Learning about Long Term Unemployment (II)

Politics and Policy

 

Last Monday, I discussed some of the findings from the conference on causes and consequences of, and policy responses to, long term unemployment, which brought to UW Madison Prakash Loungani, an Advisor in IMF’s Research Department, Kenneth Scheve, Professor of Political Science at Yale, Phillip Swagel, Professor of Public Policy at the University of Maryland, and a former Assistant Secretary of Treasury for Economic Policy, Rob Valletta, Research Advisor at the Federal Reserve Bank of San Francisco, and Kenneth Troske, Professor of Economics from the University of Kentucky. In today’s post, I will discuss the presentations and papers by Ken Scheve and Phillip Swagel and Ken Troske.

LTUE2a.gif

Figure 1: Median duration of unemployment, official BLS series (blue line, left scale), overall unemployment rate (decimal form, right scale), unemployed over 27 weeks as a ratio of civilian labor force (red, right scale). NBER defined recession dates shaded gray. Source: BLS via FREDII, NBER, and author’s calculations.

On Policy

 

From Swagel and Troske’s paper, “Training: A Targeted Policy Proposal”:

In an era of limited government resources, we look to focus training dollars in a way that will have a meaningful and cost-effective impact in improving the lifetime incomes of those receiving training. The targeted groups are people with low skills and incomes but substantial motivation and evidence that they will benefit from training such as consistent labor force attachment. Training support is meant to provide an opportunity for people to garner the basic skills needed to move up the occupational ladder.
People with low skills already have substantial incentives to get training, since acquiring new skills is a pathway to higher incomes. Many low-skilled workers, however, face substantial obstacles to utilizing training, including the potential cost of training. For people of modest financial means and limited access to credit, even the cost of community college could be an insurmountable obstacle, as could the cost of paying for others to care for dependents while taking training. Moreover, many workers in low-skill occupations are not likely to receive on-the-job training—a garage attendant or janitor, for example, might have the motivation to consistently show up to work and the non-cognitive and social skills to perform at a high level but still never have the opportunity to advance. A lump sum of training funds could allow such a worker to take remedial courses and learn the skills needed to move up the occupational ladder. Training could help allow a garage attendant or janitor to become an MRI technician or home health care aide.
The empirical training literature suggests as well that motivation is a key determinant of the success of training programs. The second component of our proposal thus targets groups such as single mothers who have considerable motivation to move up.
Our proposal would extend training support to low-skilled people who are currently employed. Some $18 billion of federal money is now spent on a welter of programs related to training and job search, but workers are generally not eligible for federal training assistance while they remain employed. We turn this on its head and make evidence of reliable employment—of strong labor force attachment, in the jargon—a qualifier for assistance. This thus serves to increase skills for those taking it up and as an incentive for employment for those not currently eligible.

The paper takes as given that there is going to be an extended period of elevated unemployment, and that some of this unemployment is structural in nature. The specific proposal is described thusly:

We would provide an annual training benefit of $2,000 for two years delivered as an individual training account as in the current WIA model for a total of $4,000. This would be a one-time benefit for an individual (once per lifetime). The funds in the account could be used for approved local training providers (often community colleges). This amount compares to the $2,713 average annual tuition and fees at a community college in 2010-2011 (from the American Association of Community Colleges 2011 Fact Sheet); participants in this program would typically continue to work at least part-time while taking up training, meaning that $2,000 would likely cover the cost of an appropriate program of part-time courses. The focus would be on basic skills; this is not meant to replace Pell Grants in funding post-secondary education and the menu of approved providers and training opportunities would be explicitly linked to development of basic skills.

The training account would allow for part-time and intermittent enrollment for up to five years, in recognition of the reality that many workers will find their training interrupted for life events.

For me, perhaps the most interesting aspect of the paper was the point that we know remarkably little about what works and doesn’t work in terms of retraining. (Some literaure here and here.) While the authors conclude we should focus on the individuals the empirical literature says benefit from retraining, they also argue forcefully for the need for additional research — and this is not merely a throwaway line. In other words, those truly interested in helping the unemployed believe more research is necessary to see what constitutes a cost-effective use of resources in retraining (i.e., better to light a candle than curse the darkness … and cut funding).

