Bryan Caplan  

Quiggin Takes My Euro-Bet

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I'm pleased to report that noted blogger John Quiggin has accepted a slightly revised version of my proposed bet on European unemployment.  The only revision: I sweetened the point spread to 1.5 percentage-points.  Average European unemployment must be at least 1.5 percentage-points higher than average U.S. unemployment over the next decade in order for me to win.  On these terms, I think my odds of winning are about 60%, which is good enough for me to put my money down.

In his acceptance post, Quiggin makes an interesting observation:
Caplan initially proposed 1 percentage point, which I rejected with a counteroffer of 2.5. He rejected that and we ultimately settled on 1.5. Assuming our offers truthfully reveal our beliefs, that suggests Bryan's point estimate for the average difference in unemployment rates is between 1.5 and 2.5 percentage points, while mine is between 1 and 1.5. Considering we have very different understandings of the economy, these estimates are pretty close.
It's a fair analysis.  But I see Quiggin's 1-1.5 percentage-point estimate of the European unemployment surplus as large.  Here's why:

Suppose that the U.S. averages 5% unemployment, and Europe is 1.25 percentage-points higher (the mid-point of Quiggin's range).  Even if labor markets clear (so anyone able to do a job and willing to do it for the market wage gets it) there's always going to be some frictional unemployment.  4.5 percent seems like a reasonable figure.  So to compare labor market performance, we really need to look at the difference between the actual rate and 4.5.  In my hypothetical, this difference comes to .5% for the U.S.; for Europe, in contrast, it's 1.75%, over three times worse.

If my metric seems unreasonable, think about how tough it was to find a job in the U.S. back in January, 2009, when our unemployment rate was 7.2%.  The plight of the job-seeker wasn't 30% worse than it was in May, 2008, when the unemployment rate was 5.5%.  It was probably more like two or three times worse.  Now imagine turning 7.2% unemployment into a way of life.  It's pretty awful to imagine, isn't it?  Well, you don't just have to imagine it, because in France and Germany, 7.2% is normal.  The horror!

P.S. Thanks for pointing out my mis-spelling of Quiggin's name.


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COMMENTS (10 to date)
IWantCookieNow writes:

You're right that's bad. I still like living here though.

Kevin writes:

Quiggin-with-an-i-not-an-a

Kurbla writes:

Bryan, do you assume that unemployment cannot get lower than 4.5%? It can, many communist countries had nearly 100% employment.

I think you do not have enough data for conclusions you are trying to make.

Current writes:

I think Bryan may lose his bet. For a reason he may not have considered.

Britain and Ireland have quite flexible labour laws. The EU allows an EU citizen to work anywhere in Europe. So, those who can speak English but cannot find work in Germany and France can come to the British isles.

I live in Ireland and in my experience this is happening.

Jared writes:

Prof Caplan,

Question for you: what is the absolute maximum stakes (1-for-1) that you'd be willing to lay down for such a test of beliefs? Is $100 (US) the top? The first number you begin to find interesting? The largest amount your wife feels is reasonable (something like "I'm willing to gamble outrageous sums; my better half is *not*.")? Just curious.

jared

Tom Davies writes:

What do you think of Quiggin's (you mis-spelt his name again in your correction) suggestion that the US unemployment rate is reduced by the difference between its prison population and that of the EU15?

Joe Marier writes:

And is the bet in constant 2008 dollars? Sorry if you answered that question before...

Floccina writes:

Has any country tried an hourly wage subsidy as a replacement for most labor laws and welfare? If not why not, is it a bad idea for some reason?

Matt writes:

"think about how tough it was to find a job in the U.S. back in January, 2009, when our unemployment rate was 7.2%. The plight of the job-seeker wasn't 30% worse than it was in May, 2009, when the unemployment rate was 5.5%"

Don't you mean May 2008? May 2009 unemployment looks likely to be over 9%.

geo8rge writes:

Comparing US numbers to Europe cannot be done directly and is silly.

How are you counting the huge US prison population, and the staff required to 'care' for them, not to mention the various others that benefit from any government program?

Another adjustment is employment in the military industrial complex.

BLS says 4/2009 unempolyement is 13.7 million.
USDOJ says between 3 and 4 million prisoners. It would not be surprising to me if a few 100,000 were also involved in guarding and caring for the prisoners.

So one could argue the US is cheating by bloating its prison population. Toss in the people who would be unemployed but for Iraqistan, and maybe some more due to the nationalization of various unproductive industries and you see the US number should be much higher than what prints.

Perhaps Europe makes up for this with other government employment.

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