Archive for the ‘Unemployment’ Category

Michael D. Tanner, senior fellow at the Cato Institute, has a new article arguing that for many people in the US it pays off not to work.

Welfare Can Make More Sense than Work

We shouldn’t blame welfare recipients. By not working, they are simply responding rationally to the incentive systems our public policy-makers have established.


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Joachim Voth, professor of economics at Pompeu Fabra in Barcelona, describes and discusses four scenarios for the Euro’s future:

We are destroying a huge amount of the good work created by the European Union, almost over night as a result of the current policy mix.

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More than four years have passed since President Obama signed into law the American Recovery and Reinvestment Act (ARRA) of 2009. The stimulus package came at a cost of more than $830 billion, or about 22 percent of annual federal spending. It was supported by many Keynesian economists although criticized for being ‘too small’.

Although it seems unpopular to look back and ask whether policies of the past have actually worked, let us have look at the effects of the ARRA.

In a 2010 study, John Cogan and John Taylor have found little evidence in favor of the stimulus package:

The implication is not that ARRA has been too small, but rather that it failed to increase government consumption expenditures and infrastructure spending as many had predicted from such a large package. A consideration of the counterfactual event that there had not been an ARRA supports the hypothesis that state and local government borrowing would have been higher and purchases would have been about the same in the absence of ARRA.

Atif Mian and Amir Sufi have published another study in the prestigious Quarterly Journal of Economics in 2012. They estimate the effect of the Cash for Clunkers Program and exploit variation across U.S. cities in exposure to the program. They conclude:

We find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

James Feyrer and Bruce Sacerdote also examine the effect of the ARRA in their 2011 NBER Working Paper. They use state and county level variation and find that each job created came at a humongous cost:

A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000.

This finding is in line with a paper by Daniel Wilson published in the American Economic Journal in 2012:

Cross-state IV results indicate that ARRA spending in its first year yielded about eight jobs per million dollars spent, or $125,000 per job.

It is also in line with much of the previous research, as documented by Valerie Ramey in a meta study published in the Journal of Economic Literature in 2011:

I assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate: a temporary, deficit-financed increase in government purchases. I conclude that the multiplier for this type of spending is probably between 0.8 and 1.5.

This would translate into something like $120’000 to $200’000 per job created.

By the way, these figures are not surprising since most economists estimated the ARRA to ‘save’ about three million jobs at most. At a cost of $831 billion, this suggests about $300’000 per job. I wonder whether the public support would have been large had Obama sold the program with this price tag.

Greg Mankiw has also been following the so-called recovery ever since the financial crisis. Instead of focusing on unemployment his focus is on the share of the population which is working. This takes into account that some people have simply stopped looking for work. During Bush’s presidency, the employment-population ratio increased slowly from 62 to 63 percent. In the recession of 2008-09, this ratio dropped to 58.5 percent. And ever since then, it has stagnated at this low level. (see figure here)

Finally, it is also worthwhile to reconsider Econ Stories’ 2011 video featuring Keynes and Hayek:

Spending is not free, that is the heart of the matter. Too much is wasted as cronies get fatter. The economy is not a car, there is no engine to start. No expert can fix it, there is no ‘it’ at all.

The question, I ponder, is who plans for who. Do I plan for myself or do I leave it to you? I want plans by the many, not by the few.

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Discussions about minimum wages are often tedious. On his blog, Greg Mankiw uses a very simple argument to counter recent claims for higher minimum wages:

Why $9?

Presumably, the president’s economic team must believe that the adverse employment effects become sufficiently large at some point that further increases are undesirable.

The fact of the matter is that a higher minimum wage ultimately surpasses the productivity of some workers. At this point the least productive people will lose their jobs. So unless we know everyone’s productivity, any claim for a higher minimum wage

  • either assumes that all workers create enough value per hour (to make it profitable to hire them at the minimum wage)
  • or neglects that the weakest members of the society will no longer find a job.

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Every now and then politics goes beyond the normal stupidity. Yesterday, for instance, the European Union decided to ‘abolish’ youth unemployment:

EU ministers agree Youth Guarantee

A six billion euro pot in the EU budget has already been set aside to tackle youth employment in regions with jobless rates of around 25%.

Mr Barroso said it was a sad fact that there are both high levels of unemployment and skill shortages across Europe.

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Crowded seminar rooms, lecture halls bursting at the seams, record-high enrollment numbers, and frequent riots among students: all this summarizes observations from various universities across Europe in the past years. In Germany, the total number of students has risen by some 35% in the last ten years alone. The same holds true for Switzerland and other countries. Many universities now have twice as many students enrolled as their capacity would allow.

This gives rise to the question why there are so many young people attending university these days. As far as I can see there are several possible explanations. Let us take a look at each one separately.

First of all, one might argue that structural change has fundamentally changed skill and knowledge requirements in the labor market. Due to technological advancements young people now have to develop more advanced skills. And to acquire them takes several years of studying at the university.

The problem with explanation is that many students nowadays leave the university without being properly prepared for any job in the labor market. In fact, initial salaries after finishing a bachelor’s or master’s program are often lower than after an apprenticeship with some years of work experience. This may be because having a diploma in cultural or media sciences does not increase productivity enough to justify any higher income. Especially when compared with on-the-job training and actual experience in a profession.

