Another Perspective on Unemployment

With the 2010 emergency unemployment benefit extension passed by Congress set to expire on December 29, 2012, plenty of folks are anxiously evaluating the US job market. The New York Times published an intriguing economist argument by Casey B. Mulligan concerning labor market contractions and their impact on the economy.

Mulligan begins by claiming that politicians, pundits and lay people alike tend to adopt a Keynesian view when trying to interpret the high ratio of unemployed to job openings, concluding that the unemployed are competing aggressively for a limited supply of jobs. Additionally, Mulligan acknowledges that any reduction in the labor demand from new employer taxes or healthcare costs would further motivate organizations to do with even less employees—again resulting in fewer job openings and more unemployed people.

Standard stuff right? Where this becomes interesting is when Mulligan claims that a reduction in labor supply in the form of additional subsidies for the unemployed has a similar effect on the job market. Arguing that with these subsidies (unemployment benefits and other aid) the unemployed will be more selective about the jobs they take, Mulligan hypothesizes that this is the reason behind the increasing amount of jobs available (in most states) yet the mostly static rates of unemployment.

Mulligan makes a few more interesting observations about economic drivers in this theory: 1) with more help available for people after layoffs, organizations do far less to avoid layoffs, and 2) subsidies for the unemployed make labor more expensive because the unemployed can be choosier about what jobs they take. This incentivizes employers to get by with fewer employees, thereby reducing the number of jobs they have available. 

A quick local application seems to lend credence to some of Mulligan’s observations. Average weekly unemployment benefits in Utahas reported in May 2011, amount to $316. If we take a low-paying job—the classic example of flipping hamburgers at McDonald’s—we can compare the part-time wage in this position to the unemployment subsidiary.  GlassDoor statistics claim the average hourly pay rate for McDonald’s cashiers and crew members is $7.63 an hour. Working part-time (the most common job opening) at Mickey D’s then earns only somewhere between $152.60(20 hours) - $228.90 (30 hours) per week for employees—and those numbers represent gross pay, not net income.

Mulligan concludes by arguing that in this way a reduction in labor supply by itself or a reduction in labor demand by itself, or a combination of both can contract the job market and explain the high ratio of unemployed to job openings. 

I think that there is some merit in Mulligan’s perspective, merit born out of a very human condition. Most individuals choose an income level that best supports themselves, their family and their chosen lifestyle. The math seems simple, if I am already struggling to put food on the table and can bring in more money by remaining registered for unemployment benefits than by taking a low-paying job, it makes more sense for my family’s survival to stay on unemployment. To be perfectly honest, $316 a week is going to be tough to live on (and Utah ranks in the top ten states of the country for offering the highest unemployment benefits). Mulligan’s perspective is often used by the anti-welfare perspective to cite what is wrong with the system, but the very real financial struggle individuals in both unemployed and low-wage circumstances face must be acknowledged.

I enjoyed Mulligan’s perspective because it offers a more well-rounded economic view than simply suggesting that only demand—rather than labor supply—has caused recent labor market contractions. Likely both elements play a role in the US’s ongoing job crisis. In this way, we find ourselves in a “what came first, the chicken or egg?” cycle.

It will be most interesting to see what happens in 2013 if unemployment benefits do indeed expire, then we may gain more insight as we watch fluctuations in the job openings data. 

1 comment:

Dave Tufte said...

Trevor: 94/100 for poor word choice.

Again ... we're off on macro instead of ManEc. Y'all know I teach an advanced macro class (that BTW gets very high evaluations) MWF at 9 that you're welcome to sit in on.

Casey Mulligan writes fairly standard stuff, but some find it provocative because of his conservative conclusions. I don't see anything problematic with this argument at all.

But, it is just one argument, and I think it's missed the big story. If you look at the detailed job market data (called JOLTS), the labor market has been back to normal for going on 3 years.

There are two notable exceptions.

1) The long-term unemployed are not getting back into jobs (but there is consistent churn in the short-term unemployed).

2) Voluntary separations (the fancy name for quitting to find a better job) are still down.

The first speaks to personality issues. Managers appear to have shedd a lot of workers they were unhappy with in 2008-9, and other managers have picked up on the bad signals those people are sending out.

No doubt, Mulligan's point tends to exacerbate this, but his is a symptom not a cause. Personally, I'm ambivalent about recreational drug use ... but the number of people who apply for jobs that require drug tests but who choose not to stay clean - is astounding.

The second speaks to the suspicion of workers that they may possess those undesirable traits as well, or to an inability to differentiate their desirable traits from the undesirable traits of the long-term unemployed. I am not sure which of those is predominant.

Again, Mulligan's point is a symptom of this rather than a cause. There are huge fixed costs in hiring new employees (training and so on). If the currently employed felt certain that they were worth that sort of investment they'd be more willing to shift jobs. But they aren't.

Why is that so? Again, what we've done over the last few years, and fairly systematically over the last 2 decades, is impose increased fixed costs of workers onto firms for managers to deal with.

For example, we may not articulate it well, but perhaps many people are worried about losing their health insurance coverage because of a sneaking suspicion that ... maybe they aren't worth what they're already getting.

In the end, it takes a lot of guts to 1) go tell an employer what you're worth, and 2) go out and prove it. There seems to be quite a bit less of this now than there was 10-20 years ago.