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

Employment Dynamics

In recent years the BLS has developed a new database where they can track the jobs created by an establishment over time. It is called Business Dynamics and you can read about it here.

Research using the new database has altered the basic view of where jobs are created. The old view that jobs are created by small businesses has been pretty much discredited by this approach.

As the chart below demonstrates over recent years, large firms have accounted for a greater share of employment than small firms. Since the 2000 recession their share has been relatively constant, implying that small and large firms have created about the same number of jobs.





The new research finds that net job growth appears to stem from the new establishments that survive. Of course the problem is that many new establishments do not survive. After 5 years less than half of the new establishment are still around and after 16 years less than a quarter survive. So while it is true that small firms create many new jobs, they also destroy many jobs.



The new data implies that net job creation comes largely from the creation of new establishments and the few of them that manage to survive over the long run.

Just as an aside this chart shows one of the problems I have with many conservative economist. They believe that government is inefficient and wasteful. Actually, they are probably right. What I have problems with is their belief that the private market is efficient, especially if it is taken to mean that it is not wasteful. As far as I am concerned the private market probably is just as inefficient and wasteful as government. Less than half of new firms survive five years. Just think of how wasteful that is– for years businessmen try to provide a good or service that the market is not demanding. It may be the best we can do, but it is still extremely inefficient and wasteful.

Was the stock market efficient last week when it was bouncing up and down several percentage points daily only to end up barely changed for the week?

Years as a business economist taught has me that markets almost always overshoot and undershoot, either producing too much or too little and asking prices that or either too low or too high. My one investment rule that may be original is that any shortage everyone sees a few years down the road will never materialize because too many people will try to take advantage of the supposed shortage and actually end up creating a surplus.

What the new data also provides is a record of the jobs created by new establishments — what the birth part of the birth -death model in the monthly employment report estimates. What this data shows is that the republican claim that new jobs are not being created appears to be based in fact.

However, that trend of new establishments creating fewer jobs is a decade old. The number of jobs created by new firms peaked in 1999 and has declined every year since and the record in recent years is right on the trend established over the past decade. Thus, it appears that the shortage of new jobs from new establishments in recent years does not appear to stem from recent developments. Rather, it is a trend that has been firmly in pace for a decade.



When I look at this data I do not come up with a good explanation for the decade long decline in job creation by new establishments. The data only goes back to the early 1990s, so maybe what we are seeing is that job creation was unusually high in the 1990s because of the IT bubble and all the recent decline represents is just a return to normal. But I doubt it, and am open to other suggestions.

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Unemployment, Unemployment Benefits and Severance Packages: A Modest Thought Experiment

by Mike Kimel

Most economists believe that unemployment benefits increase the unemployment rate. The idea is that even having a relatively small income coming in (from unemployment) can encourage people to stay jobless just a little while longer. And no doubt there are people who play the unemployment compensation game fairly well.

Now, consider severance packages. These days they aren’t uncommon. There are differences in how different states treat severance packages, but as I understand it, in general, if a jobless worker received a severance package equivalent to X weeks of pay in lump sum form, that makes the worker ineligible to receive unemployment benefits for what would otherwise be the first X weeks worth of claims. Which, would imply that for an unemployed worker, there is zero incentive to be jobless during the first X weeks of unemployment, but a jump in the incentive to be jobless beginning in week X + 1. One presumes, therefore, a greater probability of people turning down proffered job offers in weeks X-1 or X (when unemployment benefits are imminent) than in week 1 or 2 (when there is a much longer wait to get unemployment benefits).

If this solves the problem of anyone looking for a thesis topic at a Freshwater school, your thanks are all the payment I need but I do appreciate cookies.

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Who Cares About Nominal Rigidities?

Tyler Cowen doesn’t much.

I tend to agree with Cowen. Nominal rigidities were quite the thing just before I arrived, so I think they are over rated. However, there are two points one of which is totally twitty and the other of which is a dead horse still being beaten by Paul Krugman.

OK twitty: By definition for there to be unemployment there must be three agents, an employer, an employee and an unemployed person. The unemployed person must be eager to work as the employee does at the employee’s wage. The employer must consider the unemployed person qualified. This means that unemployment can certainly be eliminated if wages fall. At some point, either the employee decides to quit and just live off savings till social security kicks in or the unemployed person decides he or she doesn’t want the job. By definition, wage rigidity is needed to explain unemployment. This is true even if lower wages do not at all cause higher employment. If nothing else super low wages can convince people to leave the labor force eliminating unemployment that way. In this case wage flexibility doesn’t help the unemployed — it makes the alternative of working worse so they consider their horrible predicment the best they can hope for. I said it was twitty.

