Abbot and Costello Explain Unemployment

Greg Mankiw posts a great piece from a colleague at the University of Chicago.

Generation Gap Alert: I just talked about this with my freshmen at one of the universities where I teach. None of them knew the Abbott & Costello routine "Who's on First?"  Consequently, you may want to skip this or show your students this clip first.

Dual Mandate

There is a very good short essay by Dan Altman over at Big Think.

It deals with the dual mandate faced by the Federal Reserve. For those of you who are unfamiliar with the term, the Federal Reserve is obliged by law to consider “maximum employment, stable prices, and moderate long-term interest rates.” The kicker is that first part. Many other central banks around the world are focused on stable prices only. This makes sense if you subscribe to the idea that money is neutral and understand the relationship in the equation of exchange M * V = P * Q  (or P * Y as many prefer).

But the author points out that it complicates monetary policy when fiscal policy is ineffective.  I even wonder if fiscal policy-makers are generally unwilling to face hard choices, hoping that monetary policy can solve the problem alone. If true, the tools in the monetary policy toolbox may not offer the solution that is being sought.  This is not the time to use the old adage, “when all you have is hammer, treat everything like a nail.”

I look forward to your comments.

Productivity, Structural Unemployment & Creative Destruction

As we know, cyclical unemployment can become structural if prolonged. And as labor costs rise, there is an incentive for firms to increase the capital/labor ratio rather than hire workers. This can be part of the process of creative destruction. It's all explained rather well in this blog post at The Wall Street Journal.

What I like about the post is that it is short yet very clear. I would think you might want to use with your students as a discussion starter at the beginning of the period or to summarize a day's activity.

This May Not Help...Much

There was a useful article in Monday's edition of The Wall Street Journal (free content at this writing) that discussed a pending deal in Congress. It would trade a temporary extension of the Bush era tax cuts temporarily for an extension of unemployment benefits. On the surface, this would seem to be a great example of classical Keynesian economic policy.

However, there are a number of additional directions you can go with this. One can use the fact that the extension of tax rates is temporary and that people know this. Essentially, they are being told that taxes will go up in the not too distant future. Consequently, what is the likelihood that people will spend the extra money vs. saving it to offset future tax increases? Does it make a difference that we are in a recession? Does the incentive to save differ for those who are still struggling - perhaps with part-time work because they can't find a full-time job? If you're still unsure about your job going forward, how will that impact your decision to spend vs. save?

As for the extension of unemployment benefits, there has been research that indicates the length of time the benefits are available has a connection to duration of unemployment - the longer the benefits period, the longer the duration of unemployment. Other economists believe that people who are unemployed try to seek employment quickly - even at lower wages or positions that would previously have been unattractive.

For either tool, a case can be made that passage will help the economy. And a counterargument can be made that it won't. At the moment, the discussion is basically academic because nothing has been passed. But that makes it a perfect intellectual exercise – lots of room to play. And as neither side is planning on cutting other programs to pay for what being proposed, it will add to the deficit. You can even begin discussion of "crowding out." What do you think?

Structural Unemployment and the Beveridge Curve

One of the more interesting aspects of unemployment is how policy-makers choose to address it. But what many don't know is that the remedy needs to match the unemployment. That means you can't effectively address structural unemployment with programs mean to address cyclical unemployment.

This brings us to an interesting article from the Federal Reserve Bank of San Francisco. While it introduces a topic you probably don't cover, even in AP Macroeconomics - the Beveridge Curve - it provides a lot of information to help you through the section on unemployment.

Playing with Numbers

And for those of you who like to discuss how positive data can be used to support normative statements (on either side of the aisle) here's a very useful and interesting video (HT to Greg Mankiw).



I think this can be used a number of ways. But the most important lesson I would offer your students is "what data isn't being shown (on either side) and why?" Too often we (teachers and students) get caught up in an idea and neglect some aspect of the data that may enlighten. And just as often we add data that muddies the water. As always, I welcome your observations.

