Casey Mulligan rebuts my post asserting slack in the economy by posing the scenario “Construction Workers Teaching Kindergarten” (Note: Mulligan’s blog is down; here is an alternative link currently working – 8/2/09). He writes:
Econbrowser now claims* that the stimulus bill can be effective, because unemployment rates are high (whatever that means) in health care and education. Let’s take a look at employment changes Dec 2007 – June 2009 (millions) by industry:
Total nonfarm payrolls: -6.5
Construction: -1.3
Manufacturering: -1.9
Education and Health: +0.7
How exactly is fiscal policy going to create 3.5 million jobs by primarily hiring people in education and health? I see only two scenarios, both absurd and/or dishonest:
He argues these two scenarios are: (1) “The construction workers become kindergarten teachers” or (2) “The people in construction and manufacturing stay unemployed.”
Are Unemployment Statistics Meaningless?
Professor Mulligan apparently disbelieves unemployment rates, preferring to ascribe greater importance to employment figures. I think I understand why he does, given the optimizing theoretical framework he works with (see his interpretation of recent employment trends here). For those of us who believe that there is some information regarding involuntary unemployment in the unemployment series that BLS collects, here’s what the aggregate unemployment and the health and education unemployment series look like.
Figure 1: Unemployment rate for total noninstitutional labor force (blue for seasonally adjusted, dark blue of not seasonally adjusted), and unemployment rate for health and education services, not seasonally adjusted (red). Gray shaded areas denote NBER defined recession dates. Sources: BLS June emloyment situation report – household survey, and NBER.
The unemployment rate in health and education services has risen only (!) 3.5 percentage points, compared to 4.9 percentage points for the civilian labor force, from 2007M12 to 2009M06 (both series nsa), so I agree that the deterioration in this particular sector’s condition is not as bad as the overall economy’s. But that doesn’t deny the fact that there is some slack in the health and education sector (unless of course you disbelieve the unemployment figures entirely).
Are Spillover Effects Zero?
It’s true that if the additional job retained by a teacher has zero spillover impact on the rest of the economy, then Professor Mulligan’s argument that 3.5 million jobs will not be created makes sense. But I think it’s plausible to argue that if the teacher retains her job, keeps her house (thereby removing additional downward pressure on housing prices and keeps the house off the inventory of unsold houses), consumes more than she would have if she’d lost her job, and saves income she wouldn’t have otherwise received in the form of equities (thereby putting upward pressure on asset prices, reducing the cost of capital to the economy, etc.), additional jobs will be created.
Even if you want to rule out a priori all those general equilibrium effects, and just focus in on employment, as long as there is some Keynesian multiplier effect, then some of the employment effect occurs outside of education and health. After all, doctors don’t consume just medical services…at least in the world I live in.
People are free to believe whatever estimate of the Keynesian multiplier they want to, but it’s clear that the argument posed by Professor Mulligan requires no multiplier process. For surveys of estimates (rather than just my own preferred point estimate), see: [1], [2], [3].
On the other hand, I do agree that the stimulus package could have been better crafted; in particular, more for infrastructure and more transfers to the states would have been preferable [4].
* To be correct, it’s just myself that asserted in this post that the stimulus bill could be effective.
Technorati Tags: Casey Mulligan, unemployment,
multipliers, employment.
err – private sector employment is all that counts.
Measure private sector employment over all inhabitants (aged 18-65) over time and you’ll have a solid measure.
http://gudovac1941.blogspot.com/2009/06/methodology-thoughts-and-observations.html
Menzie,
You are absolutely correct, but I think it’s partly the fault of how the stimulus was sold that allows for these jabs.
The stimulus was necessary and giving the states money and extended unemployment were no-brainers.
But you have people like Krugman simplistically trying to show with a graph how private demand and be replaced by public demand. It just isn’t going to work out that way.
The economy needs restructuring. And not just ours, but the world economy. There is no simplistic way of papering over it it. The Chinese are trying that and will just make tings worse.
The administration should just concentrate on easing the pain and being honest.
Of, course, you could solve all of this without stimulus simply by reducing hours of work and government.
But if you insist on creating a bubble in education and health care to replace the one that burst in housing, feel free to proceed. Sooner or later you will run out of the liquid means to blow them…
I may be wrong, but it’s my understanding that the stimulus dollars going into health care are going to improve the health care system rather than being spent on actually providing care. For instance, there’s a big chunk being spent on electronic medical records technology. That potentially creates a lot of work in my personal profession — computer programming. That’s not exactly a health care job. Likewise, if the money being spent on education is actually going to improve education facilities or to provide more computer technology in schools, that isn’t increasing employment among those who provide education services, it’s increasing employment among construction workers who will improve the facilities and manufacturers who will produce the computers.
I note that professor Mulligan got his Ph.D. from the University of Chicago and that he teaches at the University of Chicago. Looks to me like Chicago recirculating its effluent back upstream. Can’t they get jobs somewhere else?
There is also the problem of “inactive”, as shown in this 1948-2008 you have to be careful with time based “unemployment” analysis:
http://fatknowledge.blogspot.com/2009/01/misleading-nature-of-unemployment.html
The education sector is hard to instrument. Do we count business seminars? Engineering proposal meetings? General non-fiction reading from the Internet?
If you believe that we are energy constrained, then do you believe better grammar schools solve that, ultimately? Or are you better off sending metropolitan traffic planners to technology firms for sales pitches. Both are a form of education.
Gudovac says: “err – private sector employment is all that counts.”
As it stands, this is a statement of religious belief. Why would it be true that private jobs are all that “count”? Public sector workers spend. They provide services. They pay taxes. They save.
kharris, one also wonders why private sector jobs created by government contracts “count” and government jobs created to, for example, monitor those contracts don’t “count.”
or one could stop wondering at all and assume, as you note, that gudovac is substituting a doctrinal point for an analytic one.
as for professor mulligan, i can’t figure out what he’s trying to say: is there someone reading here who can make sense of his comments?
I mean to beat a dead horse. “We” need a workhorse macromodel where involuntary unemployment exists — otherwise we get surely intelligent people like Mulligan writing that people are choosing to be unemployed.
The work shirk models, however, are open to the criticism that optimizing employers can create alternative incentive schemes which eliminate shirking. (See
Animal Spirits by Akerlof and Shiller).
Call me crazy but this morning I was noticing the only (decent) jobs being offered, in our local paper, were for school teachers and the medical related fields. Of course there were new paper routes and dish washing jobs available as well! Hummmmm….
You can build one more house as well. The construction workers will retain their jobs, keep their houses…
Perhaps Mr. Mulligan assumes we are a traditional society where only those currently in education and healthcare can work in them. /sarcasm
There are lots of good reasons to prefer employment figures to unemployment figures. Unemployment is bad for international comparisons because official definitions differ.
The exclusion of discouraged workers from unemployment (and of involuntary part-time workers and workers who give up and seek education due to week job markets who would return to the labor force if conditions were better) makes that particular measure problematic. Equally important, it fails to reflect the fact that lots of people described as not in the workforce and not currently looking for work, would slide into the workforce on a moment’s notice if an opportunity presented itself.
Unemployment surveys are better than unemployment insurance applications (which vary greatly due to differences in state law, severance package impacts, and involve non-application due to stigma from white collar workers), but still really only have relevance in comparing one time period to another, as opposed to being a relevant absolute number for many purposes.
Payroll surveys also have fewer accuracy issues because they interviewee is more sophisticated. Stupid survey interviewees and high non-response rates are constant static in data sets like unemployment numbers.
You see the similiar problems in religious identification surveys — small denominations with names similar to big denominations routinely get overcounted.