Second, things are unusual because we are in a liquidity trap. The reason nominal rigidities usually matter is that the real money supply could increase if the nominal money stock staid the same and wages and prices fell. From 1940 through 2008 this meant that wage and price flexibility should have prevented output from fallin. N ow, however, the money supply doesn’t matter since we are in a liquidity trap. In the IS-LM model (M/P) (money divided by the price level) appears. If P is free to adjust, then there can be no problem with insufficient aggregate demand. Therefore in all of the macro literature from 1940 through 2008, nominal rigidities were considered important. The idea here is wages go down so the firms cut prices (to maximize profits they would) so real balances (M/P) goes up so aggregate demand goes up so GDP goes up. There is no need for real wages to fall.

Right now this doesn’t matter as M/P doesn’t matter. But for decades and decades it mattered a lot, so nominal rigidities mattered. In practice, wages and prices are sticky so all reality based macroeconmists (“that’s not enough I need a majority” — Adlai Stevenson) agreed that nominal rigidities mattered. Now not so much. M/P doesn’t matter so P only matters because of debt deflation (lower P makes nominal mortgage debt an ever worse problem) so wage and price flexibility won’t save us so Keynesians don’t talk about it.

As always, don’t confuse “Keynesians” with Keynes. Keynes was not interested in nominal rigidities The General Theory through “The General Theory Restated” included nothing on nominal anything.

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Topical thread…What is a good job?

I suggest these questions, but this is not a question about ideal jobs in imagination but real jobs that are attainable.

I think all of us have some notion of what elements constitute a ‘good’ job in the broad perspective (policy and macro), and given human nature varies according to personal goals, age, and circumstance. It has also varied widely in historical context. The term is used a lot in policy debates on employment and unemployment as well.

It is much easier to reach a consensus on the definition of a bad job than to agree on what constitutes a good job.

Is a good job one in a particular industry or sector?

The question of the length of employment contracts matters?

Is a good job one that comes with employer-provided benefits?

What is the relationship between wages and the definition of a good job?

A final question about the definition of a good job involves the relationship of the worker to the employer.

Personal satisfaction of some kind? Social status? Conscience?

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On the Job Market

by Mike Kimel

On the Job Market

Recently, my employer went through a merger. As part of the process, my position disappeared. I turned down a different position that was offered, the result being that at the end of the month I will no longer be with my current employer. Yes, I am aware of how bad the job market is, and yes, I learned a lot at and enjoyed my job, but without getting into a lot of inside baseball, it was time to go. In fact, it has been time to go for a while. Sometimes it takes something like this to tell you something you already know. So, yes, I have butterflies in my stomach (I’ve never been on the job market with this many mouths to feed), but I’m also looking forward to what comes next.

So… time to assess the situation. Here’s what I got.

Step 1. Financial assessment. Job loss means a financial hit, but we can hang in there provided unemployment doesn’t last too long.

Step 2. Education / Work history. I am a trained economist (Ph.D. in economics from UCLA, two master’s degrees, and a bachelor’s degree in mathematics / economics). I have fifteen years of experience since leaving graduate school, having worked for a Big 4 (at the time, Big 6) accounting firm, two Fortune 500 companies, and for my own consulting practice. While a consultant, I also taught economics and advanced statistics in the MBA program at Pepperdine University for five years. Some of the work experience is international. Industries I’ve done work for include telecom, utilities, investment banks, brokerages, consumer goods, software, hardware, aerospace and military.

Step 3. Work categories / skills. Most of my work falls into a few different categories:

a) Statistical / econometric analysis, including designing some fairly sophisticated algorithms. I’ve built models for macroeconomic analysis, demand forecasting, costing, capital allocation, equity valuation, commodity valuation, marketing research, and hedging. Over the years I’ve used the most common statistical and pseudo-statistical packages, like SAS, SPSS, EViews and VBA.

b) Regulatory work in utilities, both as an employee and as a consultant. Some of that work was for foreign companies, and some of that was performed abroad.

c) Strategy work. I think the most fun I ever had was developing and leading implementation of strategies for dealing with new competitors while a manager at a Fortune 500 company. I’ve also had the opportunity to do some strategy work in other capacities, including as a consultant, and some of that has been abroad as well. Strategy is always a lot of fun.

d) Management. My work experience includes a few years as a corporate manager, running groups like economic policy & analysis, strategic marketing, and competitive strategies. I’m good at motivating people, and I enjoy mentoring junior staff… which explains what I enjoyed teaching as well.

e) Language skills. Though born in the US, I grew up in South America, and am fluent in Portuguese and Spanish. I’m a bit rusty from lack of recent use, but nothing that two weeks in Rio, Buenos Aires or Montevideo wouldn’t fix.

f) Writing. I do write frequently on economic and business issues, and co-authored a book. I like to think I have learned to explain reasonably complex concepts, including the results of statistical analyses, to lay audiences.

