David R. Henderson  

Art Carden on SOTU

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Over at the "Division of Labor" blog, Art Carden has a great post on President Obama's State of the Union address. (Unfortunately, clicking on the link takes you to the site but not necessarily to the specific post.)

Rather than repeating his insights, I want to point out that he understated one of his criticisms. His criticism #1 is as follows:

"One in ten Americans still can't find work." To this, I would respond that the President needs to watch the Hayek v. Keynes "Fear the Boom and Bust" video, Google "regime uncertainty" and read what Robert Higgs has written about the Great Depression, and then introduce legislation to repeal the minimum wage. Seriously.

I agree with all of this, but my criticism is that he takes as given Obama's statement, "One in ten Americans still can't find work." I'm guessing that Obama is referring to the 10% unemployment rate. But of those 10%, a substantial portion can find work but chooses not to. This is not a statement that they are necessarily lazy; instead, it's a statement that they're rational.

Imagine you just got laid off from a job paying $30 an hour and you go out looking. The first week you look, you are offered a job for $16 an hour. Do you take it? Not necessarily. You think you can do better. And if you qualify for unemployment benefits, your "reservation wage," the wage at which you will take a job, is higher than otherwise.

So it's not correct to say that these 10% cannot find work. Indeed, of those in the 10% pool who really can't find work, a large fraction is likely to be workers who would accept a job at less than the minimum wage but cannot be legally paid that amount.


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CATEGORIES: Labor Market



COMMENTS (17 to date)
Ryan_Vann writes:

Depending on what UE rate we are using, the 10% number is more or less accurate accounting for the criticism you raise.

Bob L. writes:

Here is the direct link:

http://divisionoflabour.com/archives/006778.php

David C writes:

A Good Rule of Design:
Make blog post titles link to the permalink. It's easier for people than identifying the small, tiny letters reading "permalink" at the bottom of the blog post.

Here is the real link for the post:
http://divisionoflabour.com/archives/006778.php

Les writes:

David identifies the unemployed who turn down work at rates of pay lower than they earned before being laid off. That seems like only one side of the issue.

What about those who grab work at rates of pay lower than they earned before being laid off because they are desperate for income?

Or those who were employed full-time before being laid off, but now take part-time jobs because they are desperate for income?

Loof writes:

In Loof's Libertopian view a hungry child could get a job eating the crumbs from the rich man's table - as he's wanton to be ever richer.

Bob Murphy writes:

David,

Here is the link to Art's post. At that blog, you need to click on the "Permalink" under each particular post, in order to send someone to a particular link.

Art Carden writes:

Thanks for the link. Here's the permalink to my post: http://divisionoflabour.com/archives/006778.php.

axiomata writes:

For many, unemployment transfers may be more than minimum wage wages. Therefore they would take a job slightly above minimum wage, if they weren't getting paid to look for a even better paying opportunity.

David R. Henderson writes:

Les asks:

What about those who grab work at rates of pay lower than they earned before being laid off because they are desperate for income?

Or those who were employed full-time before being laid off, but now take part-time jobs because they are desperate for income?

My answer: it would be incorrect to say that they can't find work.

Floccina writes:

FWIW I know some of these people and I know that some have found work though for lower pay and unsteady but are getting paid in cash and can still collect (as they call it). They are working for themselves but would rather have a regular job.

Ned Baker writes:

Libertopian. Ha!

"a large fraction is likely to be workers who would accept a job at less than the minimum wage but cannot be legally paid that amount"

What is the fraction? This is not empirical.

spencer writes:

You have a beautiful theory that I am sure you and others have given a great deal of thought.

But there are some 15 million people unemployed right now. Do you have a single bit of evidence that there are businesses willing to hire them at,
for example $1.00 per hour?

I seriously doubt that you can come up with any evidence to show that the demand you beleive exist, actually exist.

spencer writes:

I have studied Higgs analysis of the great depression and his claims about investment is clearly rejected by the data.

In the major econometric models business investment is generally a function of three variables:
1. profits
2. capacity utilization
3. cost of capital.

If you regress business fixed investment from 1929 to 1940 as a function of these three variables the regression does an outstanding job of explaining both the 1929-33 collapse of business fixed investment and the 1934-39 rebound in the same series. This analysis shows that Higgs claims about business uncertainty dampening capital spending under FDR are completely unfounded.

P.S. Notice that Higgs presents essentially no data analysis to support his unfounded claims.

I challenge you to show any quantitative analysis supporting Higgs claims.

David R. Henderson writes:

@Ned Baker
I don't know. That's why I said "likely."

@spencer
By definition, I couldn't have such evidence because, as you know, the minimum wage is well above $1.00 an hour.
As for evidence that there are jobs that people turn down, you would need to do a survey of unemployed people to see what percent have turned down job offers in the last month and what percent have not even looked seriously at jobs paying below, say, 40% of their previous wage.

@ spencer
I don't know the evidence you refer to. But I do know that Higgs did present evidence. He showed the increasing gap between short-term and long-term interest rates in, I believe, the late 1930s, and attributed this to regime uncertainty. He also presented polling data on businessmen's understanding of the business and economic environment. Polling data are always risky, I know, but it's simply not true that he didn't present evidence.

Best,
David

Les writes:

Hello David:

I wrote: What about those who grab work at rates of pay lower than they earned before being laid off because they are desperate for income?

Or those who were employed full-time before being laid off, but now take part-time jobs because they are desperate for income?

Your answer: it would be incorrect to say that they can't find work.

My response: You are absolutely correct. Yesterday a VP at Goldman Sachs. Today, raking leaves or selling apples on a street corner. 10% unemployment? Bah, humbug! They can all find work!

Douglass Holmes writes:

David Henderson is quite correct. President Obama says 'one in ten Americans can't find work' and that just isn't supported by the data. The phrase 'can't find work' is meant to lead us to believe that these are desperate times and desperate measures are required. Those desperate measures are what make tyranny possible.
I am one of those unemployed right now, and I can assure you that I am nowhere near desperation.
I think it would be safe to say that nine of ten North Koreans would enjoy being unemployed in America. Oops! I don't have data to back that up.

Ryan writes:

This may seem painfully obvious, so I may be missing something. But doesn't that simple phrase in Obama's SOTU speech imply that 30 million Americans are out of work? (300m * .1)

I think only like 65% of Americans are even in the labor force, so the denominator is reduced from that 300m number, making the 1 in 10 American's phrase drastically inflated.

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