Unemployment Insurance

Mike Konczal has a post examining Romney’s idea to establish personal unemployment insurance accounts, racá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r than universal unemployment insurance. This debate gets into cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 general difference between “liberal” and “neo-liberal” approaches to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 welfare state - in which cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 liberal approach would have cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 government directly provision goods, and cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 neo-liberals prefer to set up market structures to handle insurance (with subsidies thrown in for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 truly poor). I’m generally in favor of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 neo-liberal option; but Mike has had a number of good posts outlining some powerful critiques.

In this case, Mike outlines some research by Raj Chetty showing that unemployment insurance (when given in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 form of a lump grant) actually increases cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 duration that people take to find a job. This makes sense if you think that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 unemployed might need more time to find a perfect fit. So cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 “moral hazard” aspects of unemployment insurance might not be a huge worry; as long as people are avoiding immediate employment with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 aim of finding better employment.

I’m fan of Chetty’s research in general, and this study is pretty clever. But it's worth noting ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r studies have found different effects. For instance, this study by Krueger found that search intensity increases as unemployment benefits decrease; and search intensity increases as benefits are about to run out. That suggests that some sort of moral hazard aspect to unemployment uninsurance isn’t crazy. Chetty’s paper didn’t show that people who waited longer got better jobs — so we don’t know what cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 value of waiting for a better job is; or whecá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r people really did wait longer with a lump-sum benefit for better jobs.

We also have cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 advantage of looking at an actual program of unemployment insurance accounts — Chile — which is in general a good advantage of a neo-liberal approach to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Welfare State (balanced budget with flexibility for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 business cycle, private accounts for pensions, etc.). This article from VoxEU suggests that an unemployment insurance savings account raises job-finding rates.

Chile’s program combines regular contributions (“split” between employers and employees), along with a common fund partially funded by cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 government. Upon unemployment, people first draw down cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir own private account. The key picture is this:

People eligible for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Solidarity fund (ie, drawing down unemployment benefits cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y didn't pay for) find jobs at much slower rates initially. Meanwhile, among those with personal accounts -- cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 amount of funding didn't affect cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 rate at which people found jobs (suggesting that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 liquidity effects Chetty focuses on weren't a huge factor, at least here).

There's not an immediate takeaway from this. The authors of that piece emphasize cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ability for personal unemployment accounts in diminishing moral hazard and increasing employment. Contrary to that, it's possible that delaying employment led to better labor market outcomes - though we just don't have data on that. Also, you probably want to figure unemployment itself as a bad, and count shorter unemployment durations as a good thing.

Overall, I’d say that Chetty’s research — though interesting — isn’t cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 last word. His job duration is interesting, but evidence from search intensity suggests that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re may be *some* moral hazard here (cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Chetty paper had some role for that too). We still don’t know (or at least I don’t know) what cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 improvement in job quality is for people who take longer to find work. The evidence on an actual personal unemployment plan seems at least somewhat positive.

I do see one important benefit a shift to personal unemployment accounts would get us — it would depoliticize cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 unemployment insurance issue. Right now, we rely on Congress to go ahead an authorize additional duration for unemployment insurance every time we have a recession. Given that we lack a consensus on how much cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 government should actually spend or tax, this discussion gets wrapped up in that broader debate, and so you end up with some hostility to what should be a routine automatic stabilizer. If instead unemployment insurance was all handled by personal accounts, one imagines that this debate would go about differently. People would just have access to unemployment insurance and Congress would complain about ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r things. Seems like a pretty good tradeoff to me.

Why Are Wages Nominally Inflexible?

Nominal wage inflexibility is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 standard assumption in economics, and it drives many of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 key results in macroeconomics. Fiscal and monetary stimulus, in particular, are frequently justified on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 grounds that greater price inflation is needed to re-adjust real wages in a world where nominal wages can't go down.

Well, why not? Scanner data shows that goods prices are actually quite flexible even in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 short-run, contrary to what a "menu cost" argument would have you believe. Financial prices of course adjust at cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 level of microseconds. So it's not that prices in general are inflexible downwards -- just wage prices.