 

I had two observations regarding the proposal. The first was that the focus on the trainable represented essentially an abdication of responsibility for those who evidenced low payoffs to retraining. While this decision might make sense from a benefit-cost perspective, the weakness of the empirical evidence suggested caution. Moreover, even if new empirical evidence were to buttress the earlier findings, trade adjustment assistance might still be worthwhile because it is part of an implicit bargain that a free trade regime that induces costs on some workers is associated with compensation for those bearing those costs.

 

The Political Implications

 

Ken Scheve’s paper, “Envy and Altruism in Hard Times”, did not directly address unemployment, but was very relevant to how the public views policy interventions that help various groups. From the conclusion:

Mass political behavior in the midst of an economic crisis provides a unique lens for studying distributive political conflict and the determinants of political opinion and behavior. This paper points to any one of the millions of citizens who have voted, marched, or rioted to
advocate or protest one policy position or another in their national political debate on how
best to respond to the crisis and asks why did those citizens take the positions that they
did and why did they often seem so invested in the debate. It seems likely that self-interest
plays an important role in answering these questions. Having often already lost much in
the crisis itself, individual citizens are acutely aware of the consequences of policy change
on their individual welfare. Moreover, economic crises are often periods of significant policy
change with long-lasting distributional consequences. In short, with so much at stake,
it would be surprising if self-interest did not inform policy opinions and behavior in the
national debate. However, the theatre of these political debates suggests the possibility that
other considerations may also be central to determining the positions that citizens take and
their behavior in the political process. The German or American taxpayer or Greek or
Spanish civil servant is not outraged simply because they will lose from some new policy
under consideration though that may be part of the story. Rather, their policy position and
outrage is in part because the policy alternative under consideration either resonates or is
in conflict with their sense of fairness.
In this paper, I investigate how one specific understanding of fairness- inequality aversion
influences individual policy opinions about economic policymaking in the context of an economic crisis. I argue that attitudes about inequality — both envy and altruism — lead to
systematic differences in support for trade protection across different sectors of the economy,
in support for taxing banking incomes, and in support for higher income taxes. In each pol-
icy domain, individuals not only consider how policy alternatives affect their own interests
but also how they affect the incomes of others relative to their own.
The paper provides empirical evidence from a set of original survey experiments on a
national sample of respondents in the United States (and I will shortly complement this
with analogous experiments in France). First, I show experimentally how variation in the in-
comes of the beneficiaries of various policies influence support for those policies. I show that
opinions about trade, financial market regulation, and tax policy vary systematically with
information provided about the incomes of those affected by policy alternatives. Respondents are generally more supportive of policies that benefit lower income recipients or create
costs for higher income recipients. Second, I adopt a specific formalization of inequality
aversion, incorporate this utility function into standard models of policymaking, and esti-
mate structurally an equation of policy preferences. I find that individuals have the social
preferences of altruism and envy assumed in these models though the relative importance
of these motivations vary across issue areas. Econometrically identifying these preferences
lends considerable support to the main claim of this paper that envy and altruism play a
central role in distributive political conflict over economic policies during times of economic
crises. That said, the evidence presented here should be viewed as pointing in the direction
of an important role for inequality aversion but it must be recognized that it is possible for
alternative mechanisms to generate the pattern of preferences observed across the experiments. It must also be said that many such alternatives seem more plausible for one policy area than another and so fail to simply explain the pattern across all experiments in the
way that inequality aversion does. Nonetheless, exploring new experiments and analyses to
evaluate alternative mechanisms seems a productive task for future research.

The way in which envy and altruism are operationalized is as follows:
LTUE2b.gif

As the author notes, perhaps a better way of characterizing the concept is inequality aversion. The extent to which this inequality aversion shows up, in the case of trade policy, is highlighted in this excerpt:

Table 1 reports the mean estimates for each treatment category and difference-in-means estimates for each combination of treatments. These results provide substantial evidence that support for sector-specific trade barriers are influenced by the average wage of workers in the industry.
Support for new trade barriers is 11 percentage points higher (a 33% increase) for respondents who considered protection for an industry with a low wage versus respondents who considered protection for an industry with an average wage. This difference was 20 percentage points (an over 80% increase) for respondents who considered protection for an industry with a low wage versus respondents who considered protection for an industry with a high wage. The differences between the middle and high wage treatments are also substantively and statistically significant.