A second explanation for record-high enrolment numbers could be the increase in household incomes. Unlike in previous times, today most parents can afford to support their children up to the age of, say, 25. This enables young people to postpone work and spend more time doing what satisfies them. There is no doubt that despite some annoyance due to exams and seminar papers, being a student is far less tedious than having a job in the private economy. This is especially true for all those students in programs of dubious academic quality and challenge. After having fulfilled the duties of school, spending several years dealing with “something interesting” while having a lot of leisure time to meet friends is simply a tempting option. Yes, students live on a small budget but often that budget allows for a decent standard of living which may include iPhones and holidays.

This leads to a third reason for today’s crowded universities: the absence of tuition. While there may be some good arguments to subsidize tertiary education, it ought to be hard to justify a 100 percent subsidy. However, most students in Germany, Austria, or Switzerland hardly pay any tuition or fees. This artificially low price obviously spurs demand. And it does so beyond what would be reasonable. The more university studies are subsidized, the lower the incentive of students to carefully decide whether or not to study, to choose the most suitable program, and to finish studies as successful and early as possible.

An obvious problem with the third argument is that enrolment numbers have increased in countries with high tuition as well. However, it certainly plays some role in those countries with low tuition fees.

A fourth argument that is often put forward is the decline in academic standards. Unless you assume that young people today are way more intelligent than those in previous generations, you will have a hard time to explain why so many teenagers today are able to finish high school, college, and finally get a university degree. In the past, only a small fraction of the population in Germany earned the qualification for university studies. Today that fraction has increased to about fifty percent.

It seems that a simple confusion of correlation and causality might have something to do with that increase. Politicians have long seen the unemployment statistics which show that those with more years of schooling are doing much better in the labor market. The straightforward (and naïve) conclusion has been that more young people must stay in school for 12 or 13 years and ideally acquire a university degree afterwards. But since neither the quality of teaching nor the intelligence of students has increased much, only a lowering of standards could enable more students to accomplish that goal.

It is no wonder that any lowering of standards also lowers the value of academic degrees. As a result employers will ask applicants for ever higher degrees. Today it takes 13 years of schooling to be able to start an apprenticeship at a local savings bank in Germany. In the past, ten years were sufficient. This is not because the job or its requirements have changed. It is just because banks take into account the lower standards in schools.

Going back to the initial question why enrolment numbers have increased so dramatically, I would argue that it is the result of several well-intentioned but ultimately flawed policies. Studying at a university is artificially cheap, universities offer a whole array of programs that meet students’ interests but have dubious value in the labor market, and academic degrees have lost much of their past-time reputation as a result of lowered standards.

Today it takes only a 15-minute walk across almost any campus to see that something is wrong with tertiary education. A university ought to be a place of higher academic work where people focus on learning and doing research. Having a look at posters, leaflets, and students these days, universities more and more seem to be a place where young people gather around to enjoy their time.

I could be totally fine with that. But I cannot since the same people later on complain about dismal job opportunities, because they disturb and distract those students who do want to learn and study, and because of the high subsidies for tertiary education.

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In a recent article for the WSJ, Nicholas Eberstadt argues that over the last fifty years the United States have become a nation of transfer recipients:

Government transfers in current dollars, in trillions

American Character is at Stake

In 1960, U.S. government transfers to individuals totaled about $24 billion in current dollars, according to the Bureau of Economic Analysis. By 2010 that total was almost 100 times as large. Even after adjusting for inflation and population growth, entitlement transfers to individuals have grown 727% over the past half-century, rising at an average rate of about 4% a year.

In current political discourse, it is common to think of the Democrats as the party of entitlements, but long-term trends seem to tell a somewhat different tale. From a purely statistical standpoint, the growth of entitlement spending over the past half-century has been distinctly greater under Republican administrations than Democratic ones.

The U.S. is a very wealthy society. If it so chooses, it has vast resources to squander. And internationally, the dollar is still the world’s reserve currency; there remains great scope for financial abuse of that privilege. Such devices might well postpone the day of fiscal judgment: not so the day of reckoning for American character, which may be sacrificed long before the credibility of the U.S. economy. Some would argue that it is an asset already wasting away before our very eyes.

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It is now more than four years since the beginning of the financial crisis. And ever since economists have discussed whether we will face an L-shaped, a U-shaped, a V-shaped, or a W-shaped recession. If you don’t know what that means, there is a simple explanation on Wikipedia.

Let aside theory, what counts is actual experience. And unfortunately, as Greg Mankiw pointed out the data support the L-shaped story:

Employment population ratio

To some extent this development is similar to the 1930s. Despite (or because) of massive government intervention job growth in the private sector has been very slow. This view is supported by two videos: the first from an interview with Dr. Thomas Sowell, and the second from ReasonTV:

Once you start to intervene, it is not just the question of the merit of the particular intervention, it is the fact that nobody knows when you are going to intervene again.

Unemployment stood at 17 percent in 1939, a decade after the stock market crash.

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If we were to believe in Keynesian economics, shouldn’t we encourage more Greek people to riot in the streets? One day they will have destroyed enough to make reconstruction jobs stimulate the economy…

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Maybe the best thing you can say about the current “Occupy” movements is that they have good intentions. But if this true, I would immediately recall Bernard of Clairvaux’s famous phrase “The road to hell is paved with good intentions.

A much more precise description of the protesters might be to call them naive. In a recent article for the Jewish World Review, Thomas Sowell expands on that:

The Moral Infrastructure

If in fact 99 percent of the people in the country were like these “Occupy” mobs, we would not have a country. We would have anarchy.

If the “Occupy” movement, or any other mob, actually represents a majority, then they already have the votes to accomplish legally whatever they are trying to accomplish by illegal means.

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