Step 4. Deciding what type of job to target. I’ve been very lucky in life, and I can safely say I have enjoyed almost every day in my last fourteen years of work. (And yes, I have fifteen years of work experience.)

Looking back, I’ve tended to really like oddball problems and a fair amount of autonomy. Give me the project that is already two months late, that nobody knows how to do, and from which everyone is backing away. The fun problems are the ones that make you sweat. Consulting jobs often provide a lot of interesting problems, a lot of autonomy, and a minimum of formality.

On the other hand, I have had a few jobs in the corporate world where I had the freedom to poke my nose into a lot of different tents, and in such cases it can be very easy to get involved in cool projects. All you need is a willingness to follow your nose in the direction of bad news. In the corporate world, nobody wants to be involved with bad news. But fixing the issues that created the bad news is often the most interesting work in the company.

I’ve never worked in a “Wall Street” type job, but I’ve done a fair amount of work that is probably interchangeable: hedging models, forecasting prices and demand for equities and commodities, and of course, designing statistical algorithms.

Step 5. Preparing a resume, and lining up references. Available upon request.

Step 6. Tap your network. That’s the purpose of this post. Anyone looking for someone with my skills and background? Know of anyone who is? Know of someone I should contact? Know someplace I should look? I’d be grateful for any pointers or assistance.

Minor correction. For legibility, contact info shown below rather than within the post.

Should you want to reach me, my e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at gmail.com.”

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Thinking about Performance

My aging Subaru had a problem a while back. Leak of transmission fluid; a seal or another failing, leading to steady dripping out. And with little need to open the hood, no gauge—or even an “idiot light”—on the dashboard, it dripped for quite a while. And then some.

The first repair—call it Quizzical Effort 1—refilled the fluid, but didn’t find the leak. So we started driving it again, but were a bit more alert for signs that it was doing things such as slipping out of gear or having trouble accelerating from a stop.

We took it to another, better shop for Quizzical Effort 2 (QE2). There they found the leak itself. We spent a bit more money, but the leak is gone and the transmission fluid stays where it belongs.

But it was without fluid for quite a while, and fluids go into other parts of the system, “priming the pump,” as it were, for better operation.

Can we say that my car has made a “recovery”?

The question keeps rearing its “ugly” head as the Jobless Recovery moves forward. Even the Optimists (Mark Thoma, Brad DeLong) are hesitating in the face of the evidence*; Thoma’s graphic at the link just previous notes that the current reovery is not just Jobless, it’s still Job-Reducing, while DeLong tries to dance a line between “this time is different, just like the last one” and “we’re going to turn this into Structural Unemployment Any Day Now” while still thinking of rainbows and kittens.

The strongest evidence that the Recovery has begun is the fiat that NBER declared the recovery to have begun. The second-strongest evidence is that there is noticeable growth in the economy** since the date chosen by NBER.

The following graph appears to support NBER’s declaration. But note the yellow area.

If you want to speak of Business Cycles—I don’t; I consider RBC Theory as its proponents describe it to be the silliness idea this side of phlogiston, but there are those who do, and it’s a convenient fiction for purposes here—then surely you should speak of a full Cycle.

The return to the level of Capacity Utilization at the end of the previous recession comes not as the recession ends, but four quarters later, a year into the “recovery.”***

And that’s just the Capital side of the equation. Labor is rather more complicated.

It is as if the machine is running again, but has not received a proper tune-up, or any other (“structural”) work that needs to return it to peak performance. As John Maudlin noted last May, employment rises with income, and income tax receipts were not rising with the “head-fake” recovery—”grass shoots—of that time.

My Subaru used to get around 17-18 mpg (city). Now it’s closer to 15-16. It would require an investment of capital and labor to get it completely repaired. Being liquidity-constrained, I’m not going to make that investment until a couple of other things are cleared up—including, but not limited to, the possibility of upgrading to a model built in this century.

Similarly, capital recovery is a slow process, and incremental labor tends to follow that in productive industries. The gap in capacity at the beginning of the “recovery” took 12-13 months to be filled. Given that it took 55 months for the Employment/Population Ratio to recover after the 2001 recession (or here), it seems not at all unreasonable to expect the current recovery to take 67 or 68 months.