Both Phill Swagel and Ken Scheve had remarks in the morning panel. Professor Scheve’s remarks were quite relevant to the issue of what to expect in terms of policy changes. He observes that while the Great Depression induced a big change in views about intervention in the economy, it might be the case that that experience is the exception, rather than the rule. Even before the end of the Great Depression, views toward helping the unemployed had hardened considerably, despite high unemployment. Using more recent data, he observed that there is little correlation between unemployment and the view that “Government should see to it that people have jobs and a good income and unemployment.” (from the National Election Studies).
LTUE2c.gif

Figure from Scheve presentation.

Statistical analysis does confirm that the unemployed do have different views of policies aimed at helping the unemployed. However, even if the differential is statistically and numerically significant, even now when the unemployed represent a large share of the labor force, the overall impact on preferences is not sufficiently large to have a large impact on the policy process. This is in addition to the following two points:

  • Bartels (2008) and others have argued that political representatives are more responsive to high-income constituent opinion than low-income constituent opinion.
  • Dominant role played by interest groups in policy process.

Some commentary. As I have thought about this presentation over the past week and a half, it seems to me that is where economic analysts have an important role in the policy process. If the unemployed and otherwise disenfranchised cannot speak up (or act) for themselves, then it is incumbent upon economists to ensure that critically important resources not be wasted (that is the clinical perspective; there is of course the moral imperative, but that differs from person to person, so I will not presume), as in Christina Romer’s recent commentary.

 

And More on Current Politics

 

Professor Phill Swagel’s morning presentation [not available online] made several points. The first was that the fault for the Great Recession does not lie entirely with the Bush-Cheney Administration. The depth and extent of the recession is attributable to the collapse in confidence in policymakers, which was exacerbated by the failures of the Obama Administration to forge a bipartisan stimulus package. This collapse in confidence in turn induced a process of massive deleveraging.

 

Agreeing with Drs. Valletta and Loungani, Professor Swagel stated that the bulk of unemployment is primarily cyclical in nature; however, the longer the unemployment persists, the more of it will be structural in nature.

 

More on Professor Swagel’s views on policy here.

 

Not an Ivory Tower Conference

 

There are some Econbrowser readers who love to take me to task for my devotion to models and analytical frameworks, allegedly without reference to the real world. The conference’s morning panel brought in an audience of policymakers and others — including those who had first-hand experience with the phenomenon of long term unemployment. From the Capital Times:

Nobody needs to remind Jeanne Hime what hard times look like.
After 30 years as a union electrician, Hime watched her hometown manufacturing plant close down, disrupting the lives of hundreds of working families in Darke County, Ohio.
“These weren’t people who could just pick up and find a job somewhere else,” says Hime. “They had lifetime roots in the community and didn’t want to leave.”
Now retired and living in Mount Horeb, Hime isn’t confident the good factory jobs will ever return. And she takes exception to those who dismiss the current unemployment situation as simply a cyclical turn of the economy.
“People like me have been burned too many times,” she says. “Why should they believe anything is going to change?”

While some would say the models and the real-world experiences have little in common, the responses of the panelists demonstrated that the development and interpretation of the models cannot exist in a vacuum.

La Follette School of Public Affairs Professor Tim Smeeding, who heads the Institute for Poverty on the UW-Madison, expressed more concerns about the long-term disenfranchised. He says no one has an answer for the 30-year olds with no job skills or the 12 million Americans on probation or parole.
“These are the folks at very the bottom of the hiring pool,” he says.

Dealing with those issues will require analytical thinking, and empirical work, to determine what works — and does not work — in helping people — just as the paper of Swagel and Troske highlighted. The faster we dispense with such false dichotomies, the faster we can get to work.

 

Update, 11:10am: Mark Copelovitch brings my attention to David Brooks’ column today, in which he writes:

There are probably more idle men now than at any time since the Great Depression, and this time the problem is mostly structural, not cyclical. These men will find it hard to attract spouses. Many will pick up habits that have a corrosive cultural influence on those around them. The country will not benefit from their potential abilities.
This is a big problem. It can’t be addressed through the sort of short-term Keynesian stimulus some on the left are still fantasizing about. It can’t be solved by simply reducing the size of government, as some on the right imagine.

