Bryan Caplan  

Unemployment, Labor Market Regulation, and Sour Grapes

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Unlike the authors of the CEPR report, John Quiggin at Crooked Timber is willing to make me a bet about European vs. American unemployment.  However, he wants to adjust for incarceration rates:
I'm willing to take Bryan on, with one amendment. I will take the bet provided that people in prison are counted as unemployed. By my estimate, that raises the US rate by about 1.5 percentage points and the the EU-15 rate by about 0.2 percentage points. That is, assuming current imprisonment rates remain unchanged, the bet is that the Eurostat measure of unemployment (which excludes prisoners) should be no more than 2.3 percentage points higher in the EU-15 than in the US.
I'm willing to negotiate the point spread - over email, I offered Quiggin 1.5 percentage-points.  But I don't want to add his incarceration rider, because it muddies the issue of labor market performance.  While I think that America's labor policies are better than Europe's, I think that America's penal policies are worse - and likely to remain so.  From a labor market perspective, though, Quiggin's incarceration adjustment would only make sense if you thought that most or all of the people in jail would be unemployed if they were released.  That doesn't make sense to me - while the people currently in American prisons might not be model workers, most of them could easily be gainfully employed on the outside.

The really interesting part of Quiggin's response to me, though, is his conclusion: America's unemployment advantage is no big deal, anyway:

[A]lthough the US is middling on unemployment outcomes, it's an outlier on a range of measures that have been presented as important in promoting high employment. In addition to higher geographical mobility, it has very low minimum wages (lower now in real terms than it was in the mid-1950s), very weak trade unions, almost no restrictions on hiring and firing, and very limited welfare benefits for unemployed workers*...

In political terms, it's hard to see how the pressure to adopt "more flexible" * labour market institutions can be justified by reference to the US example. While lower unemployment is better, it's hard to see why a country with a decent minimum wage, strong union movement and good social welfare systems would want to scrap those things to achieve a one percentage point reduction in unemployment.

My reaction: When I was an undergraduate, left-wing economists took unemployment more seriously than other economists.  They argued that a job is a lot more than a source of income; it is also a source of happiness, self-respect, and political stability.  I think they were right: A heavy-duty safety net is no substitute for financial independence. 

As the superior unemployment performance of the U.S. model has become clearer, however, left-wing economists have started thinking about unemployment in more conventional terms.  The most plausible explanation for this transition is sour grapes: Since freer labor markets create lower unemployment, lower unemployment isn't an important achievement.  If you've got a more charitable explanation, though, I'm listening.


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COMMENTS (16 to date)
Charles writes:

The issue is; does the country have a strong enough social policy to prevent the use of crime to survive. In the 18th an 19th century England dealt with it's unemployment problem by exporting those who committed such crimes (along with other no doubt)to Australia. Perhaps that is why an Australian economist understands.

Kit writes:

We used to deport them to the Americas until 1770s. For some reason we stopped and had to send them to Australia instead. ;)

Kevin writes:

Q-u-i-g-g-i-n

Nick Sorrentino writes:

Hard to have a debate about such things when the measure of unemployment by the government is basically bogus and does not count those who have given up looking for work or the underemployed.

El Presidente writes:

Bryan,

They argued that a job is a lot more than a source of income; it is also a source of happiness, self-respect, and political stability.

If you've got a more charitable explanation, though, I'm listening.

At your request, I will attempt to be charitable. Perhaps we cannot eat self-respect, or seek shelter under happiness. Increasing unemployment by reducing wages trades unemployment for working-poverty. I don't imagine that the left-wing economists you speak of suggested that expanding poverty was the solution to reducing unemployment. Jobs are more than a means to a paycheck, but in the absence of a job we still need a paycheck we can live off of. I suppose I would ask you why it is necessary to increase income inequality and poverty in order to constrain unemployment. That seems like a feeble solution, and a short-lived one at that.

When we set people in opposition to one another such that one can only advance if the other advances more, we discount the social impacts of disparity. If your greater advantage allows you to demand a greater portion of our collective output, then adding to your existing advantage further reduces my leverage in subsequent rounds of exchange. The reason a job can be more than a paycheck is that it can enhances one's ability to obtain the material and non-material things a person needs to be healthy. Social status, the ability to be financially and emotionally stable and to maintain stable relationships, the capacity to provide for children, a sense of accomplishment and purpose, and other aspects of a healthy life are typically obtained in part through employment. These things are not as dependent on having a job or a particular nominal income as on reaching a social position relative to others. The job is a means to several ends. When it ceases to be effective in achieving them, it might as well be replaced by a safety-net, as far as individuals are concerned.

So, whether we get the paycheck or the intangibles, neither alone is enough. We need both. Why should it ever be the case that people would have to choose one or the other? Why won't we marshal our resources to provide both? Are we incapable, or simply unwilling?

