Relevant and even prescient commentary on news, politics and the economy.

Who is not retiring, and why?

Via Bloomberg comes this note on demographics and the work force, and continues a conversation about how that impacts all of us. Probably not in the way most often provided in punditry…such as taking jobs away from the millenium generation, wealthy old geezers stereotypes, or alarms sounded about who is to pay for services we want, etc.

It’s well known that the U.S. is turning gray. It’s less well known that the workforce is turning gray as well. The percentage of Americans who are 65 and older will rise from 13 percent in 2010 to 20 percent by 2030 — and, if the recent trend continues, a growing share of those elderly Americans will carry on working past the normal retirement age.

Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics

In 1990, 11.8 percent of those 65 and older worked. In 2010 the figure was 17.4 percent. By 2020, the Bureau of Labor Statistics expects it to be 22.6 percent. The numbers are even more surprising for Americans older than 75. Less than 5 percent of them worked in 1990. In 2010, it was 7.4 percent. By 2020, according to the BLS, 10 percent of them will still be toiling away.

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Facts or Fallacies Part III: Combinations, Murder and the Primordial Lump

Facts or Fallacies Part III: Combinations, Murder and the Primordial Lump
by Tom Walker (Sandwichman at Ecological Headstand)

In Part I, I compared the statistical fact that non-farm employment was lower in September 2010 than it had been in December 1999 with the assertions that those who believed any such thing could occur were guilty of a lump-of-labor fallacy. In Part II, I rehearsed debating points regarding Paul Krugman’s columns citing the alleged fallacy.

My intention in Part III is not to refute the fallacy claim. I believe I did that sufficiently in “Why Economists Dislike a Lump of Labor” and “The Lump-of-Labor Case Against Work-Sharing.” To date, no one has brought forward a substantive rebuttal to those articles. Instead, I will explore further the evolution of the fallacy claim.

In “The Lump-of-Labor Case Against Work-Sharing,” I established that David Frederick Schloss was the originator of the phrase designating the lump-of-labor fallacy (the term “lump work,” designating labor sub-contracting, can be traced back to Henry Mayhew’s 1851 London Labour and the London Poor). That attribution has not been challenged and has even been taken up by The Economist — without, of course, giving credit to the researcher or acknowledging his debunking of the fallacy claim. A few months ago, I discovered the probable source of the stock explanatory supplement to the fallacy claim, “their theory is that the amount of work to be done is a fixed quantity…” which appeared in a report in the New York Times on the 1871 Newcastle engineers’ strike.

The phrase and the explanation still leave questions as to the origin of the general idea, which was in some respects already a commonplace by 1871, as several precursors to that 1871 New York Times report and contemporary letters to the editor of the Times of London demonstrate. What those precursors have in common with the New York Times report and with much subsequent usage is the contention of a union principle of extortionate obstruction.

John Wilson in “Economic Fallacies and Labour Utopias” (1871) cited “the enforcement of all sorts of arbitrary restrictions on the combined workmen” attributable to a “Unionist reading of the Wage-fund theory.”

James Ward in Workmen and Wages (“What Trades-Unions Really Are”, 1868) alleged the “real cause of the objection to piecework and overtime… the fallacy which lies at the bottom of this whole system [of trade unions] as:

…the view that wages being determined in their amount by importunity and combination, they form a fund for the general benefit of all, and that the fund gained by the contributions and exertions of all ought not to be encroached upon by the superior strength and dexterity of a few.

Harriet Martineau in “The Secret Organisation of Trades,” (1859):

Their aim and object is, in every case which we have been enabled to investigate, to stint the action of superior physical strength, moral industry, or intelligent skill; to depress the best workman in order to protect the inferior workman from competition; to create barriers which no Society-man can surmount, and which few non-Society-men dare to assail; and, in short, to apply all the fallacies of the Protective system to labour.

Martineau refers to an 1838 article, “Trades Unions and Strikes,” as authoritative regarding the true motives and practice of trade unionism. The 1838 article commented on the conspiracy trial of five leaders of the Glasgow Cotton Spinners Association, which took place in the wake of a strike and the murder of John Smith, a strikebreaker. In his capacity as Sheriff of Lanarkshire, the article’s author, Archibald Alison, had conducted the raid on the union meeting and arrested the accused.