While surely there is a structural component, Brooks is making the common mistake of equating long term unemployment with structural unemployment. As discussed in this post, the two are related, but the bulk of the current unemployment is cyclical in nature.

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16 thoughts on “Learning about Long Term Unemployment (II)

  1. Ricardo

    Back when free markets were respected in the US such a meeting would have actually included businessmen who actually create jobs. They would talk about what they look for from employees and how the government impedes their ability to create jobs.
    Today such a panel is made up of academics and professional politicians not job creators. Even Menzie’s token “real world” participant was not a job creator. Everyone feels the pain of Jeanne Hime and those losing their jobs.
    Just one quote from the article says it all: “… her hometown manufacturing plant close down, disrupting the lives of hundreds of working families in Darke County, Ohio.” Just imagine, a businessman spent millions of dollars just so he could close down his plant and make the workers miserable. Everyone knows that it was the evil business that caused all the pain. All the prosperity that came when the business opened was just a ploy to build the expectations of the people just so that the business could close down and hurt all those people.
    It is foolish to even think that the businessman acutally wanted to keep his plant open. It is foolish to even consider what conditions made the business close. Why talk to the owners. We all know they are evil people who just love to make workers suffer.
    We are out there teaching and training so that psychology graduates can work behind the counter at Enterprise car leasing. It is the evil businesses that don’t employ those graduates in their chosen professions. Why doesn’t Enterprise allow these graduates to have their own rooms to provide free psychoanalysis with each car rental.

  2. tj

    Retraining is a wonderful idea, and the authors have put some thought into implementation. However, the policy recommendation still smacks of ignorance. It is similar to policy makers sending tractors to developing countries to increase productivty, but nobody knows how to maintain or repair the tractors.
    In other words, the heart is in the right place, but we are ignorant of realities ‘on the ground’.
    In the training recommendation above –
    Do trainees live close enough to the community college to make travel feasible?
    The policy also dumps a new supply of students into an overburdened community college system. The policy may end up crowding out programs for regular students.
    Will trainees have to quit a part time job to make time for training? (Many trainees will be working more than one part time job.)
    How will single mothers, among the lowest paid, find day care while in training?
    Will there be re-employment assistance following the training?
    Many in the trainee pool lack the basic reading/writing skills necessary to complete the training. The authors suggest ‘garage attendants’ and ‘janitors’ be trained as ‘MRI technicians’.
    A possible solution, off the top of my head, would be to engage employers. The government could recruit employers who are willing to screen and train un/under employed workers and then provide employment following the training. Many employers will already have formal or informal day care options available. Some employers may offer compensation to trainees if they are producing some output or value.
    In exchange, a government subsidy would go to the employer instead of the trainee. Government could offer an X year tax incentive for the employer.
    It is far more efficient for employers to identify the type of skills/training that are/is in short supply, rather than have the government identify and train for skills that employers may not value as highly.

  3. GCTIII

    Gotta love all the charts and remarks. How about getting small business and big business to get together and explain why they are not hiring.
    Oh that would mean they would get the actual facts and they would not like them. Getting a degree in a field that is not needed in your area is a waste of time.
    Blaming business for all the problems in the world, when states increase taxes and unions will not allow workers to work in their states without joining one.
    Helping single mothers as they really want to move up? You all need to work in the projects where I have worked most of my life. They could care less about your government programs. Throw what you like at them. Been in projects all over the country and they all say the same thing. Why work when we can get a hand out. We can work under the radar or work until we almost hit the income limit and they make more then my staff.
    We have three colleges in my city. One college is one street over and we bring in counselors and offer free rides for these poor people and in 17 years only 4 have gone to college. Most will not even come to GED classes and we hold them at different hours of the day.
    I get so tired of we need to help this and we need to help that. How about saying No more get off your butt and get to work, we will continue to give you welfare for a certain amount of time and you are going to work for it.
    It is strange how throughout my years every person evicted or frauding the taxpayer goes to work after they get caught.
    We need to take care of our elderly and disabled in this country. We need to take care of that single person or couple working hard to make life better. All the time trying to get a real education.
    But enabling people to take from taxpayer because they are too lazy to work is another situation all together. I am going to get flamed for this but that is the reality of the situation. No professor or shrink that does not work where I have will change anything.
    I am so tired of anyone who makes a decent living and pays there taxes is now evil, because they need to sacrifice more. Hell I see 49% of my paycheck now once all these social programs are done with me. But me and any business owners are the evil ones and it is getting old.