Which would be around January or February of 2015, just after the midterm elections and therefore nearing the end of the first Palin Administration.

It would be rude of me to note that the first “non-recession” period of the Great Depression lasted only fifty (50) months. Or that there hasn’t been a period of growth so long without tax increases since the Vietnam War.

As with my Subaru, some major investment is needed. Whether there will be the liquidity for that to happen in time is left as an exercise.

*Both, in fairness, have declared the current “recovery” “fragile” (Thoma) or filled with “unforced errors,” but persist in calling it a recovery.

**Let us sidebar that much of that growth is in the FI part of FIRE. If you have assumed that the lion’s share of the profits generated by an economy should go to those who are supposed to intermediate, you have to deal with the structure you’ve got, not one that would produce better, or even optimal, growth.

***The monthly series (MCUMFN; not graphed) reaches and passes the start of the previous recovery in July of 2010. NBER official dates the end of the recession to June of 2009, where Capacity Utilization reached its nadir of 65.2. It is perfectly reasonable to say “a recovery” began then, but a “Business Cycle” that ends with nearly 7% of usable capital (a 9.6% decline in capital terms) sitting vestigial is a poor “Cycle” indeed.

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Public Works on a Vast Scale?

I spent the last hours of last night watching the PBS “Human Experience” episode on the Civilian Conservation Corps. A few million people put to work: for long hours, living in Army barracks, with all but $5 of their pay having to be sent home every week. Gosh, sounds just right as part of FDR’s Conservative First 100 Days.

The documentary makes a couple of things clear: (1) it kept about 3,000,000 people busier than they would have been otherwise* and (2) when the time finally came to enter WW II, those three million were in better shape than they would have been, and were prime volunteers without whom results might have been very different.

Even independent of what it produced, what’s not to like? No wonder it was the most popular Depression-Era program.

Doesn’t it seem like something the new Administration might have wanted to emulate? Well, it did…

In late March of 2008, Neil Maher, guest-blogging at The Edge of the American West, was clear: even as the crisis was growing, a New and Improved CCC would prepare the U.S. for the next fifty years, even as the old one prepared it for the fifty that followed it.

Brazil has recently begun looking back to Franklin Roosevelt’s CCC to help solve that country’s economic and environmental problems…The goal of Brazil’s CCC-like program, which the Nature Conservancy helped initiate, is to plant one billion trees over the next ten years across the country’s Atlantic Forest. Rather than funding the program by increasing taxes, Brazil will rely on novel market mechanisms including the sale of sequestration vouchers on the international carbon market, obtained through the program’s reforestation efforts, as well as the collection of water use fees in the reforested regions. Similar tree-planting programs reminiscent of Franklin Roosevelt’s CCC are also now operating in China along the Yangtze River and through Wangari Maathai’s Greenbelt Movement in Kenya. Even war-torn Afghanistan has created its own “Afghan Conservation Corps.”

The United States needs to follow suit, and the upcoming election is a good place to start. Hillary Clinton openly calls for the creation of a “green economy” centered on a cap and trade system for carbon emissions that will help create five million new jobs. Barack Obama wants to develop a program that rewards those who plant trees, restore grassland, or undertake farming practices that capture carbon dioxide from the atmosphere. Even John McCain, who claims fellow Republican and early conservationist Teddy Roosevelt as his hero, proposes to limit carbon emissions as president. A new and improved Civilian Conservation Corps, one which enrolls women as well as men and focuses its efforts on fighting global warming, would allow all of these candidates to turn campaign rhetoric into post-election reality.

Catching up on my blog reading today, I came across a recent Andrew Samwick post in which he reposted a link from December of 2008—just after the election—to this NYT article:

President-elect Barack Obama promised Saturday to create the largest public works construction program since the inception of the interstate highway system a half century ago as he seeks to put together a plan to resuscitate the reeling economy….

Mr. Obama’s remarks showcased his ambition to expand the definition of traditional work programs for the middle class, like infrastructure projects to repair roads and bridges, to include new-era jobs in technology and so-called green jobs that reduce energy use and global warming emissions. “We need action — and action now,” Mr. Obama said in an address broadcast Saturday morning on radio and YouTube….

It would cover a range of programs to expand broadband Internet access, to make government buildings more energy efficient, to improve information technology at hospitals and doctors’ offices, and to upgrade computers in schools.

“It is unacceptable that the United States ranks 15th in the world in broadband adoption,” Mr. Obama said. “Here, in the country that invented the Internet, every child should have the chance to get online.”

Twenty months later, I can’t even find an outline of this in the policies proposed or passed.

