March 10, 2002
From the desk of Jane Galt:All right, my little chickadees,
All right, my little chickadees, I’ve come out of retirement to talk about a topic that I am sure is on the minds of us all: Unemployment!
No, not how to collect it, though as a veteran of multiple layoffs, you can be sure that I’m an expert on that as well. No, today I’m going to talk about an exciting term you may never have heard: NAIRU, or the Non-Accelerating Inflation Rate of Unemployment. (It will not surprise you that this term was invented in the 60’s, when even economists tried to make their acronyms sound like something with which their hippy-dippy students could identify.) Actually, I won't quite be talking about NAIRU itself (really, I just love saying the word), but about it's kissing cousin, Full Employment
What brought all this to my mind is that, as sharp-eyed observers may have noticed, unemployment just dropped to 5.5% from 5.6% the month before. Now, that may not seem like much of a drop to you, but the fascinating thing about this is that 5.5% is well below what believed the full employment level to be in the mid-90’s. Full Employment describes a situation where pretty much everyone has a job that wants one. So where’d the 5.5% come from, you ask? The answer is that full employment doesn’t actually mean that everyone’s employed. There are people who are just entering the job market, like students or housewives, who just haven’t found the right job; there are people moving between jobs; and there are people who are supposed to be looking for a job, and tell their wives they are looking for a job, and put on a suit every couple of weeks so that they can look the guy at unemployment right in the eye and tell him how hard they’re trying to find a job, but who don’t actually want to find a job. The first two are known as Frictional Unemployment; the last is usually known as “that goddamn bum you married” or some such.
That last group is also a symptom of what’s known as Structural Unemployment. In simplest terms, this is the unemployment that is introduced into the system by the regulatory structure of the markets. These can raise unemployment either by making it more attractive for people to stay unemployed, or less attractive for employers to hire people. The most common things that can cause structural unemployment:
Minimum Wage Laws Minimum wage laws, as any reputable economist will tell you, cause a loss of jobs. Depending on their politics, they may argue about how large this is, and whether the social cost is offset by the benefit of some people getting higher wages, but few will argue about whether or not the jobs get lost. Those that do, like Card and Krueger, who tried to refute this using possibly the worst dataset in economic history (it relied, among other things, on self-reporting), end up getting ripped to shreds by other economists. (When I asked my b-school professors about the study, they told me that Card-Krueger, who like the minimum wage, are highly respected by op-ed columnists. Becker, and others who refuted their study, are highly respected by economists. You decide). The idea that minimum wage laws do not cause unemployment goes against the basic proposition that when you increase the price of anything, suppliers (workers) want to provide more of it, while consumers (employers) want to buy less of it. Yet economists who would never be caught arguing that if you increased the price of paper by 15%, companies would use the same amount, somehow get all giggly and foolish about the minimum wage.Imagine that there were a “minimum car price law” that set a floor of $20,000 for cars. Sure, some people might trade up from a Geo to a Ford Taurus, but what about your layabout Cousin Todd, whose entire income comes from selling the Grade Z reefer he grows in his basement? Bummer, dude . . . guess he’s walking. Minimum wage laws work the same way. There are some employers who simply up the wages they pay, and either take it out of profits, or pass it onto consumers in higher prices. But there are some employers whose businesses are marginally profitable; raising the minimum wage means they either go out of business, or do the work themselves. There are other employers who currently use labor because it’s cheaper – but with higher wages, would find it more profitable to switch to machinery. Hand carwashes and dry cleaners are good examples of businesses that simply aren’t economical at the current minimum wage – people won’t pay $20 to get a shirt cleaned. There are also employers who don’t care too much right now about efficient use of labor, but might care a whole hell of a lot if you raise the price of that labor by 20%. All of those companies will cut jobs if you raise the minimum wage.
Meanwhile, everyone and their cousin (though possibly not Todd) enters the job market, because the wages make working more attractive. Unemployment is measured by how many people are looking for work at a given time. More people seeking fewer jobs make unemployment jump. How high it will jump depends on how responsive workers and employers are to the price of labor; but it’s idiotic to say that there will be no response (or, as I heard on television the other day, that minimum wage laws actually increase employment because. . . I don’t know, Ralph Nader beamed it to the pundit from his Organic Space Capsule or something. That actually sounds more intelligent than the argument he made, which was so dumb that I can’t make my mind hollow enough to reproduce it here. This is what I get for watching TV).
The rise in unemployment due to minimum wage is a rise in structural unemployment; it is a permanent increase in the equilibrium level of unemployment in the economy.