  4. Nemesis

    Capitalist corporations exist to grow profits and capital accumulation in perpetuity, not to “create jobs”. Gov’t cannot make up for the inability of the private sector to increase employment by borrowing and spending at 10% of GDP and 17-18% of private GDP.
    A net growth of private labor product can only increase and be sustained if the enterprise can continue to grow revenues, profits, and capital accumulation “domestically”.
    The US ceased growing domestic full-time, private employment as long ago as the mid-’90s. Less full-time employment in private “education” and “health care”, there has been no growth of full-time, private empployment since the late ’80s to early ’90s in per capita terms.
    Therefore, it follows that the US since the late ’80s to early to mid-’90s has not created a net increase in value-add productive stock per capita.
    Not coincidentally, it was after the early to mid-’80s that US per capita domestic oil production commenced a 3.2%/yr. per capita depletion rate to date, whereas debt-money creation has grown per capita at 4.8%, resulting in a net debt-money growth to oil depletion per capita of nearly 7 times, and 5-6 times to US industrial production per capita.
    Because economists perceive costs and value in terms of prices, which are determined to a large extent by debt-money growth and incremental gov’t borrowing and spending, they miss the real costs of per capita net energy in per unit per time terms.
    [edited for length - mdc]

  5. Jonathan

    I really enjoy reading the nonsense comments here. Thanks for the entertainment.
    As to the post, I’ve read some nice studies, mostly OECD and kind of old, that summarized training as: helps those who left the workforce for a reason and are now returning. Read that as women having children who need updating on skills. This fits with the paper’s recommendations about targeting groups that are working and single mothers in particular. It is unfortunate but there seems to be no way to train workers who aren’t otherwise attractive to employers. A single mother who is otherwise a good candidate but who nees some skills or updating is the right focus. Problem is, even if you can identify these, there aren’t enough to make that big a difference in the aggregates.
    As for blame, my take is kind of like one of those weird counter-factuals in which we blame Britain for not agreeing with Rudolph Hess so the Cold War and all the US deaths in Europe in WWII are due to us not siding with the Nazis against the Soviets. So yeah there’s uncertainty, something the GOP loves to cite, but it’s uncertainty related to their absolute obstructionism. When no one knows if one party is going to blow up government, yes there is uncertainty. It isn’t about tax rates but about whether government will function at all. That isn’t a bipartisan issue at all but the illiterate, irrational extremism of the GOP.

  6. 2slugbaits

    Ricardo and this GTCIII character would do well to take advantage of a remedial reading class at one of those community colleges. Nowhere did anyone blame employers for long term unemployment. Nowhere did anyone say businessmen were the root of all evil and to blame for the Great Recession. The thrust of Menzie’s post is exactly the opposite; he is saying that most of today’s unemployment is due to cyclical factors and is not anyone’s fault except the government’s for not doing something about it. We have a magneto problem. Weak aggregate demand. No one expects a sane businessman to invest in capital deepening or a deeper labor force when that same businessman is already sitting on excess capacity. I continually hear Republicans and Very Serious People talk about “supply and demand” (genuflecting all the while); but what they really need is to first understand the difference between supply curves and demand curves. Supply and demand isn’t one word “supplyanddemand,” it refers to two different curves. Today’s problem is weak aggregate demand. Talk that addresses the supply curve is not responsive to the current problem. Structural unemployment may very well be an aftereffect of a prolonged cyclical increase in unemployment, but structural unemployment is not our primary problem right now.
    As to the moral issue, the troubling question is whether countercyclical policies should be designed to minimize unemployment spells of the recently unemployed or if our policies should try to minimize the worst cases of long term unemployment. Minimax or mini-mini? Is it better to give up on the long term unemployed in the hope of getting the recently unemployed back to work ASAP. Should we have a FIFO policy or a LIFO policy? These are tough moral questions.

  7. Ricardo

    Slug,
    Individually I know some great economists and academics, even some politicians that are not too bad, but I have to say that “in the aggregate” you fit right in with the Academics.

  8. Menzie Chinn

    Ricardo: You write:

    Back when free markets were respected in the US such a meeting would have actually included businessmen who actually create jobs. They would talk about what they look for from employees and how the government impedes their ability to create jobs.

