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October 8, 2014

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Latest Posts from Economist's View


Wellbeing: Busts Hurt More Than Booms Help

Posted: 08 Oct 2014 12:15 AM PDT

If the number of retweets of a link is any indication, there seems to be a lot of interest in this paper:

Busts hurt more than booms help: New lessons for growth policy from global wellbeing surveys, by Jan-Emmanuel De Neve and Michael I. Norton, Vox EU: Wellbeing measures allow us to distinguish higher incomes from higher happiness. This column looks at new welfare measures and macroeconomic fluctuations. It presents evidence that the life satisfaction of individuals is between two and eight times more sensitive to negative economic growth than it is to positive economic growth. Engineering economic 'booms' that risk even short 'busts' is unlikely to improve societal wellbeing in the long run. 

To say it another way, "policymakers seeking to raise wellbeing should focus more on preventing busts than inculcating booms."

Links for 10-08-14

Posted: 08 Oct 2014 12:06 AM PDT

'It’s Not a Skills Gap That’s Holding Wages Down: It's the Weak Economy, Among Other Things'

Posted: 07 Oct 2014 09:45 AM PDT

Jared Bernstein:

It's Not a Skills Gap That's Holding Wages Down: It's the Weak Economy, Among Other Things: The inadequate quantity and quality of American jobs is one of the most fundamental economic challenges we face. It's not the only challenge: Poverty, inequality, and stagnant mobility loom large, as well. But in a nation like ours, where wages and salaries are key to the living standards of working-age households, all these challenges flow from the labor market problem.
OK, but this is a supposed to be an article about technology. What's the linkage between technology and this fundamental problem? As a D.C.-based economist who's been working on the issue of jobs and earnings for almost 25 years, trust me when I tell you that most policy makers believe the following:
"Yes, there's a problem of job quantity and quality, but it's largely a skills problem. Because of recent technological advances, most notably computerization, an increasing share of the workforce lacks the skills to meet the demands of today's workplaces.
What's more, the pace at which technology is replacing the inadequately skilled is accelerating—think robotics and artificial intelligence. These dynamics explain growing wage stagnation, wage inequality, and the structural unemployment of those without college degrees."
Problem is, most of that is wrong.
Technology and employers' skill demands have played a critical role in our job market forever, but they turn out to be of limited use in explaining the depressed incomes of today, or of the past decade. ...

This is part of a post from three years ago when people were making similar arguments about the skills gap (another way of saying the problem is structural, not cyclical):

I wish I'd remembered point three when I wrote recently about the difficulty of separating cyclical and structural unemployment. I was saying, essentially, the same thing that Peter Diamnond says here (via):

...Third, I am skeptical of the value of attempting to separate cyclical from structural unemployment over a business cycle.... The tighter the labor market and the more valuable the filling of a vacancy, the more a firm is willing to hire a worker who is a less good match, who may need more training.... [A] worker who might be viewed as structurally unemployed, as facing serious mismatch in the current state of the economy, may be readily employable in a tight labor market. The common practice of thinking about the extent of unemployment as a sum of frictional, structural and cyclical parts misses the point.... [D]irect measures of frictional or structural unemployment... dependent on the tightness of the labor market... have limited relevance for the role of demand stimulation policies. The idea that the US economy is not adaptable and capable of dealing with the need for skills and jobs to adapt to each other is peculiar, given the long history of unemployment going up and down. When the labor market is tight and firms have trouble finding workers, they reach out to places they have not looked before and extend training in order to find workers who can fill their needs. ...

Here's (part of) the post of mine referred to above:

Cyclical and structural unemployment can be hard to tell apart. For example, suppose that a business owner would like to hire someone to operate a complicated piece of machinery, and needs someone with experience. The owner offers $10 per hour, but, unfortunately, no one applies. Interviewed by the local paper, the owner complains that qualified workers simply aren't available.
However, that is not true. There is an unemployed worker who has been running that kind of machine for 10 years. He's good at it, and only lost his job due to the fact that the place he had worked for the last 10 years shut its doors in the recession. At $15 per hour, or more, he would have taken the job. But $10 is just not enough to pay the bills and save the house, and he decides to hold out and hope that something better comes along.
So whose fault is it? Should be blame the worker for being unwilling to take a decent job due to the fact that it doesn't pay enough (perhaps unemployment compensation is helping the worker to wait for a job that will pay enough to support the household)? Should we blame the store owner for not paying enough to attract workers with families to support? Neither, the problem is lack of demand.
If times were better, i.e. demand were stronger, the business owner could afford to pay $15, and would -- problem solved. So, all that is needed is an increase in demand for the products the business sells (demand that would exist if the worker and others like him had jobs). But at current demand levels, which are depressed, it is not worth it to pay that much. The business owner would be losing money.
So is the problem cyclical or structural?  It will look like structural unemployment in the data, the owner can't find anyone who is qualified who will take the job at the wage being offered, but the heart the problem is a lack in demand. ...

Or, as I've told the story at other times, there is a worker in another city who is unemployed, well--trained for this job, but the wage that is offered does not provide enough income to justify moving. At a higher wage, it might. Again, a problem that looks structural is actually due to lack of demand. With more demand, and the ability to pay a higher wage, the firm would find the skilled worker it seeks.

But I like the way Peter Diamond said it best.

'The Deficit' Is Not 'The Economy'

Posted: 07 Oct 2014 08:13 AM PDT

Where have I seen this game played before? This is from Chris Dillow:

"The economy", by Chris Dillow: On the Today programme yesterday, Nick Clegg said (2'11 in)... Then on PM yesterday (about 17'402 in), Carolyn Quinn said...

In the context she's using the word, she clearly means not "fix the economy" but "fix the deficit".

Now, I had thought that Clegg had merely mis-spoke. But it's unlikely that two people would mis-speak in exactly the same way within hours of each other. I suspect something else is going on - the construction of a hyperreality.

They are trying to equate the deficit with the economy, to give the impression that good economic policy consists not in boosting real wages, cutting unemployment, or addressing the threat of secular stagnation but merely in "fixing the deficit." ...Clegg ... and Quinn ... are both in the same Bubble pushing the same quack mediamacro.

Worse still, by "fixing the deficit" they mean some type of austerity. But there's a big difference between the two. We could - perhaps - fix the deficit by state-contingent fiscal rules, or by adopting a higher inflation target (or NGDP target) and thus using monetary stimulus to inflate our way out of government debt. ...

Instead, the only economic policy permitted by the Bubble is the fake machismo of "tough choices." Not only are these tough only for other people - mostly the most vulnerable - but they don't even work in their own terms; one lesson we've learned since 2010 is that "tough decisions" to cut the deficit don't actually do so as much as their perpetrators hope. But then, in the Bubble's hyperreality, neither justice nor evidence count for anything.

It's sad that so many people think the way to fix the economy, or the deficit, is to help the people who don't need it rather than helping those who do. Austerity that hurts those in need trickles up -- austerity financed tax cuts help those at the top -- but very little trickles back down again. Tax cuts for the wealthy do little to help the economy, and tax cuts certainly don't help the deficit. The claim that they somehow pay for themselves and reduce the deficit has no foundation in actual evidence, it is also "quack mediamacro" designed to fool people into supporting policies that benefit a key GOP political contingency.

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