Sheriff Alison (1792-1867), historian, entrepreneur and leading figure in the judiciary, was deeply involved with measures against political activists for more than twenty years. His investigations included the demonstrations leading up to the 1832 Reform Act, the activities of individuals with trade union and Chartist sympathies, protesting cotton spinners and those involved in the 1848 bread riots. He received special commendation for his work on the latter when, following bread riots and a series of demonstrations (at which he was on occasion to be seen on his horse on the police front line), apprehended persons, seen to be ringleaders, were prosecuted and transported.

In “Trade Unions and Strikes,” Alison discussed the “leading particulars and principles on which all Trades’ Unions are founded” in detail. Among the myriad restrictions imposed by “this despotic body” “upon the freedom both of capital and labour” were regulations regarding wages and hours of work:

The ruling Committees also take upon themselves to fix the number of hours which the men are to labour, and the wages they are to receive. It would be incredible, a priori, to what a length in some trades their laws carry this restriction; and how effectually, by a compact, well organized combination, they can succeed in raising, for a long period, the price even of the most necessary articles of life.

Alison’s own political philosophy can be discerned from his observation in yet another article he wrote on the Glasgow incident, “Practical Working of Trades Unions,” that “Violence, terror, and intimidation, are in fact the foundation of all popular combination”:

No one seemed to anticipate that the workmen themselves were to be the principal sufferers by the repeal, and that the despotic authority assumed by the Managing Committees was to be the source of far greater distress and suffering to the operatives than all the Combination Laws had been, or than any government, how despotic soever, could venture to inflict. Yet all this has now proved to be the case, and the misery thus brought upon the working classes by the tyrants of their own creation far exceeds in intensity any thing which has been produced even by the combined effect of scarcity of provisions and commercial embarrassment. A more memorable commentary never has been read on the prudence of intrusting the working-classes to their own guidance, according to the approved system of Modern Political Philosophy, or of the enormous peril even to themselves, of those principles of self-government, which are at once the most popular, the most common, and the most dangerous of the many false doctrines which for the last ten years have overspread the world.

If, indeed, the working classes could be brought to combine without violence and intimidation to others, much of the argument urged in support of the unlimited power of combination would be well founded, and by far the greatest part of the suffering they bring upon themselves and their fellows would be avoided. But experience proves that this never is the case: and a consideration of the disposition of human nature in such circumstances forbids the hope that it ever will be otherwise. Violence, terror, and intimidation, are in fact the foundation of all popular combination; and so universally is this the case, that it may be doubted whether there has been so much as a single instance of combination, either before the repeal of the Combination Laws, or since that time, of a strike lasting for any considerable time without threats or violence to the new hands, having formed, either by express agreement or general understanding, an essential part of the system. Indeed, if you speak to an operative in any trade of striking, and conducting himself according to the principles he ostensibly professes, that is, of giving to others that liberty in disposing of their labor which he asserts for himself, he will at once, if you are in his confidence, laugh at your folly, and admit that, without intimidation and menaces to others, combination would be a mere empty name.

It needs to be emphasized that in the above passage, Alison indicts all trade unions, not only the Glasgow Cotton Spinners Association. Did the Cotton Spinners have restrictive regulations? It would appear so. A less hostile source than Alison states, “The great object of this Association, as appears from its regulations, and the Report to which we have referred, was to keep up the wages of cotton-spinning in and around Glasgow, by producing, artificially, a short supply of that class of labourers.” Can one generalize from this single observation? “Glimpses of similar organizations, among various bodies of workmen, have been obtained, from time to time, in the progress of strikes, or in the proceedings of courts of justice.” Nevertheless, the author of this milder treatise in Tait’s Edinburgh Magazine concluded, “The real cause of the misery of the working classes, is a short supply of food and employment, occasioned by artificial means, and an unjust appropriation of even of what exists by the privileged classes.”