Bryan Caplan raises this issue, arguing that workers who offer to work for less "sound weird." That sounds about right. But why? Here's what's going on on eicá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r side of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 labor market relationship:

1. From cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 employees' point of view: cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y're aware that a situation with a lot of unemployment generates a market for lemons. The long-run unemployed tend to be different from those who are employed -- cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y may not even compete for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 same jobs. Yet workers have much more private information on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir own about cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir own capacities than employers.

So you have asymmetrical information. How do workers signal to employers that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y really are more qualified than all those people in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 unemployment rolls that really do lack skills? These sort of labor search questions are a bigger deal during a severe recession, in which you have a greater mix of people with and without usable skills, when you worry about cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 depreciation of human capital among cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 long-run unemployed, etc.

If you walk up to an employer and say, "I'll be willing to work for 10% off;" you basically signal to that employer that you are worth less than cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r job-seekers queuing up at cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 door. If employers were able to perfectly measure skills, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y might be willing to take a chance on you anyway knowing that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y're eicá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r getting a good worker at a lower price, or at worst a worse worker at a dearer price. All cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y can see in reality is that you have some level of ability that's hard to measure -- but you apparently lack enough confidence in your own ability to get a job that you're willing to lower your wage. That's not a good signal. If you have access to many ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r job-seekers (say, it's a recession and many people are unemployed) it's easier to go for those workers.

2. From cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 employer's side, you worry about cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 morale and productivity among all of your current staff. It's very damaging to morale, it seems, to simply cut cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 wages of current workers -- perhaps cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y consume many commitment goods, and even small wage cuts result in costly cutbacks among cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 few categories of discretionary spending that workers have. Maybe cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y're just psychologically drawn to "make more" over time, and don't like going backwards.

Eicá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r way, you worry about cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 productivity of workers that you get pay on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 cheap. Instead, you want to pay wages that are a little above cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 market wage to grab workers of slightly better quality. Perhaps you manufacture an O-Ring style product in which outstanding effort from all workers is essential to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 final product. In that case, you really worry about cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 maximum productivity of your worst employee. Grabbing minor wage savings from a marginal employee is a second-order consideration relative to lowering company-wide productivity that can happen from offering even a few workers lower than market wages.

Again -- you're not going to be hiring cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 best workers at a lower wage. The best workers are confident that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y can actually get a good wage. The information asymmetry problem here is tough, and prices here are used as signals more than incentives.

There's a huge literature on this subject I'm not familiar with, so I'm sure ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rs have had similar thoughts. This is what I would look to though.

Asset Prices, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Business Cycle, and Unemployment

A few months ago, I blogged about research done by Roger Farmer and Naryana Kocherlakota on understanding unemployment; and in particular relating trends in unemployment to asset markets and investor confidence.

The key issue is that it's difficult to understand why unemployment remains so high so far after cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 financial crisis. A real business cycle approach would look for real shocks to production; in particular idiosyncratic shocks to technology. Yet it appears that this recession involves a number of nominal and financial-sector related frictions difficult to rationalize using that model.

Anocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r approach relies on New Keynesian thinking. In this view, prices are “sticky” as it is costly to adjust prices in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 short-run in response to a moderate shock. This induces a friction in in economic activity, especially in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 market for labor, that can be fixed through macroeconomic stabilization in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 form of monetary or fiscal stimulus. However, if you look at scanner data, retail prices are actually fairly flexible. On top of that, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 economy faced such a substantial shock, and we are sufficiently far out in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 future, that surely price-setters have had cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 chance to adjust prices by now.

In short: cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 particular frictions and shocks underlying traditional macroeconomic models seem to be of limited relevance in explaining this recession. As a result, I’ve been trying to read up on alternate models — relying, for instance, on financial market frictions, household balance sheets, etc. Roger Farmer, in a new paper, offers up anocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r such model that relies on old-style Keynesian thinking.

The basic logic comes out in this graph:

This shows asset prices and unemployment being closely linked throughout cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 business cycle; which isn’t a trivial fact. The logic is that asset prices follow bubbles and crashes due to self-fulfilling optimism and pessimism from investors. These booms and crashes result in larger social consequences in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 form of higher unemployment through search frictions in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 labor market.

In this model — as in some sense as in Keynes original work — investors do have rational expectations. They expect a bubble; and a bubble happens. They expect an economy that performs poorly over an extended period of time; and that too materializes.

