Three myths about unemployment

The media and politicians sometimes cloud the reality about jobs, unemployment, and the recession. Here's the real deal.

Read Tyler Cowen's post of the nature of job loss in this recession. Summary: Aggregate demand (i.e. the business cycle) explains most of the job loss, sure, but there are structural dynamics, too. Not to mention, bad policy fixes which add rigidities. My thoughts below.

... I would start with the fact that output has bounced back more robustly than employment has. AD theories per se do not explain that differential.

... It's also the case that the rate of new job creation has been especially low. Yet the nominal wages on those jobs-to-be are not constrained by previous contracts or agreements. Tell stories as you may, but it's hard for me to see that as exclusively an AD problem.

... I don't want to oversell the minimum wage hike + unemployment compensation extension + means-testing hypothesis here, but surely it deserves a mention as one relevant factor. Those are real factors too. (There's more, read here)

First, the "jobless recovery" phenomenon is relatively new. Media coverage seems to have fallen for stories that post-recession job growth is always slow. Not true. The first hint of this phenomenon was after the 1991 recession, which was worse after the 2001 recession, and appears to be worse again this time. There is something qualitatively different about how the modern economy heals. It might be structural, but the predominance of service work (17 in 20 jobs) and flex-time / part-time implies more labor market flexibility, not less. An alternative explanation is new economic institutions. Non-compensation costs of an increasingly regulated labor market may be making employers increasingly averse to hiring until growth is robust. Uncertainty may be a factor as well -- about the recovery, about new laws and regulations. I've said it before: even if health reform turns out to be good long-term policy, enacting it came with an uncertainty cost which is amplified in a down economy.

Second, the minimum wage increase was terribly timed. Economists need to look beyond the lump of labor in AD theories and recognize the unemployment rate is multiples higher for less-skilled workers. Young men, especially young black men, suffer an unemployment rate that should blow your mind. Workers aged 16-19 have an unemployment rate of 23.7 percent today, compared to 19.9 percent a year ago (March 2009). For African-Americans aged 16-19, it is 41.1 percent today, ten percent higher than a year ago. For all of us pedigreed, older workers, this recession is not about us. But imagine if it were because the Legislative Branch made it illegal for us to work at our current salary (mandating to our employer that we be paid 50 percent more, or laid off). Would you blame your layoff on weak aggregate demand or the U.S. Congress?

Third, Unemployment Insurance destroys jobs. Menzie Chinn points to some Fed research (Valletta and Kuang) showing the UI extension had a minor impact on unemployment duration. Minor is greater than zero. "extended UI benefits account for about 0.4 percentage point of the nearly 6 percentage point increase in the national unemployment rate over the past few years." Keep in mind, that's just for the UI extension, so the effect of UI itself as currently designed is even worse. Are you comfortable with a program whose mere extension is responsible for destroying 600,000 jobs?

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