality of matching and all of these considerations need to be addressed together.  It was Mortensen and Pissarides in particular, building on work by Diamond, who built just such a consistent model.

A very surprising empirical fact helped to motivate this perspective: even in a recession millions of jobs are being created every month.  The figures we usually hear about the number of jobs created is the net figure but in the United States in August, for example, there were 4.1 million hires (and 4.2 million separations).  Thus, as noted above, understanding unemployment requires understanding these much larger flows of job creation and destruction.

Calibrating the (Diamond)-Mortensen-Pissarides model and embedding it in a dynamic real business cycle model to see if it can match the facts has been a key aim of recent work (see also here and Robert Shimer's work).

Search theory has been applied extensively to the labor market but the same type of theory can be used to understand any issue in which matching is important such as marriage markets and the housing market.  

See Tyler for many more details on Diamond, Mortensen and Pissarides.

Structural Unemployment in South Africa

Unemployment in South Africa is now running at 24% overall with significantly higher rates for blacks.  A shift away from low-skill labor combined with minimum wages and strong trade unions, however, has meant that it is very difficult to lower wages and reduce unemployment.  From a very good piece in the NYTimes:

The sheriff arrived at the factory here to shut it down, part of a national enforcement drive against clothing manufacturers who violate the minimum wage. But women working on the factory floor – the supposed beneficiaries of the crackdown – clambered atop cutting tables and ironing boards to raise anguished cries against it…

Further complicating matters, just as poorly educated blacks surged into the labor force, the economy was shifting to more skills-intensive sectors like retail and financial services, while agriculture and mining, which had historically offered opportunities for common laborers, were in decline.

The country’s leaders invested heavily in schools, hoping the next generation would overcome the country’s racist legacy, but the failures of the post-apartheid education system have left many poor blacks unable to compete in an economy where accountants, engineers and managers are in high demand….

Last year, as South Africa’s economy contracted amid the global
financial crisis, unions negotiated wage increases that averaged 9.3
percent [inflation is 5.1%, AT]….

Eight months ago, Mr. Zuma proposed a wage subsidy
to encourage the hiring of young, inexperienced workers. But it ran
into vociferous opposition from Cosatu, the two-million-member trade
union federation that is part of the governing alliance [insiders v. outsiders, AT], which
contended that it would displace established workers.

Hat tip: Brandon Fuller.

West German unemployment in the 1980s

A number of commentators in the discussion yesterday doubted whether West Germany had non-natural rate unemployment just before unification.  I didn't cover this in detail because I thought it was commonly accepted, but I'll offer up more evidence and it suggests oth unemployment and a deficiency of aggregate demand at the time.  Here, from the Kansas City Fed, is one typical account of West Germany, from 1989:

Thus, unemployment increased steadily from 1970 to 1988.  What caused this asymmetric effect of monetary policy on unemployment?  As argued below, restrictive monetary policy in combination with adverse external shocks…

The article describes West Germany as, through the 1980s, having had "persistently high unemployment."  (Keep in mind that less than twenty years before the unemployment rate in West Germany was one percent, though the natural rate was rising over time.)  

There were also plenty of structural reasons for West German unemployment, but those nominal and real rigidities are potentially amenable to macroeconomic policy.  Here's another treatment, from 1990, noting the persistent unemployment in West Germany, in excess of the natural rate.  This lengthy study, while finding AD deficiencies to be one factor behind West German unemployment, focuses on structural causes of unemployment, most of all wage rigidities.  That's a moot point; those unemployed workers still should benefit from well-executed fiscal and monetary policy, at least to the extent one believes such policies to be effective.  The study also finds that frictional unemployment and structural unemployment in the Lilien sectoral shift sense — the kinds that don't respond well to fiscal policy under any account — to be slight in West Germany at that time.