There are still a few loose threads to be tied up regarding the tenets of classical political economy on machinery and the matter of Luddism or frame-breaking. I had earlier suspected an 1831 popular tract, The Working-Man’s Companion. The Results of Machinery, Namely Cheap Production and Increased Employment, Exhibited: Being an Address to the Working-Men of the United Kingdom, as a possible source of the fallacy claim. That book presents an amiable and didactic rebuttal to the error presumably committed by those who break knitting frames to protest their destitution. The book’s central premise was a popularization of Say’s Law of Markets:

There is no truth so clear, that as the productions of industry multiply, the means of acquiring those productions multiply also. The productions which are created by one producer, furnish the means of purchasing the productions created by another producer; and, in consequence of this double production, the necessities of both the one and the other are better supplied. The multiplication of produce multiplies the consumers of produce.

The consequence of this law is that there is no such thing as a limit to the wants of consumers or to the means available to consumers to satisfy their wants. Thus the amount of work to be done is also unlimited and, in fact, expands as a consequence of machinery. The introduction of machinery may indeed displace workers in one particular occupation but will soon open new opportunities. With regard to that temporary displacement, however, the author had a bit of advice uncharacteristic of latter-day fallacy claims: withdraw your labor from the market!

There is a glut of laborers in the market. If you continue in the market of labor during this glut, your wages must fall. What is the remedy? To go out of the market… When there is too much labor in the market, and wages are too low, do not combine to raise the wages; do not combine with the vain hope of compelling the employer to pay more for labor than there are funds for the maintenance of labor: but go out of the market. Leave the relations between wages and labor to equalize themselves…

Similarly, John McCulloch recites, in “Effects of Machinery and Accumulation,” a thoroughly orthodox version of classical political economy, refuting arguments by Malthus and Sismondi about the prospects of a “general glut” of the market. But he had some novel things to say about the hours of work:

It may, however, be asked, would the demand be now sufficient to take off the increased quantity of’ commodities?—Would their excessive multiplication not cause such a glut of the market, as to force their sale at a lower price than what would be required to-repay the diminished cost of production? But it is not necessary, in order to render an increase in the productive powers of labour advantageous to society, that these powers should always be exerted to the full extent. If the labourer’s command over the necessaries and comforts of life were suddenly raised to ten times its present amount, (and this would really be the effect of the improvement in question), the consumption as well as the savings of the labourer would doubtless be very greatly increased; but it is not at all likely that he would continue to exert his full powers. In such a state of society we should no longer hear of workmen being engaged 12 or 14 hours a day in hard labour, or of children being immured from their tenderest years in a cotton-mill. The labourer would then be able, without endangering his means of subsistence, to devote a greater portion of his time to amusement, and to the cultivation of his mind.

McCulloch also saw no threat from combinations of labor to the functioning of the laws of supply and demand, “it is obviously false to affirm that workmen are allowed to dispose of their labour in any way they please, so long as they are prevented from concerting with each other the terms on which they are to sell it.” McCulloch argued that even when workmen combine to enforce an unreasonable demand, it does no harm because they will fail in their object.

Finally, there is the curious matter of David Ricardo’s famous chapter On Machinery, added to the third and last edition of his Principles of Political Economy, in which he contended that “the discovery and use of machinery may be attended with a diminution of gross produce; and wherever that is the case it will be injurious to the laboring class, as some of their number will be thrown out of employment, and population will become redundant, compared with the funds which are to employ it.”

Ricardo’s supposition has been upheld by such worthies as Paul Samuelson (“Ricardo was Right!“) and John R. Hicks (“A Reply to Professor Beach“). Joan Robinson went so far as to suggest, “…there appears to be, from a long period point of view, very strong grounds for the popular opinion that inventions tend to reduce employment.” Samuelson, however, reiterated that, “Needless to say, the doctrine is wrong which claims that all inventions that shift resources from circulating capital to fixed capital — to durable machines at the expense of “wage funds” — must reduce the demand for labor.”

As I said at the beginning, my intention here has not been to refute the fallacy claim but to provide further background on an allegation that has already been thoroughly discredited but that keeps reappearing with impunity.

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Robert Reich and old people ‘clogging up the pipes’

Video of Robert Reich is here discussing unemployment and (updated) uses the lump of labor fallacy description:

Transcript:
>>and when we’re at a time when there’s so many people in their 50s who are unemployed and may not be able to get back into the job — the job market, I mean, it’s unlikely to happen, but wouldn’t it be a good idea to actually lower the eligibility for social security retirement?