Nevercá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365less, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 paper still relies heavily on psychological assumptions about investor behavior. Investor confidence drives both asset prices, as well as willingness to hire. This response is, as I suggested in my last post, asymmetrical, as it is harder to hire than it is to fire.

I find this paper interesting as it brings cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 problem of unemployment into cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 domain of asset pricing. While Farmer emphasizes cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 psychological basis of bubbles and busts, someone like John Cochrane would emphasize how ultimately discount rates — cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 rates at which we value future income relative to current income — determine cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 values of current financial assets (which are just claims to future cash flows).

In Cochrane’s world — asset prices fluctuate in conjunction with macroeconomic outcomes. Is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 economy looking bad? Do you anticipate losing your job, your business, or ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r such negative shock? If so, you wish to hold less risky assets. Yet we can’t all rebalance away from risk, as cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re are only so many stocks and bonds and so forth. Instead, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 price of stocks and bonds fall in order to compensate us for bearing this sort of risk in a time of economic uncertainty.

Yet Farmer would point out that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 process also works in reverse. High discount rates — equivalently, “pessimism” — felt by cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 owners of capital manifest cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365mselves in an unwillingness to hire, particularly if cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re are frictions in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 labor search process.

I suspect that tying Farmer’s model into a more "rational" model of asset prices that emphasizes cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 links between financial markets and real markets would amplify cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 multiple equilibrium nature of unemployment. This was cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 key feature of Keynes of course, and it’s interesting to see Farmer resuscitate this idea. And with unemployment at 9% or what have you it doesn’t seem implausible to think that numerous economic possibilities are open to us, depending on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 nature of economic equilibria we end up at.

Unemployment and Recalculation

There are two ways to think about current deep and persistent rates of unemployment. One point of view is that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se merely reflect cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 poor rate of economic growth, and ought be remedied by stimulus eicá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r fiscal or monetary. Anocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r point of view is that high unemployment reflects cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 degree of economic restructuring that needs to happen to cover cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 malinvestment of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 housing boom; and so easy fixes are not available for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 labor market. The first set of views are held by a number of people across cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 right and left; with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 preference for fiscal/monetary stimulus varying by ideology. The second set of views are held by a motley of individuals, from Austrians to Raghuram Rajan, to Minnesota Fed President Narayana Kocherlakota, to Arnold Kling and his idea of PSST (patterns of sustainable specialization and trade).

One point of evidence in favor of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 “structural” view is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 pattern of hiring and firing — in which many jobs across a range of dying industries are disappearing. According to that school of thought, this indicates that those industries are experiencing a reallocative shock.

Ricardo Caballero comments on this in an interview with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Minnesota Fed:

Q: And should we be concerned about jobless recovery in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 United States? Do you think cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re might now be a higher level of structural unemployment?

This was a time when cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 important work of Steve Davis and John Haltiwanger in documenting cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 nature of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 process of job creation and destruction in U.S. manufacturing led to an explosion of research trying to explain this process.

One of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 key features of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir findings was that recessions come with sharp spikes in job destruction. Somehow, ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r researchers jumped to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 conclusion that this spike meant that job reallocation was strongly countercyclical. That is, that reallocation increased during recessions: a sort of Schumpeterian cleansing. Many cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ories were written about this phenomenon.

Mohamad and I made cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 racá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r obvious observation that a spike in destruction in itself does not mean that reallocation increases during recessions, since this would also require that creation increases. Steve and John had already documented that job creation actually falls at impact. We explored whecá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 initial spike in destruction translated into abnormally high creation during cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 recovery phase of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 cycle, which would be a dynamic version of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 countercyclical reallocation story. Not only did we not find this increase in creation during cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 recovery, but we found that job creation was actually below normal levels. That is, cumulative restructuring is procyclical, not countercyclical.

We cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365n went on to show that a model where financial constraints tighten as a result of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 recession could explain such patterns. I think this is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 connection with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 current recovery. This was a recession which severely damaged cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 financial sector; hence, it is not surprising that hiring is so muted.

I don’t think this view is inconsistent with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 idea that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 economy does face long-term structural challenges in adapting to new social and technological changes. However, I’d say it tackles cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 idea that such reallocative challenges are an argument for weaker stimulative efforts. Racá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r, this seems to say that proper economic recovery goes hand in hand with reallocation. No need to view AD/PSST as opposed from cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 policy point of view.