Immigration Effects on the U.S. Economy

I just received a very interesting issue of the FRBSF Economic Letter. The topic is The Effect of Immigrants on U.S. Employment and Productivity. I will state up front, it does nothing to provide a sound economic argument for those looking to restrict immigraion on the grounds of protecting American jobs.  And quite frankly, I didn't think it would. If anything, it provides further support for an view put forth several years ago in this issue of the Federal Reserve Bank of St. Louis's The Regional Economist.

I would recommend either or both of these articles for use with your students provided they are reading at grade level. I would think they would make a good discussion starter for labor markets, factors of production, and production function and GDP, just to suggest a few.  If you wouldn't mind, read them over and share your suggestions or thoughts.

Unemployment

I know many of you won't "officially" get to this issue until second semester when you address macro, but others will get to it sooner. Some might be teaching macro first, others may be teaching a survey course and get a chance to address unemployment as part of the survey. Regardless, here's an article from The Economist that you will want have available.

The article addresses the unemployment problem in the U.S., and why it doesn't seem to be responding to traditional Keynesian stimulus. The short answer is “this isn't just about weak demand.”

As the article points out, there are issues of structural change (the role of manufacturing and construction in the economy), institutional issues (dual income families are harder to move), and incentives (the impact of extended unemployment benefits). I would suggest uncertainty over future government policy may also be a factor.

There's a related article here.

What are your thoughts?

An Interesting, Albeit Sobering, Graphic

There is an interactive on the Associated Press web site (HT to Chartporn) that you can use in your macro sections. But it might also be useful in micro as a kickoff to the year. You can zero in on your state, and even your county to get a statistical reading. Then you can discuss whether it "feels" better or worse. You can also discuss the change rates.

Do you think you can use this in class? Please share any additional ideas.

Productivity

This video (HT to Carpe Diem) is about a new, robotic warehousing system. I could see all kinds of lessons arising from this video.



Show the video and ask students to identify which tasks disappear when a system like this is introduced? Using a productivity or growth equation (Y = aF[L,K,N] or some variation), what is happening when a system like this is introduced? What tasks is the system taking over? What skill-level would workers doing that job have to have to do those tasks? How would those jobs be classified (skilled, semi-skilled, unskilled)? How might this system offer an improvement over workers performing those tasks? How would marginal cost/benefit be a part of the decision to introduce such a system?

What would be the implications to a program of unemployment support for displaced workers if systems like this were wide-spread? Would this be an example of cyclical or structural unemployment? How does this relate to Schumpeter's idea of creative destruction?

Education, Skill Sets and Recovery

The Federal Reserve Bank of Cleveland has an interesting article in the recent issue of Economic Trends (see page 14). The author asks whether a mismatch between worker skills and job skills may be a factor in the slow job creation growth.

On the surface, this is a logical question. Recessions are often seen as a time for factors of production to be reallocated. This applies to labor. Certainly, as companies retrench they will look to increase productivity among existing workers before bringing on new ones. Indeed, one lesson we teach is that rising prices increase supply, partially because higher prices allow less productive resources to come into the process. Workers with weaker skill sets may, indeed, face a period where their skills don't match demand.

But I'm not sure I agree with one aspect of the article's conclusion. The author talks about lower productivity and higher unemployment. I would think that the retrenchment would lead to higher productivity. To that point I would point at the long-term trend, as illustrated here by Mark Perry on Carpe Diem. Mark's data is longer-term. And granted, the past does not guarantee the future, but I think it would be logical to expect increased productivity from the existing workforce, at least in the near-term. If there is a skills mismatch, growth will have to come from higher productivity. And that increase in productivity may change the larger economic landscape, establishing a higher premium for certain skills, while those with lesser skills could face an uncertain job market. Recent productivity data would be helpful in this respect.