>>It might be, Sam. In fact, a lot of people right now are saying that the eligibility age for social security retirement given the depth of our continuing jobs recession — and this jobs recession does continue — maybe should be lowered so that you create openings for younger people coming into the job market who right now don’t have a chance because there are so many older people clogging up the pipes, as it were.

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Facts or Fallacies? Part II: In which Paul Krugman takes his lumps and eats them too while Jamie Galbraith runs afoul of the notorious lump-of-labor f

by Tom Walker
(Sandwichman at Ecological Headstand)

Facts or Fallacies? Part II: In which Paul Krugman takes his lumps and eats them too while Jamie Galbraith runs afoul of the notorious lump-of-labor fallacy-fallacy

In comments in response to Part I at Angry Bear, it was suggested that Paul Krugman has also made the lump of labor fallacy claim and that perhaps I should be talking about his arguments (or those of Paul Samuelson) instead of those of conservative think-tankers. Both of those liberal Keynesian economists have indeed advanced the fallacy claim. I would love to discuss the matter with Professor Krugman and sent him an invitation.

Meanwhile, indulge me while I rehearse my debating points on some archival material. I’d also like to bring in a few big names on my side: James K. Galbraith, Dean Baker and… Paul Krugman! Just to even things out, the pre-recession Krugman gets Bruce Bartlett and Larry Summers on his tag team.

(Update: Crooked timber picks up the lump theme.

Here’s what Krugman wrote in his 2003 column, titled Lumps of Labor .

Economists call it the lump of labor fallacy. It’s the idea that there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs. (A famous example: those dire warnings in the 1950′s that automation would lead to mass unemployment.) As the derisive name suggests, it’s an idea economists view with contempt, yet the fallacy makes a comeback whenever the economy is sluggish.

Sure enough, the lump-of-labor fallacy has resurfaced in the United States — but with a twist. Traditionally, it is a fallacy of the economically naïve left — for example, four years ago France’s Socialist government tried to create more jobs by reducing the length of the workweek. But in America today you’re more likely to hear lump-of-labor arguments from the right, as an excuse for the Bush administration’s policy failures.

Do I think “any increase in the amount each worker can produce reduces the number of available jobs”? Certainly not. But clearly large gains in productivity require some kind of adjustment. The adjustment process can be slow or fast, smooth or rough, complete or incomplete. Reducing the length of the workweek can be an important part of the adjustment process. So what motivates the “derision” and “contempt” of economists?

Personally, I prefer a piece Krugman wrote six years earlier, The Accidental Theorist in which he chided William Greider for being a “dull boy” and employed a playful hot dogs and buns economy to show why Greider’s alarmism in One World, Ready or Not: The Manic Logic of Global Capitalism was unwarranted. In that column, Krugman didn’t call it a “lump of labor fallacy” but the intent was clearly the same. Thirteen years later, the following comment appeared in reply to Krugman’s column:

Wow. Reading this after recently rereading the chapter entitled “The Alchemists” on the follies of big finance, written by Greider 13 years ago confirmed what I was recently becoming aware of: It turns out that Greider was articulating with shocking prescience what would happen 10 years later while economists like Krugman were mocking him for not consulting them. Well, Greider was right!

To be fair, when the facts change, Krugman changes his mind, as he did in November, 2009 when he endorsed Dean Baker’s proposal for a work-sharing subsidy:

Just to be clear, I believe that a large enough conventional stimulus would do the trick. But since that doesn’t seem to be in the cards, we need to talk about cheaper alternatives that address the job problem directly. Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German-style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.

So much for the non-accidental hot dogs and buns theory… But what about the specific question of older workers and the lump of labor? Couldn’t it be that some lumps are lumpier than others?

In contrast to the delayed retirement age prescriptions of Jason Kuzicki, Francois Melese or Andrew Biggs (see Part I, Jamie Galbraith has been advocating a temporary suspension of the early retirement penalty as a way to open up more jobs for the young. Let Old Folks Retire Early and Make Way for the Young was Galbraith’s contribution to Dan Froomkin’s Huffington Post series on job creation ideas. One comment in response to Jamie’s suggestion declared Galbraith is a victim of the “lump of labor fallacy.