English Professor writes:

If I were you, Bryan, I wouldn't bet any money on an issue that depends on government statistics. Nick Sorrentino objects (I think) to the ways that the US govt counts the unemployed. He may have a point. But from what I've heard and read, European governments do everything possible to hide their true unemployment numbers. If they can shift a person from unemployment to "disability" or to some other category on the public dole, they do it to make the unemployment numbers look better. I think you should look at workforce participation rates (especially for people in their 20s and in their 50s) for every European country, and then compare those with the rates in the US. That might tell us more about what is really going on.

Daublin writes:

"At your request, I will attempt to be charitable. Perhaps we cannot eat self-respect, or seek shelter under happiness. Increasing unemployment by reducing wages trades unemployment for working-poverty. I don't imagine that the left-wing economists you speak of suggested that expanding poverty was the solution to reducing unemployment."

This is one of those issues that just leaves me baffled about the goals. I really thought that unions, minimum wage, and so on, were supposed to be there in order to guarantee better jobs. If they aren't doing that, then why would they become ends in themselves?

To the above point, isn't "working poverty" better than, what shall we call it, wellfare poverty?

Have leftists forgotten what they were fighting for? I'm as surprised as Bryan to see someone openly arguing for the minimum wage as an end in itself.

Jonas Reschat writes:

In Demark, where I live, unemployment (available to work, but without work) isn’t the problem. The current unemployment rate is 2.9 %. The real problem is that people of working age aren’t part of the labor force. 768,800 in age between 16 and 64 are not working and are being provided for by the government (students, who are also provided for by the government, are excluded from this number; else it would be one million). The Danish population is 5.5 million. Less than 100,000 of the 768,800 appear in the unemployment statistics - the rest are simply not part of the labor force. A large part of rest (372.400) is either on efterløn (basically pension before pension, from the age of 60) or on førtidspension (lifetime payment for physically or mentally ill, addicts and various lazy people, who didn’t fit in elsewhere in the system of transfers). If it weren’t for these transfers the unemployment rate would be much larger.

I don’t know about other European countries, but I do know that in Denmark unemployment statistics tell you nothing about the real employment situation. Since 2001 and until recently the unemployment rate had been falling. But the labor participating rate has also been falling. This means that many just went from one kind of transfer income to another, and thereby disappeared from the unemployment statistics without being employed. Needless to say the politicians don’t pay focus on the real problem. This is obvious when one considers that (1) the unions prefer a low labor supply, and (2) the Danish voters mistakenly think that most of their taxes are spent on roads, education, health care and the like.

El Presidente writes:

Daublin,

Perhaps I wasn't clear.

This is one of those issues that just leaves me baffled about the goals. I really thought that unions, minimum wage, and so on, were supposed to be there in order to guarantee better jobs. If they aren't doing that, then why would they become ends in themselves?

Having a minimum wage and unions doesn't necessarily translate into living wages and effective representation. I don't believe my comments could be rightly construed as arguing for either a minimum wage or unions as ends in and of themselves. Besides, a minimum wage that is not indexed is like a safety-net laying on the ground. It doesn't do much good if it won't keep you from hitting bottom. Unions have lost their power in part because the scale and scope of industry have dwarfed them.

To the above point, isn't "working poverty" better than, what shall we call it, welfare poverty?

Yes and no. In some ways, looking for a good job can be better than having a bad job. Which would you choose? I think you are operating under the assumption that the person neither has nor is entitled to the option of a good job (i.e. a living wage, security, and stability). In that case, perhaps you are right. But, why must that be the case?

Tracy W writes:

El Presidente, isn't the solution then to provide income to people who are working? Like for example the USA's Earned Income Tax Credit (and many other countries outside the USA, including some in Europe also have similar top-ups designed for people who are working).

Social status, the ability to be financially and emotionally stable and to maintain stable relationships, the capacity to provide for children, a sense of accomplishment and purpose, and other aspects of a healthy life are typically obtained in part through employment. These things are not as dependent on having a job or a particular nominal income as on reaching a social position relative to others.

Why do you say this? This seems wrong, or trivial.
To say that your social status is dependent on reaching a social position relative to others makes it into a tautology, unless you have some special distinction between social status and social position what you are saying here is that your social status is dependent on your social status. This is about as useful as saying whether you have a job or not depends on your employment status.

The ability to be financially and emotionally stable, how is that dependent on reaching a social position relative to others? Are Amy Winehouse and Britney Spears emotionally stable? How about sports stars who get themselves into trouble with massive financial debts?

To maintain stable relationships, how is that dependent on reaching a social position relative to others? Aren't Hollywood stars famous for their history of broken relationships?
How are a sense of accomplishment and purpose dependent on reaching a social position relative to others? The Unabomber had a sense of purpose, but no particular social status. When I reach the summit of a peak after a tough climb I have a distinct feeling of accomplishment, but that doesn't seem related to my social position relative to others, since I don't think that changed during the climb.