This brings me to a post by Greg Mankiw. Greg asks whether the current average duration of unemployment may indicate the Non-Accelerating Inflation Rate of Unemployment (referred to as NAIRU or "the natural rate of unemployment" by some) may be increasing. If the economic structure has fundamentally changed, say by requiring more skilled and more productive workers, one could see how this would be possible. However, as has been pointed out here and in other places, the duration of unemployment could be a result, in part, of extended unemployment benefits providing a skewed incentive. I'm not sure I totally buy that explanation, but I do understand it. I think Greg is right in saying we may not have the answer to the question for some time.

To summarize this post, I don't know whether we are undergoing a major structural reorganization of the economy. A skill mismatch would certainly contribute to that, and changing productivity would certainly be expected in such a circumstance. If these issues are tied together, it would indicate a need for a different approach to economic policy than what is being tried. But I find all three links interesting and worth your time. I certainly welcome comments.

Unemployment

In many AP Macroeconomics courses, there is an opportunity to look at unemployment. And one of the discussions revolves around the level of unemployment benefits and the duration of benefits. There is a very good article in yesterday’s (Friday, May 28, 2010) edition of The Wall Street Journal (free at this writing). (If it changes, try putting the article title in your browser.)

The article is about the United Kingdom’s budget problems, and how various support benefits, including unemployment, may be part of the solution. I recommend it.

Do Volunteers Steal Jobs?

"Low wage workers steal jobs." This argument is one we have all heard. It gets applied to issues such as immigrant labor, off-shoring, even unionization. The prima facie argument is compelling. Someone willing to work for a lower wage replaces the individual working at a higher wage. It isn't fair, etc., etc.  That's what made this post on Econlog so very interesting. The author of the article referred to in the post, indicates that there was suspicion about the motives and effect of volunteers in the aftermath of the Haiti earthquake. Locals thought the workers were "stealing their jobs" by agreeing to work for less than the local wage. When informed that they were doing it for free, a common response was that the workers must be getting paid elsewhere.

The type of thinking exhibited by the villagers may be questionable, but is it a logical extension of the arguments we hear related to immigrants, off-shoring, etc.? If it is true, shouldn’t anyone from the outside who is involved in the cleanup after a catastrophe be looked upon with suspicion? The motives of numerous charities should be questioned because the workers are doing things that locals could be doing themselves and possibly getting paid for.

Would it also apply to help extended during catastrophes? If "outsiders" come to help fight forest fires or build levies against flood waters, aren't they taking work from those in the community whose job it is (or could be) to perform those services?

I'd be interested in reading your reactions. If you've read your Adam Smith (both The Wealth of Nations and The Theory of Moral Sentiments), how do you think he would respond?

Encouraged Workers

First, here's a bit of humor from Limericksecon to take you into the weekend. It does a nice job explaining how previously-discouraged workers, moving back into a recovering job market, can actually increase unemployment.

It makes a nice follow-on to this post of mine from last month.

Productivity and Unemployment

Having recently covered both unemployment and productivity with my students, I was intrigued by this article in today's issue of The Washington Post.

It discusses the connection between unemployment and productivity. And, on the surface, it seems to confirm a connection made in my previous post regarding Okun's Law.

More specifically, it addresses whether there is a connection between the persistent unemployment the nation has experienced, and the increased worker productivity that we've witnessed recently. It seems to make the argument that the unemployment numbers would fall if only we weren't being more productive. And while that is a seductive argument on the surface, we need to dig further. To that end, I direct you to three other sources.

The first is an old post by Alex Tabarrok at Marginal Revolution. He wasn't buying the connection in this 2003 entry. It's important to note that he was writing during a time when high unemployment was a topic of debate - although it was not as high as we are seeing at the moment.

The next two posts are from the always excellent Becker-Posner blog. Last November, Gary Becker explained why there may not be as clear a connection as many would think. Richard Posner provided a convincing dissent.

All of these are both worth reading. And the combination should provide an opportunity to review concepts while also providing substance for in-class debate when discussing aggregate supply and demand and government policy, don't you think?