Unfortunately, the commenter, “bgladish”, did not elaborate on his declaration. However, in a Forbes column published last February, Bruce Bartlett explained why “early retirement, work sharing and tax credits won’t boost employment.” To his credit, Bartlett cited not only the ubiquitous lump-of-labor fallacy as the reason why not but also a pair of studies: one from the Social Security Administration and the other by economists at the International Monetary Fund.

The problem is, the IMF study (which I had critiqued two years earlier on EconoSpeak misrepresented the standard rationale in Europe for early retirement — which was not so much to open up jobs for the young as to divert workforce reduction away from the low-seniority, younger workers. The IMF study did helpfully point out, however, with regard to the alleged lump-of-labor fallacy, that “Those who make the fallacy claim fail to offer specific evidence of the supposed belief in a fixed amount of work.”

The main conclusion of the SSA study was, to put it bluntly, utterly irrelevant to the case Bartlett was trying to make. Larry DeWitt, the SSA historian, rejected the hypothesis that the retirement earnings test of social security was designed to open up jobs for the young on the grounds that “the aged had already been forced out of the workforce” so they were “not a major factor in blocking opportunities for the young…” Other points raised by DeWitt were the “ineffectiveness of the supposed incentives,” the gradualness of implementation of the program and, finally, the limited coverage of the original Social Security program. None of these points spoke to the issue of whether or not in today’s circumstances early retirement might be effective in boosting employment among the young.

In his column, Bartlett described work-sharing (which Krugman had endorsed a few months earlier) as “another bad idea making the rounds” and cited the lump of labor fallacy as his rationale for why work-sharing wouldn’t boost employment.

The problem is that the amount of income being produced would still be the same. While some unemployed workers would gain jobs and income, current full-time workers would become underemployed and see a reduction in their incomes.
True to form for lump-of-labor claims, Bartlett failed to cite specific evidence
of the supposed belief in a fixed amount of work.

So I made a point of asking Dean Baker whether or not his work-sharing proposal assumed a fixed amount of work.

Here is Dean Baker whether or not his work-sharing proposal assumed a fixed amount of work. Here is his reply:

Actually, I don’t assume a fixed amount of labor, but in the context of an economic downturn, we definitely are in a situation where there is deficiency of labor demand. In this context any reasonable person would ask whether it is better to have more workers employed at fewer hours per workers or fewer workers (more unemployed people) employed 40 hours a week.

In a more general context, I think we should definitely be trying to have the U.S. follow the rest of the world in promoting shorter workweeks, longer vacations, paid time off for family leave, sick days etc. There is nothing natural about the current workweek. In fact, one of the main reasons that we have not followed the rest of the world in moving toward shorter workweeks is because of the high overhead costs (most importantly health care) associated with hiring workers. Firms would often rather pay a worker time and a half for overtime hours, or even double-time, rather than incur these overhead costs by hiring another worker.

Since this is a rehearsal for a debate with Paul Krugman, I’ll leave the last word to the good Professor:

Should America be trying anything along these lines? In a recent interview in The Washington Post, Lawrence Summers, the Obama administration’s highest-ranking economist, was dismissive: “It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.” True. But we are not, in fact, expanding the total amount of work — and Congress doesn’t seem willing to spend enough on stimulus to change that unfortunate fact. So shouldn’t we be considering other measures, if only as a stopgap?

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Facts or Fallacies? Part I: BLS Data v. the Zombie Lump-of-Labor Fallacy-Fallacy

Facts or Fallacies? Part I: BLS Data v. the Zombie Lump-of-Labor Fallacy-Fallacy

by Tom Walker (Sandwichman at Ecological Headstand)

In the third quarter of 2010 real GDP in the U.S. was 21 percent higher than it had been in the fourth quarter of 1999. Labor force participation grew during the same period by 9 percent, an increase of nearly 14 million people. However, between December 1999 and September 2010, total non-farm employment fell by just over 200,000.

Here is what Bill McBride at Calculated Risk (“Older Workers and the Lump of Labor Fallacy”) thinks is supposed to happen:

The number of jobs in the economy is not fixed, and people staying in the work force just means the economy will be larger.

True enough, the economy did get larger ñ by 21 percent. But the number of jobs wasn’t just “fixed”; it actually fell by a fraction of a percent, even though labor force participation also grew. According to McBride, the result would be a classic lump of labor fallacy if it was a fear or assumption that people held about the effects of immigration or seniors staying on the job past retirement age.

