Scott Sumner  

The new jobs figures and macro theory

PRINT
A Local's Defense of Property ... Statist policies in China...

Each January the government revises its payroll jobs estimates, to provide more accurate figures. The recent revisions are not dramatic, but do slightly strengthen two arguments that I've been making over the past few years. Let's look at the previous and revised estimates for jobs growth over the past for years:

Year -- Previous -- Revised -- Wage growth

2011 -- 2.083m -- 2.080m -- 2.0%
2012 -- 2.236m -- 2.257m -- 2.2%
2013 -- 2.331m -- 2.388m -- 1.9%
2014 -- 2.952m -- 3.116m -- 1.9%

The 2013 figures still show no evidence of fiscal austerity slowing growth, indeed the speed up in jobs creation (over 2011 and 2012) was revised slightly upward (albeit not significantly.) Paul Krugman's prediction that growth would slow is still wrong. And Krugman was also wrong about 2014. He expected that the ending of extended unemployment insurance would not lead to more employment, but the new figures suggest that employment growth in 2014 was significantly higher than in 2013 (728,000 more.) That's 0.5% of total employment; consistent with my earlier claim that the extended UI program may have boosted the unemployment rate by roughly 0.5%. Brad DeLong made a similar argument in 2008. Both AD and AS matter, even in a recession.

The usual caveats apply---no single data point is definitive, and of course these tests were proposed by Krugman.

One other point, the extended UI test is further clouded by the ambiguity surrounding the date of its demise. The program ended at the beginning of 2014, but it was not until midyear that it became clear that Congress would not extend the program retroactively. So its effects may have played out gradually during 2014.

The wage growth figures are consistent with the standard AS/AD model. After a sudden drop in AD (during 2008-09) unemployment rises sharply. Then wage growth moderates and the SRAS curve gradually shifts to the right, bringing the unemployment rate back to its natural rate (which itself varies over time, but by much less than the actual unemployment rate varies.) The people who predicted that unemployment would get stuck at high levels were wrong.

I see no sign of "hysteresis," the theory that a demand shock can permanently increase the unemployment rate. Many Keynesians proposed that theory to explain why European unemployment rates stuck at high levels (in both booms and recessions) after increasing sharply in the 1970s and 1980s. I don't think they were willing to face up to the fact that the European welfare state and/or labor market regulations were causing the high unemployment. You don't see that tendency in the US, Switzerland, and East Asian developed countries. In fairness, even welfare states may be able to avoid high natural rates of unemployment with flexible labor markets and/or sensible wage subsidy programs (as we've seen in Denmark, and more recently in Germany.)

The AS/AD model is also the best way to explain the situation in the eurozone. The overall rise in unemployment is due to sharply lower growth in AD (NGDP.) But the variation between countries is also explained by supply-side factors, especially the structural problems in the Mediterranean countries. Greece faces two problems, too little AD and too little AS. Given their debt problems, the only way Greece can significantly address the AD problem is by leaving the eurozone. The only way it can address the AS problem is by cutting minimum wages, deregulating, and privatizing. The new Syriza government has proposed exactly the opposite---less AD and less AS.


Comments and Sharing






COMMENTS (10 to date)
LK Beland writes:

By many measures, the US labor market is back to the same state as in the beginning of the Clinton administration.

So we still need another 8 years of decent monetary/government policy to achieve true full-employment. 2003-2023. 20 years! What a waste.

R Richard Schweitzer writes:

All that information is fine to have at hand; but what knowledge does it produce?

What have been the real changes in "real" disposable incomes?

What are the impacts of existing and continuing debt demands on disposable incomes.

What are the effects of existing and continuing constraints on redeployment of unencumbered increases in disposable incomes as investments?

And what the heck can "monetary policy" (define "policy) do about either of those factors?

Lorenzo from Oz writes:

Australia had a pattern of ever-rising unemployment each round of the business cycle. See here.

But the shift in monetary policy from mid 1993 produced years of sustained growth. Economic liberalisation of various types did increase the flexibility of the economy, but it was the continuous growth which really broke the cycle.

We still are not doing as well on the unemployment front as we should be--mainly due to labour market regulatory structures. But a whole lot better than we were.

Ray Lopez writes:
Paul Krugman's prediction that growth would slow is still wrong

But US GDP growth in 2013 was slightly less than 2014, so Krugman 'was right' though the number is probably statistically insignificant.

R Richard Schweitzer writes:

@Lorenzo

OZ 1993 et seq.:

". . . monetary policy from mid 1993 produced . . . "

The rising demand for OZ commodities had nothing to do with the results?

Come now !

Scott Sumner writes:

Lorenzo, Good point. With Australia's low taxes they ought to do better on the unemployment front--so your comment on labor market rigidities make sense.

Ray, As I've told you numerous times, RGDP growth sped up from 1.6% in 2012 to 3.13% in 2013.