How is the capacity to provide for children dependent on your social position relative to others? Wouldn't that be dependent on your income? If you have the money to buy food you can pretty nearly always find someone who is willing to sell food to you even if you are a pariah. Politicians who have thoroughly disgraced themselves still appear to keep eating and feeding their kids.

And how about other aspects of a healthy lifestyle? How do your exercise habits, or not smoking, depend on your social position relative to others?

jb writes:
Yes and no. In some ways, looking for a good job can be better than having a bad job. Which would you choose?

I would want to see the relative statistics on happiness, satisfaction, etc before I made that choice.

I will say that as the percentage of people on welfare goes up, the less social stigma will be attached to it over time. We're looking at a moving target.

I think you are operating under the assumption that the person neither has nor is entitled to the option of a good job (i.e. a living wage, security, and stability). In that case, perhaps you are right. But, why must that be the case?

I'm not sure where you get this thought process from what was written.

From my perspective, everyone is entitled to the option of a good job. But I don't think everyone is entitled to be paid well while they wait for a good job to materialize. Partially, this is simple social justice - anyone who is working is contributing to the ongoing health of the state and its citizenry, and they should never be put into a position where they are measurably worse-off for choosing to work at a less-than-perfect job than someone who prefers to wait for the perfect job.

And, at an equivalent income, the person who is giving up leisure hours to work is measurably less well-off than someone who is not working. So, given that, it seems perfectly fair that those who work receive more income than those who don't.


Robert Speirs writes:

Imprisonment confers one great social benefit - those in prison do not commit crimes against the greater public. The economic cost of such crimes must be counted in determining whether a particular imprisonment policy is effective or not. Similarly, some workers are so unproductive that their participation in the economy as workers would be a net loss. It would be better to pay them to sit at home and watch TV.

hacs writes:

"When I was an undergraduate, left-wing economists took unemployment more seriously than other economists. They argued that a job is a lot more than a source of income; it is also a source of happiness, self-respect, and political stability. I think they were right: A heavy-duty safety net is no substitute for financial independence."

Given that work is characterized as happiness, self-respect, and political stability, the conclusion is tautological, but it is only a vacuous truth.

When to promote some pro-work policies implies to crush (temporarily or permanently) an "inconvenient" or "invisible" subgroup of people (more vulnerable people), their supporters are being really communist because from all socialist/communist contributions, the specimen point of view on people is one of the most disgraceful, imposing anguish on somebody as a necessary cost of to benefit others (they were not original in that). That never will be individualism, at maximum ant-ism/insect-ism.

The independence of some cannot cost the enslavement (pauperization) of others in a democracy, and unemployment is a hard reality with barbarous consequences (for example, employees have health care supplied by the employer as a deductible cost, a completely different situation of unemployed people) to many Americans.

Americans need to retake their original principles (interdependent individualism and liberal democracy), where work was eminent (mainly among protestants), but where a societal sense was basilar.

cjd writes:

EU countries have a decided distaste for unemployment statistics, and are willing to trade off lower growth and less efficiency in investment and general economic wellbeing for lower unemployment rates. As our Danish friend above pointed out, that also means forcing people who'd like to work out of the labor market, creating hidden unemployment, but keeping official unemployment rates low. We think that's sucks, because it's really, really unfair. Hey, it's their countries, why should we complain?

In the US, we prefer high labor force participation rates, freer competition in the labor market (unionized and public jobs excepted), higher economic efficiency, and more investment and growth (most of the time), and certainly a much higher economic living standard (with no paid vacations because we can't afford them at our wage rates). That means that we've made a collective choice that greater fluctuations in unemployment statistics are a GOOD THING. We have much less distaste for unemployment rates than Europeans; ergo, we have more of it, and more fluctuations in it. We think that's a good bargain. So, why should we listen to Europeans' complaints about that? Hey, it's our country, why should they complain?

SamB writes:

Bryan writes "...while the people currently in American prisons might not be model workers, most of them could easily be gainfully employed on the outside" - but is this really true in the aggregate sense?

If we accept that "aggregate unemployment" (which is what is discussed) reflects job availability, then a prisoner who upon release becomes "gainfully employed", takes one of those (nominally) scarce jobs and displaces whoever previously held that job.

As such, the argument is not so much about whether one thinks that "...most or all of the people in jail would be unemployed if they were released" ... but rather the proportion of total population that IS not gainfully employed (in the sense of spending their time on some socially productive activity).

Kevin writes:

I think that unicor (see unicor.gov/about/) employs many prisoners in the Federal US prison system. And, they are paid -- around $1.00 per hour.

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