This is a common error people make with immigration – that immigrants displace other workers, when in fact immigration increases the size of the economy. I suspect we will see more and more of this age related “lump of labor” fallacy.

So, you see, people make a common error when their ideas about how the economy works agree with the facts. (edited by Rdan) Let’s explore this further.

(Rdan here…I want to clear up a point of intent…Bill is not being included in the Mises or AEI camp of philosophy. Krugman and Samuelson talk of the lump of labor fallacy in a similar manner to Calculated Risk. Krugman also chastises the use of )

McBride suspects we will see more of this age-related fallacy. Indeed, we are already seeing more of this kind of fallacy rhetoric just in the last few months from the minions of right-wing Thinktankia urging that the Social Security retirement age be raised. (Pay attention, Bruce Webb and Coberly!)

Here’s Jason Kuznicki from the Cato Institute (“In which the French are explained, but they remain mistaken”) sneering at young people in France who were protesting against raising the retirement age:

It’s our old friend, the lump of labor fallacy: Force the oldsters into retirement, and it’s like a jobs program for everyone else. There is only so much labor to go around ó not like jobs are ever created, you know – so we’d better be sure we get our fair share of it. Or so the theory goes. The protest signs, insofar as they communicate anything worth repeating, have often read Place aux jeunes! Make room for the young! – or similar.

Not that this approach to economics makes any sense, either theoretically or practically. Putting someone out of work faster means he’s not producing anymore, which makes the economy worse off on the whole. And ‘his’ job won’t necessarily stick around, because retirement is often the least painful time at which to eliminate a position entirely. Today’s workers aren’t likely to be trained for the same types of work as their parents and grandparents, and they shouldn’t necessarily want to be. The lump of labor fallacy imagines a world frozen in time, not one of dynamism and growth.

Or how about Francois Melese at the Ludwig von Mises Institute (“French Students Should Celebrate Pension Reform”) chiding those youngsters, professors, and politicians for not better explaining the facts and fallacies of lump-of-labor life to them:

At first glance, students’ fears also seem warranted. If an older worker is forced to work an extra couple of years, it seems obvious this would delay a young person’s entry into the labor force. If we assume there are a fixed number of jobs, the net effect would be to crush employment opportunities for young people. With youth unemployment already absurdly high – over 20 percent – it’s no wonder students spilled out onto the streets to protest.

However, the fact that students are in the streets demonstrating against this particular pension reform suggests professors and politicians deserve an F ó they have failed to explain what economists call the lump-of-labor fallacy. Jobs are not fixed and do not depend exclusively on the supply of labor.

O.K., now I’m confused. Bill McBride and Jason Kuznicki just told me that more workers means more growth and hence more jobs but now Francois Melese explains that jobs do not depend on the supply of labor. Which is it? Maybe Andrew Biggs at the American Enterprise Institute (“The Case for Raising Social Security’s Early Retirement Age”) can straighten things out:

Increasing the number of older workers is the first step toward increasing retirement security, but there must also be demand for this large workforce. Some argue that no jobs exist for older workers. But this claim commits what economists call the “lump-of-labor fallacy,” which holds that there are a limited number of jobs for which workers must compete. Economists almost universally reject this view, and the fact that employment continues to rise despite immigration and rising worker productivity (which presumably would reduce the need for extra workers) speaks against it.

Phew! Now I think I get it! There must also be demand for the larger workforce. And the fact that employment continues to rise in spite of immigration and rising productivity proves that there is not a limited number of jobs…

Oh, wait… That brings me back to the BLS figures I started with. The number of jobs is not increasing. In fact it fell by 200,000 jobs over the last eleven years. How can “the fact that employment continues to rise” speak for or against anything when, in fact, employment doesn’t continue to rise? It’s going to take another blog post (or two) to unravel this unholy mess!

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Employment Policy

Robert Waldmann

Larry Summers, who is very very good at provoking debate, said
“It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.”

Paul Krugman responds here

True. But we are not, in fact, expanding the total amount of work — and Congress doesn’t seem willing to spend enough on stimulus to change that unfortunate fact. So shouldn’t we be considering other measures, if only as a stopgap?”