    Exactly when would that halcyon time be? Maybe 1929? Or perhaps 1911, before the Triangle Factory fire?

    Since you stated (in your DickF incarnation) on October 6, 2008, “We are currently not in a recession…”, you will excuse me if I do not take your definition of what constitutes a “great economist” to heart.

  9. Ricardo

    Menzie,
    I think you know why I changed my name. It was because of a cyber-stalker. He is now gone because he was threatened with a law suit (not by me) so I don’t expect he will return here, but just in case I would appreciate you making the connection as infrequently as possible. He is a real pain in the patutee and if he ever gets locked into posting here everyone will suffer. That said I do understand why you made the connection here referencing my post.
    You flatter me that you recall my comments in 2008. Thanks.
    Let me print the whole quote so everyone will understand the context.
    “We are currently not in a recession but the recent bailout and associated government spending amounting to approximately $2 trillion dollars will pull resources and capital out of the productive economy and dump them into the black hole of an already over built and over extended credit and real property market.”
    The NBER did not announce the official date of the recession until December 1, 2008 so officially the recession was still a question (though in reality we were). My point was that the NBER had not announced a recession but all of the elements to pull us into the “black hole” of recession were present.
    They got the start of the recession about right. I am not so sure about the end of the recession. 1.8% growth and 9% unemployment is pretty weak.
    But anyway to your question, yes, I will excuse you.

  10. 2slugbaits

    Ricardo Since I’m neither an economist nor an academic, I’ll take your observation as a compliment. Thanks. Still, I don’t think you need to be either one to understand that there are three kinds of unemployment: frictional, structural and cyclical. Frictional unemployment is good unemployment…it is evidence of a growing and dynamic economy. Structural unemployment is a tough monster to tame, but it is almost entirely a supply side phenomenon. Structural unemployment comes about due to binding legal impediments (e.g., minimum wage laws) or the inability of employers and potential employees to find each other (i.e., a need/skillset matching problem). That really doesn’t describe today’s economy. There are scads of well qualified people in just about all occupational fields that are ready, willing and able to work if there is demand for their services. But there isn’t demand. The economy is operating well below potential, so talk of structural unemployment just seems irrelevant to me. Now I’ll grant you that eventually prolonged cyclical unemployment will lead to higher structural unemployment as workers lose skills and motivation, but we’re not there yet.
    What’s frustrating is that governments, especially state governments headed by GOP governors, are trying to combat unemployment with programs with roots in the 1980s when the problem was more structural. It’s like they don’t get it. Those kinds of jobs programs won’t help and might actually make things worse in a prolonged liquidity trap. And you don’t have to be an economist to see this. Back in high school economics we used Paul Samuelson’s textbook (okay, it was an elite school), and there’s nothing in today’s economic world that a high school graduate from that class wouldn’t understand. This is a well traveled path. Krugman’s right…economics is in a Dark Age.

  11. Ricardo

    Slug,
    Thanks for a very thoughtful post. Yes, if you are not an economist please take my comment as a complement. You are exceptionally well read in Keynesian theory.
    It is interesting that you brought up classifications of unemployment because I was just reviewing Ludwig von Mises Human Action just this morning on this topic. In Chapter XXX. INTERFERENCE WITH THE STRUCTURE OF PRICES Mises classifies unemployment as:

    The market wage rate tends toward a height at which all those eager to earn wages get jobs and all those eager to employ workers can hire as many as they want. It tends toward the establishment of what is nowadays called full employment. Where there is neither government nor union interference with the labor market, there is only voluntary or catallactic unemployment. But as soon as external pressure and compulsion, be it on the part of the government or on the part of the unions, tries to fix wage rates at a higher point, institutional unemployment emerges. While there prevails on the unhampered labor market a tendency for catallactic unemployment to disappear, institutional unemployment cannot disappear as long as the government or the unions are successful in the enforcement of their fiat.

    So, both the Democrats trying to pour money into the economy to stimulate employment and the Republicans trying to cut government spending to reduce the deficit are both simply perpetuating unemployment. Until the government gets out of the way structural unemployment (Mises) will continue.
    Thankfully after I graduated from school and began to study real economics on my own I de-programmed myself from the endoctrination of Samuelson.

