Scott Sumner  

Krugman and Gruber are deeply confused about "voluntary" job losses

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Lenin the Prohibitionist... Questions that have no answer...

Paul Krugman was upset over a recent column by Casey Mulligan. Here's Krugman:

Jonathan Gruber is mad as hell, and he's not going to take it anymore. The eminent health care economist and health reform architect is annoyed at Casey Mulligan's latest, which misrepresents Gruber's views; mine too.

Gruber is right to be mad: that was a disgraceful, deceptive column. But I think you also want to put it into a larger picture: the enduring myth of the stupid progressive economist.


Here is a portion of the Jonathan Gruber column that was supposedly misrepresented:

But actually the CBO did not project lost jobs at all. Job leaving is not the same as job losing. Many Americans who may eventually leave jobs or reduce their work hours will do so by choice to make themselves and their families better off. Voluntary reductions are not a cost of the healthcare reform law, they are a benefit. . . .

But the likelihood of voluntary reductions in work is not the only issue. The CBO also projects work reduction by individuals who cut back on hours or avoid moving up the job ladder because they don't want to lose Medicaid eligibility, or because they don't want to make so much in wages that they would lose tax credits to help pay insurance premiums. Unlike voluntary job leaving, this second kind of work reduction would entail real economic distortions and be a cost, not a benefit.


Mulligan focused on the first paragraph, and ignored the second. I suppose one could argue that that omission was deceptive, but in this case I'm not very sympathetic. The first paragraph represents the overall tone of Gruber's piece, and the second is a sort of throwaway "to be sure." But here's the bigger problem, the second paragraph implies that the first is incorrect, and hence that the entire Gruber piece is deeply misleading.

The basic problem is that Gruber suggests some sort of important distinction here between voluntary and involuntary job losses. But the reduced employment discussed in the second paragraph is every bit as voluntary as the lost of employment in the first paragraph. Mulligan is right, a distorted labor market is a distorted labor market, regardless of how one tries to characterize it.

Labor market distortions and sticky wage recessions have several things in common. Both result in lower output, and both result in increased leisure. In both cases the baseline assumption is that the increased leisure is valued at less that the lost output.

However there is an important difference in this case. Sticky wage recessions do not advance any important public policy objectives, medical subsidies do. I happen to support the concept of government subsidies for medical care, which means I'm willing to accept some labor market distortions. (However I oppose Obamacare.) But use of terms like 'voluntary' is deeply misleading, for reasons I discussed in this earlier post. Distortions create deadweight losses, and the reasons have nothing to do with the "voluntary" nature of the public's responses to those distortions.


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COMMENTS (12 to date)
Randy writes:

You nailed it with the statement that "the baseline assumption is that the increased leisure is valued at less than the lost output". Having done real work (as opposed to holding a political class position) for most of my adult life, I believe that the political class routinely underestimates the value of leisure to those who do real work for a living. So I think that the effect of being able to obtain benefits (such as subsidized health care and subsidized retirement) without applying oneself fully to work cause greater labor market distortions than expected by the designers of such programs. Not that that's a bad thing...

Daublin writes:

I've always had trouble with the distinction between being unemployed versus choosing not to work. Almost everyone can choose to work as a bag boy or at a restaurant. Moreover, if you can't get your preferred job, or the job you are used to, I don't see what difference it makes that 18 months have passed.

A more solid observation is that total employment is going down in the U.S. Some of it is people consuming more leisure. Some of it is people doing house work that doesn't show up in the statistics.

I don't especially like this trend, because I think there is high value to participating in the formal economy. I also don't think it makes sense to have a discintinuous jump from volunteering to working. As well, these rules are imposed by force; I much prefer if people can negotiate their terms of collaboration in an organic way between each other, rather than referring to government-issued standards.

Others, however, really seem to want a smaller fraction of the population to be working, and the rest of us to be taking it easy. It's not a crazy idea, given how valuable leisure is.

ed writes:

"a distorted labor market is a distorted labor market, regardless of how one tries to characterize it."

But aren't you ignoring the theory of the second best, that when there is one distortion, adding a second distortion can be welfare improving?