Please click the link and read Krugman’s op-ed if you haven’t already. It is excellent but limited to 700 words. Unlimited reflections on the topic after the jump.

I’m going to start with my proposal. I think that there should be a combination of subsidies for new hires funded by revenues from cap and trade (I’m a member of the Pigou club) and an increase in the progressivity of the tax system (not just because I always want to increase the progressivity of the tax system).

Second, Krugman suggests that US unemployment is not just high, but much higher than it need be given the large recession and small stimulus. Note that the evidence he presents is the change in employment and unemployment in the US and Germany. One might suspect that this amounts to the US unemployment rate rising to a level similar to the German unemployment rate – that in effect Krugman is proposing that we don’t accept unemployment that suddenly rises to around 10% in a recession but rather insist on such levels all the time.

One would be wrong (I admit I was such a one, I haven’t been following German unemployment). The OECD standardized US unemployment rate surpassed the Euro area unemployment rate in August 2009 (warning pdf) (figures for September are in the mail the August figures were released October 12). The OECD standardized US unemployment rate 9.7% was significantly higher than the German rate 7.7% in August. The decline in German GDP was, if anything, slightly larger. I find this stunning.

So how did they do it and should we do what they did?

First all Euro area countries have strong restrictions on layoffs. At least two Italy and Spain have decided not to apply the restrictions to many newly hired workers starting, in the case of Spain, almost 30 years ago. The Spanish increase in unemployment is even huger than the US increase.

It was already clear in 1980 that employment protection protected employment in recessions. It is also notable that, before their reforms relaxing restrictions, Italy and Spain managed decades with no employment growth. I very much like employment protection legislation as it changes the balance of power between workers and employers. I don’t like zero employment growth for decades. In any case, it isn’t going to happen there (in the USA).

The effect of employment protection legislation is a confounding factor not relevant to the US policy debate and a major part of the explanation of the especially bad experiences of the US, Spain and Ireland.

Second job sharing. Germans have been doing this for decades. The idea is that there is a fixed number of hours of work demanded and it is better if everyone works part time than if some are unemployed. This reasoning is like a red flag to a bull to almost all economists certainly including Larry Summers (and including Paul Krugman in the past). Krugman considers it a third best approach imposed by political limitations. I’d note that the simplest way to do this would be to make the payroll tax progressive so that less has to be paid by firms and workers if there are more workers each of whom is paid less . Also a progressive payroll tax implies increased revenues in the future even if marginal rates are a function of real wages (so inflation doesn’t cause bracket creep).

In one of my favorite papers of all time MacDonald and Solow argue that employment will be increased by a progressive payroll tax for fixed revenues (zero in their model). They consider a unionized firm (the paper is very old) but evidence on wages suggests that similar things happen without formal unions. The point is that it doesn’t really matter why a firm is spending the same money to pay 3 people a lot or 4 people a little. Whether the 3 are paid a lot because they work longer hours or because they have higher hourly wages, hiring them is still 3 jobs for the price of 4.

I don’t see any value added from applying the benefit only in cases in which one can document the splitting of a set of tasks to share jobs. This would be complicated and I don’t think there is anything especially desirable about that.

Note a historical example, the Clinton tax increase of 1993. Not all taxes were increased as the bill also expanded the Earned Income Tax Credit. Taxes were higher on average and much more progressive. The tax changes were followed not only by a huge increase in employment but also a downward shift of the Phillips curve. Theory and evidence correspond in this case. Also the proposal is wildly popular according to dozens of polls.

OK aside from that Krugman mentions hiring subsidies. Now most such subsidies would go to employers who would have hired without a subsidy. One would expect much of that money to go to the workers who would have been hired anyway (how much depends on assumptions about labor markets and/or bargaining). So ? It’s an excuse to pump more money into the economy which would be good policy.

Also such subsidies have been shown to affect employment. In particular a deadline to get the subsidy (only paid if one hires before oh say November 2 2010 just to pick a date) would have a large effect on the speed of the increase in employment. Following Greg Mankiw, I’d add it on to cap and trade as part of where the revenues go. As noted by Mankiw, this is also an excuse to start subsidizing before CO2 permits are actually sold as it takes time to set up a cap and trade system.

So I propose the Greg Mankiw/soak the rich plan to help US employment.

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