  12. 2slugbaits

    Ricardo The idea that minimum wages decrease employment is only sometimes true. First, the minimum wage has to be binding; a minimum wage of $5/hr is meaningless if the prevailing wage is $7/hr. But even when it is binding, sometimes that’s a good thing. But what peeves me about the folks at von Mises is that they cannot even get the theory right, nevermind the actual practice. There are many cases in which economic theory tells us that unions and a minimum wage can increase employment. Every micro textbook worth its salt has a chapter on monopsony, and every textbook explains why monopsony labor markets are socially inefficient, reduce employment, and extract producer surplus from labor. A little freshman calculus is all you need to know that prove that the marginal expenditure curve will be steeper than the supply curve, which means monopsony firms will hire too few workers at too low of a wage. These are the kinds of real world, not to mention theoretical issues that the folks at von Mises just don’t get.

  13. Ricardo

    Slug,
    Are you a Saul Alinsky disciple? You certainly did make a rapid shift away from our topic, one of Alinsky’s primary techniques.
    To stay on point let me repeat, until the government gets out of the way we will have institutional unemployment.
    But since you brought it up, monopsony can actually only exist when created by government. The first example that wikipedia uses is single payer government health care. So if the government got out of the way we would also reduct monopsony … not to mention monopoly.
    I know you will bring up the mystic belief that Walmart is a monopsony but in a free market that is foolish. Walmart became what is by competing and winning the low cost product competition war against others like K-Mart and Sears. So no mysticism please. If you reference examples please make them real not fantasy.

  14. 2slugbaits

    Ricardo You certainly did make a rapid shift away from our topic
    Excuse me, but you’re the one who posted the von Mises nonsense about free market wages always getting it right. Monopsony is a classic case of when free markets get the price and quantity supplied all wrong.
    monopsony can actually only exist when created by government.
    Wrong. This tells me that you do not understand either the economic intuition or the math behind monopsony. Monopsony can happen without government…in fact, that’s when it is most likely to happen. For example, the relationship between nurses and hospitals is usually at its most monopsonistic in the absence of government intervention to correct a labor market failure. Similar story with teachers. If we only had private schools the problem of monopsony would be much worse. I could go on.
    I know you will bring up the mystic belief that Walmart is a monopsony
    Sorry to disappoint, but you guessed wrong. At one point Walmart might have had some limited monopsony power with some of its suppliers, but today I believe that is much diminished. At most we’re probably talking about Walmart as a major player in oligopsony, but even that is likely to be a stretch.
    Walmart became what is by competing and winning the low cost product competition war against others like K-Mart and Sears.
    This tells me that you really do not understand monopsony at all. Competition in the sense that your are using the term has absolutely nothing to do with monopsony. Monopsony is a phenomenon that develops when there is only one buyer for a product and the suppliers of that product have a low elasticity and an increasing supply curve. In that case the monopsonist captures producer surplus because the first derivative of the total expenditure curve has a steeper slope than the supply curve. So you’re right…no mysticism to it. Just freshman math.
    If you want real world examples, it just so happens that I’m quite familiar with the literature because I recently had to explain it to some 3-star. So here are a few famous studies:
    “Monopsony in the Market for Public School Teachers,” American Economic Review, Dec 1971
    “The Baseball PLayers’ Labor Market,” Journal of Political Economy, June 1956
    “The Economics of Professional Baseball,” Brookings Institution, 1973
    “Model of a Professional Sports League,” Journal of Political Economy, Dec 1971
    “Wage Determination Under Trade Unions,” by John Dunlap (1966)
    “Labor Markets, Wages and Employment,” Ingrid Rima (1981)
    “Skill Shortages and Employment and Training Policy in the U.S.: Past Relationships and Desirable Future Directions”, Paul Harrington and Andrew Sum. Boston: Center for Labor Market Studies, Northeastern University, 1984.
    And last but not least, the classic article in the field:
    “Dynamic Shortages and Price Rises: The Engineer-
    Scientist Case,” by Kenneth Arrow and William Capron, Quarterly Journal of Economics (1959).
    And of course you could always look up the stuff by Joan Robinson.

  15. mp

    2slugbaits, your 02:19 was excellent and timely for me.
    Professor Chinn, excellent as usual and thanks.
    Back to lurking.

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