Finally, in the Figure 6A from the paper, we can see the surprising finding that the level of long-term nonemployment has been unusually low in the 2009-2011 period.
1) Unemployment has been overstated, relative to previous recessions. This would apply to the approximately 1% of the labor force that currently is categorized as unemployed with very long unemployment durations. It would also apply to the U-6 unemployment rate that includes marginally attached and part time workers. The paper outlines how there tends to be marginal employment activity over time with long term non-employed workers, after a displacement, but that over time permanently non-employed workers become a larger proportion of the remaining non-employed. Following this pattern, we should continue to see a reduction in U-6 unemployment. I suppose that we might end up with a permanently self-identified population of unemployed workers, but I think it is more likely that to the extent that this group reflects the displaced workers who permanently leave the labor force, they will slowly begin to self-identify as not-in-the-labor-force.
So, if this is the case, the current unemployment rate, stated comparably to previous periods, might be in the low 5%s. This would explain how real wages have been higher than we should have expected, given the unemployment rate. The authors also point out that the permanently non-employed displaced workers tend to be older, which also might explain why unemployment in this recession tended to be excessively high for older age groups.
This also comports with the recent high level of job openings and the idea that, adjusted for demographics, JOLTS indicators point to a historically comparable unemployment rate around 5.7 (which, given our current demographics would come in at around 5.3%).
2) I have been too hard on EUI. If this paper is on to something, then EUI didn't change labor behavior significantly, so it shouldn't be blamed for the long-term unemployment problem or for significant hysteresis in the labor market. These are workers who are mostly just being labeled differently within a fairly typical labor market behavior. I would still argue that it might not be the most efficient redistribution program, but this paper seems to support the argument that the apparent increase in unemployment durations from EUI comes mostly from movement between "Not in Labor Force" and Unemployment, not from delays in re-employment.
To the extent that this data is informative, it might suggest that in the next downturn, an extremely generous EUI program won't necessarily be that damaging to the labor market - it will just appear to be.
These implications would all generally point to a more optimistic picture of the current economic context. It would mean that historically comparable Labor Force Participation took a deeper cyclical dive than the reported numbers suggest. Although, the adjusted statistic would show a dip earlier in the recession, with stronger recovery since then. But, it also means that we are currently basically recovered and that the labor recovery was stronger and sooner than we thought it was. Much of the remaining reductions in unemployment would typically be recorded as re-entries into the labor force.
Finally, these findings show how beneficial functional NGDP targeting could be. There is something to be said for the creative destruction that might come out of a difficult economic period. But, I think it's incorrect to argue for unnecessary economic disruptions. The aggregate costs surely outweigh the benefits. This paper points to significant permanent disemployment coming from economic dislocations. If some of these labor disruptions are a result of suboptimal monetary policy, and if more stable nominal demand could prevent some of these dislocations, it could lead to higher labor force participation and utilization over time. I don't think higher labor force participation should be considered a goal, a priori. But, the permanent disemployment from these dislocations are almost certainly inefficient and are not remotely optimal for the affected workers, so in this case, it would represent improvement.
One thing I have to wonder if this study took into account, is the factor of early deaths on the part of those who have problems remaining employed over the course of their lifetime. Too many I've known are a part of those early death statistics!
ReplyDeleteI don't doubt you're right, Becky. Minimizing these dislocations would bring real benefits, to say the least.
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