Choice on a Macro Scale

In an article titled Europe's Choice: Growth or Safety Net (subscription content, but poke around for the title on your browser) in today's issue of The Wall Street Journal, there is a good explanation of the choice and trade-offs facing the member states of the European Union.

Europe has not rebounded from the current malaise, even to the extent that has been seen in the U.S. And many observers believe that the reason for poor performance has been what many believe to be an over-generous safety net for Europe's workers. Labor laws and unemployment benefits are a bane to European employers, imposing costs that keep them from hiring or rehiring workers - essentially an incentive to not create jobs.

Concurrently, the level and duration of benefits can act as an incentive to workers to stay "on the dole" and makes finding a new job less imperative.

The story has an accompanying video (mostly useful for investors) and an interactive graphic showing a timeline for the crisis faced by the EU.

I look forward to your comments.

Productivity, Unemployment & GDP

In a recent class, I asked my students to explain why output could grow while unemployment did not improve or even worsened. The answer seemed to be in productivity.

Now we come to this story in The Economist. It compares the recession, growth, unemployment and productivity in Europe and the U.S. The diagnosis is the same. The prognosis is that the U.S. recovery will be faster than Europe's despite the fact that Europe opted for lower productivity as a trade-off for saving jobs. The culprit, or at least one of them, appears to be institutions - in this case, labor regulations. It's an interesting read and presents a good case.

I welcome your thoughts.

Some Interesting Charts...

courtesy of our friends at Chartporn. The first is a graphic from The New York Times. It shows how large and small banks are dominant in various parts of the country. I may be getting forgetful as maturity sets in, but I seem to remember from my days at the Federal Reserve Bank of Chicago, that smaller banks held a smaller proportion of deposits than is shown in this graphic. That may be a consequence of where the line between large and small is drawn, but the patterns look similar to what we knew about in the Seventh District.

The second is a graphic on outsourcing. The chart does a good job of explaining how outsourcing affects the domestic economy, and really lends itself well to discussions about structural unemployment. I do wish some of the negatives at the bottom of the chart were a bit more prominent, as they need to be part of the discussion when studying the role of government in managing aggregate supply and aggregate demand.

I'd be interested in your comments.

Ricardian Equivalence

As those in AP and IB courses on macroeconomics approach the chapters on fiscal policy and influencing aggregate supply and aggregate demand, I want to draw your attention to a couple of posts that you may find helpful. (And who knows, many of you may already be at this point and searching for additional information.)

Likewise, more traditional economics classes will probably transition soon into the macro portion of the course. And when discussing fiscal policy, the stimulus package may be invoked as an example of how government policy may influence aggregate supply and aggregate demand.
The first link is from the always informative Becker-Posner blog. Gary Becker lays out a pretty good explanation of the current stimulus plan and why, in his analysis, it does not meet the criteria for a good Keynesian stimulus. He discusses crowding-out and policy delays, and makes his case for a flawed attempt to kick-start the economy.

Richard Posner presents another viewpoint. Now, this is no counterargument. Posner does concede problems with the package and admit that it could be improved, but he is not ready to throw the package "under the bus."

But what was most interesting, in my opinion, was his invocation of the Barro-Ricardian equivalence. Indeed, it was this discussion on the Wealth of Nations blog about Ricardian equivalence that drew me to the Becker-Posner exchange in the first place. So a HT is in order.

My class had discussed Ricardian equivalence not very long ago and will do so again in the near future. I will be using information from all of these posts to help clarify the concept for my students.

I look forward to your comments.

Encouraged Worker Effect

Today's edition of The Washington Post has a story about rising unemployment in the middle Atlantic region. The reason put forth is that improving economic conditions are giving the unemployed a feeling that jobs are or will be more plentiful. As a result, workers who had dropped out of the market because they were discouraged (which would have reduced the unemployment rate) are now coming back in. Call it the "Encouraged Worker Effect."

Is this something you could use when studying unemployment?