Whither the New CCC? Whither preparation for competing with the Chinese in the mid- and late 21st century? Whither developing job skills to ensure that broadband isn’t just something Google sells to Verison? Who will be the people ready to maintain and repair solar cells?

*Let’s face it: it’s a difficult job, spent away from home and family, for basically room and board and a (very) little l’argent de poche. Not the type of job you keep if you get a letter from your spouse saying that the local Woolworth’s is paying $1.00/hour.

(cross-posted from Skippy the Bush Kangfaroo)

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Should Potential Employers have Access to Credit Scores ?

Robert Waldmann

Oh good, Kevin Drum and Matthew Yglesias disagree. This is bound to be interesting.

Drum remembers the good old days when liberals had less respect for the standard results of simple neoclassical economic models.

The specific issue is that firms are using credit scores to decide who to hire. This can trap some people as they can’t improve their credit score without a job and can’t get a job with their current credit score. Kevin Drum thinks the practice should be banned. Matthew Yglesias isn’t sure.

Yglesias wrote

But at the same time I try to adhere to the principle I outlined here and resist the urge to call for regulating the business practices of private firms when the issue isn’t pollution or some other case where the externalities are clear. After all, it seems like either this credit check business is a sound business practice (in which case allowing it is making the economy more efficient and ultimately building a more prosperous tomorrow) or else it’s an unsound business practice (in which case competition should drive it out).

That is actually a pretty radical position. I wonder what clear externality the 64 civil rights act addressed. I’m quite sure Yglesias doesn’t think what he seemed to assert, but I want to figure out what he had in mind.

Drum responds “More important is the fact that we liberals shouldn’t view the relationship between businesses and individuals as solely economic transactions” and gives an example

Here’s an example. Back in 1968, Congress passed the Truth in Lending Act. Among other things, it made credit card companies liable for charges on stolen credit cards over $50. In a purely economic sense, there’s really no excuse for this.

Ah how naïve. There is always an excuse based on economic theory (with the assumption of full rationality) for any policy. I view any assertion to the contrary as a personal challenge. This one is easy. Drum argues that the regulation creates a moral hazard problem as we are more careless with our wallets. I see his moral hazard and raise him an adverse selection (Hint: adverse selection is a great tool for justifying regulations as market outcomes are inefficient if there is adverse selection).

So let’s say everyone is better off with the regulation so the most wallet guarding yet not risk averse person is willing to pay extra to the bank in exchange for this protection. That doesn’t mean that this will be the market outcome. Let’s say a credit card company introduces a new card with the $50 limit. It will attract all the people who can’t keep track of their wallets. It will also attract people who commit a rare kind of fraud giving their card to an accomplice, having the accomplice buy stuff and then reporting it lost. There aren’t many of those, but there are enough that the extra interest (or other fees) that the company would have to charge would drive away everyone but the fraudsters and the most absent minded yet risk averse (I raise my hand). So the new product would enter the adverse selection death spiral.

The only solution is to force everyone to buy the protection which everyone wants if the fee is the actuarially fair fee for 100% coverage. Oh look, that’s the current law. That was easy. No sweat, no equations.

I mean Kevin you consider the health care reform debate and recall how forcing people to buy insurance, whether they want it or not, can be Pareto improving in a standard economic model.

Now on the original topic, I side with Drum. I think there is an externality. If people are rendered unemployable, maybe because of their fecklessness maybe because of their unluckiness there are externalities. For one thing the standard argument for laissez faire assumes we are totally selfish and absolutely needs that assumption to get the result. If desperate unemployable people cause others pain, then there is an externality. Another simpler externality is crime. People who are excluding from employment have little to lose from turning to crime. That’s an externality.

I’m pretty sure Yglesias’s idea is that both of these are arguments for redistribution from rich to poor and that such redistribution is more efficiently obtained by taxing and transferring. First, self esteem can’t be transferred. Good examples for the children can’t be transferred either. More importantly, there is no way that the feckless poor are getting much in the USA. You make policy with the electorate you have not the electorate you want. US voters are very willing to regulate business. They are totally unwilling to transfer money to people who firms don’t want to employ, because they seem to be irresponsible.

Assuming a social planner who taxes and transfers optimally is like assuming regulators can’t be captured or assuming that CO2 doesn’t cause global warming. That’s not the world we live it. I think we have to transfer however we can and that includes hiding information from potential employers. The loss in efficiency is a social loss only if one assumes that income distribution doesn’t matter (or assumes that there are optimal lump sum taxes and transfers which is an oxymoron). The link clicking reader will notice that my arguments are pretty much orthogonal to Drum’s.

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