Richard, Dependence on commodity exports makes an economy less stable, and hence you'd expect Australia to have more recessions. However due to good monetary policy they have fewer recessions.

ThomasH writes:

@scott,

The 2013 figures still show no evidence of fiscal austerity slowing growth.

I don't see how one can make this kind of statement without a model that specifies what is expected to remain the same and what is expected to change in response to "austerity" whatever that means it the model. Figures without a model can show nothing.

"Keynesians" have a model in which a change in demand will reduce growth unless offset by a change in monetary policy (and they further, if usually implicitly, assume that during a recession monetary policy is already doing as much as it can, being constrained by political considerations) and so monetary policy will not offset the decrease in demand. [For example, Krugman laws this out very explicitly in a column in which he explicitly models the central bank NOT offsetting an increase in demand leading to a stronger dollar and weak effect of higher demand on real growth. http://krugman.blogs.nytimes.com/2015/02/06/the-dollar-and-the-recovery-wonkish/]

Market Monetarists, on the other hand, think that policy is not constrained and that the central bank will offset a decrease in demand.

For all I know the economic model could be the same and the effect of the change in demand is the same in the two models, the only difference being the difference in assumptions about monetary policy. It would be interesting to see how a Market monetarist models works if the central bank does NOT offset the change in demand.

[Oddly, I have attempted to submit a comment along these lines before, but failed to see it.]

ThomasH writes:

@scott,

The 2013 figures still show no evidence of fiscal austerity slowing growth.

I don't see how one can make this kind of statement without a model that specifies what is expected to remain the same and what is expected to change in response to "austerity" whatever that means it the model. Figures without a model can show nothing.

"Keynesians" have a model in which a change in demand will reduce growth unless offset by a change in monetary policy (and they further, if usually implicitly, assume that during a recession monetary policy is already doing as much as it can, being constrained by political considerations) and so monetary policy will not offset the decrease in demand. [For example, Krugman laws this out very explicitly in a column in which he explicitly models the central bank NOT offsetting an increase in demand leading to a stronger dollar and weak effect of higher demand on real growth. http://krugman.blogs.nytimes.com/2015/02/06/the-dollar-and-the-recovery-wonkish/]

Market Monetarists, on the other hand, think that policy is not constrained and that the central bank will offset a decrease in demand.

For all I know the economic model could be the same and the effect of the change in demand is the same in the two models, the only difference being the difference in assumptions about monetary policy. It would be interesting to see how a Market monetarist models works if the central bank does NOT offset the change in demand.

[Oddly, I have attempted to submit a comment along these lines before, but failed to see it.]

[Even more oddly, the comment above, the only one today, did not go through a few minutes ago because supposedly too many comments had been submitted in a short period of time?]

[ThomasH: obviously, your previous comment did go through. I left it up as evidence. About your former comment, I really have no record of it. If it happens again, it's best to email me right away. --Econlib Ed.]

W. Peden writes:

At least in the case of the UK, there was arguably never much in the way of stylized facts in favour of the hysteresis hypothesis, because unemployment figures corrected for shifts in the participation rate lack the "jobless recovery" in 1983-1986. See Pissarides (2003) “Unemployment in Britain: A European Success Story”. More recently, the UK has had a big AD shock (NGDP growth averaged 2% from 2008-2013 compared to a 5.6% 1992-2007 trend) yet unemployment is already around its pre-crisis level.

I would add deindustrialisation to the explanation of the rising natural rate in Europe in the 1970s and 1980s, combined with considerable regional problems and inflexibility of labour in some countries. If you look at the participation rate, the UK's unemployment problems over the years look less like hysteresis and much more like regional structural problems. Focusing on a dissipating structural effect of deindustrialisation rather than hysteresis would explain why the UK natural rate seems to have continued on its downward secular trend in spite of the 2008-2009 recession and 2012 growth pause.

Deindustrialisation and a falling opportunity cost of unemployment also help to explain why the UK natural rate began rising in the 1960s and early 1970s, at a time of repetitive POSITIVE AD shocks.

I do wonder whether hysteresis has led to a misplaced focus on long-term unemployment, and consequently inhibited the development of felicitous active labour market policies.

Anand writes:

Regarding your last comment, very few people in Greece want to get out of the Euro (like Syriza).

If we impose that constraint, monetary policy is out of Greece's hand, so fiscal policy (say more govt. spending) can be used to change AD, right?

It might not be the most efficient way to increase AD, but Syriza is not running the ECB. They have to do what they can.

It seems to me that you think there wouldn't be much of an impact on AD, while supply-side policies would be much more detrimental longer-term. This is debatable, but one can question whether one should be implementing drastic supply-side policies in the middle of a big recession. Why not wait till situation is more stable?

Comments for this entry have been closed
Return to top