In this case, the pre-existing distortion was the linking health insurance to employment, via a variety of legal and tax rules, which means that effectively a person's compensation could end up being much more valuable than their marginal product.


Rob Rawlings writes:

I just had a great idea.

Lets increase UI to $10000 a week and have free healthcare. This would involve no job losses but people would voluntarily choose leisure over work and increase the utility of both themselves and their families.

Who would produce all the stuff needed for consumption? We're paying ourselves $10000 a week so we just can buy it from foreigners, right ?


Where do I apply for my Nobel prize ?


Krugman's apparently now trying to prove Tom Wolfe correct, that indignation is the surefire strategy for idiots. His latest is essentially, that everyone knows that Paul and friends are the nice people, and it's the Republicans who are mean and hate poor people.

It's a terribly inconvenient thing to even have to remind everyone. Just listen to Paul.

Rob Rawlings writes:

"Both result in lower output, and both result in increased leisure. In both cases the baseline assumption is that the increased leisure is valued at less that the lost output."

I can see why this is true in a recession where some workers would choose to work at the going rate that similarly skilled workers are receiving. But if they choose to work less because they get higher benefits are they not choosing leisure over output based on prevailing condition? Of course others will have to produce what they consume but that a different issue.

Scott Sumner writes:

ed, I think you misunderstood my argument. I agree that health care market distortions might call for a subsidy that produces other labor market distortions. And I said so. The problem is not the conclusion reached by Gruber, but his argument. He seems to think the term 'voluntary' tells us something useful about the welfare effects of labor market distortions. It doesn't.

Rob, Yes, but the prevailing conditions are distorted, so we cannot assume the leisure is worth more than the foregone output. The labor market distortions prevent them from getting the output that they produce by working. That's what a distortion means.

Bob Murphy writes:

Great post, Scott. I'm hitting the same thing on my blog in the context of "substitution vs. income effects"; the pro-ACA people are acting like this is a huge distinction. Your key paragraph in this post:

"The basic problem is that Gruber suggests some sort of important distinction here between voluntary and involuntary job losses. But the reduced employment discussed in the second paragraph is every bit as voluntary as the lost of employment in the first paragraph. Mulligan is right, a distorted labor market is a distorted labor market, regardless of how one tries to characterize it."

James G writes:

I read that Gruber piece the other day and one point he makes struck me as glaringly misleading.

You can't make the argument that the voluntary withdrawal in the first paragraph is a benefit and the work disincentives in the second are not. The reason being that those who voluntarily leave their jobs, but receive no subsidies through the exchanges are the only people for whom there is a difference. Their main benefit from the ACA comes from a private insurance market that doesn't suffer from the Lemons problem and thus provides insurance at a reasonable cost. But, this group of people can't possibly be very large. The reason is it can only consist of people who have income in a very narrow band where they could not afford private insurance under the current system (in which case they would have already left the labor market) but can afford to pay the full premiums under the exchanges. Any person who receives some subsidy towards their health insurance is in fact facing a work disincentive.

Floccina writes:

If this result below holds up it should bother Democrats (concerning the earlier retirement) because they seem to believe that people should not be allowed to trade off life length for fun.

Dubner: Well look, it may sound terrible but Kai, I'm happy to say, there's a hidden side, a little silver lining here to consider. So the economist Josef Zweimuller, at the University of Zurich, recently did a study that looked at two fairly identical groups of blue-collar workers in Austria. One group that got early retirement up to three and a half years earlier than the other, and what Zweimuller found is that early retirement -- as much as we may crave -- actually has a considerable downside.
Daniel Artz writes:

I had trouble getting past the quote from Krugman about "the enduring myth of the stupid progressive economist."

Why is that a myth?

Jack PQ writes:

I just want to point out that Krugman begins with the sly and unfair description of Jonathan Gruber as an eminent health care economist and Casey Mulligan as... what, chopped liver?

Gruber (MIT) and Mulligan (Chicago) are two top economists with equally impressive publication records. You cannot say Gruber is eminent without saying Mulligan is eminent too.

Krugman makes it sound like Gruber is about to get a Nobel prize while Mulligan is a hog dog vendor. Rubbish. Yet another black mark for Krugman.

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