High Payroll Taxes on Employers like, for example, Social Security and Unemployment contributions, work much the same way as minimum wage laws do – they raise the cost of labor, so employers use less of it.
Making it difficult to fire people This seems counterintuitive, but the harder it is to fire someone, the more risky it becomes to hire someone. What if you accidentally got a Cousin Todd, smoking up in the alley before he drives the forklift? You can’t let him drive the forklift – and if you can’t fire him either, he ends up sitting in the break room, drawing a salary and making funny fish faces at the TV.This is one of the main reasons that Spain has 22% unemployment. If you can get a job, you’re in Sucker Heaven – that’s why this is the nation that gave the world the 3-hour lunch break. But as we’ve seen, anything that makes employment more attractive to workers makes it less attractive to employers, and this is no exception. Companies desperately try to substitute machinery for people, or temporary workers for permanent ones – anything to keep from adding someone to their payrolls that they might be stuck with for the next 40-50 years.
Interestingly, this, along with the minimum wage, is a major factor in inner-city unemployment. Firms won’t take a risk on anyone, because discrimination suits and other laws increase the risk that you might get stuck with someone awful. For people with a spotty unemployment record, this makes it very difficult to break into the labor market, because the minimum wage prices them out, and firms hire friends and family of current workers whose work habits they can verify.
Productivity Lowering Regulations Though they are not the precise econometricians some extreme free marketers would have you believe, meticulously measuring every input from paperclips to people to ensure that they are getting an adequate return, employers do have a pretty good idea of how much work they have to get out of employees to make them pay for themselves – especially at the lower end of the job market. Anything that lowers an employee’s productivity brings him closer to the point where he’s not worth his salary.Examples of productivity lowering regulations:
o Union-type rules specifying minimum staffing, minimum hours, or maximum speed of work, otherwise known as “featherbedding”
o Safety regulations that force employees to work less efficiently
o Environmental regulations that alter work practices
o ADA regulations that force changes in work area configurations
o Any sort of regulation that forces employees to spend time documenting how they complied with the regulationNote that some of these regulations may, depending on your politics, be something you support. However, the next time you hear employers talk about the implied productivity loss in a regulation, realize that this means that a real, live person may really lose their job.
High Unemployment Benefits make it more attractive for the Goddamn Worthless Bum to stay firmly planted on the couch. This isn’t much of a worry in the United States, because almost no one is willing to do any work, even lying on the couch, for a maximum benefit of less than $8,000. In Europe, however, it’s a major contributing factor to “natural” (read equilibrium) unemployment rates not seen in the US since the Great Depression.All welfare benefits can contribute to this effect, most especially ones that require recipients to be looking for work. Since many such programs define things like sitting around and visualizing what it would be like to actually have a job, looking for work doesn’t necessarily correlate strongly with getting work – and oops! There goes the unemployment rate.
Now back to NAIRU (I just love saying it – I can practically smell incense and the Oaxaca ditch weed). NAIRU is thought by many to be the equilibrium level of employment that an economy can sustain over the long run without throwing itself into an inflationary tizzy. There are differing explanations for why this is, with which I won’t bore you, but most economists do agree that there is some level, which differs between economies, below which unemployment cannot sustainably drop.
The interesting thing is that NAIRU rose for decades in the US and Europe. In 1960, when JFK ran on the slogan “Let’s get this country working again!” unemployment was a whopping 3.6%. In 1996, it was widely agreed that the “Full Employment” level was somewhere around 6%.
Oops. What happened?
Well, welfare reform, for one – a lot of people suddenly found that they couldn’t just look for work; they had to actually find some. Turned out a lot of them had had some all along, under the couch cushions maybe, and others found it was less of a hassle to just get a job then go through the arduous process of pretending to look for one.
For another thing, productivity, which had dropped like a stone for decades, suddenly started rising again in the 1990’s – we think. As with any economic figure, people argue – in this case, about whether those gains were really felt outside of the computer industry. So the jury’s still out.
And, of course, the idea of NAIRU itself is taking a beating these days, although some would argue that those who criticize it are wild-eyed radicals trying to drive the stock market to ever loftier heights.
Anyway, by some mysterious process, we’ve arrived at a recession level of unemployment that’s lower than the expansion level of five years ago. Pretty neat stuff. Which only leaves us one question:
Where the hell’s my job?
Posted by Jane Galt at March 10, 2002 1:20 AM | TrackBack | Technorati inbound links