Unemployment

Persistent unemployment was one of the issues that prompted widespread acceptance of what became known as Keynesian economics. This Keynesian "revolution" found its roots in the Great Depression. The decade of the 1930s was one characterized by persistent and significant unemployment around the world.

While the unemployment today is nowhere near the level of the 1930s, interventionism and acceptance of both stabilization and welfare policy has emerged and evolved over the past 60 years in such a way that the majority in the US accept and demand that the state engage in both functions.

Peter Diamond's work suggests that labor markets function are impacted by search and transaction effects that can lead to dramatic employment effects. These empirical questions are under study by labor economists and this work will undoubtedly shape the way professional economists think about both the labor market and the relationship of that market to the macroeconomy.

I do think it is clear that, even in highly flexible labor markets there are potential and actual differences between supply and demand and that, even in an age of rapid communication and information flow, there are transactions costs related to search and match. This search and match shapes both demand and supply and is only now the focus of attention by social scientists. I suppose what I am saying here is that Hayek's knowledge problem is present in the labor market.

Moreover, it is misleading to use "the" in considering labor markets. Labor is not a homogeneous imput and the demand side of this exchange is so varied that there are many markets. The professional sports market, higher education market, air conditioning repair and installation market are so different, with distinct supply and demand characteristics that they illustration another Austrian observation - the danger of aggregation.

That said, I am thinking about two bits of information in the news today. The first is the FAA funding bill which has lead to a partial layoff of these government workers and the second is the report on June 2011 unemployment.

The latter reports that the number of unemployed is approximately 14 million.

In a related story:

The total number of people receiving benefits, meanwhile, dipped to 3.7 million. That doesn't include millions of people receiving extended benefits under emergency programs enacted during the recession. All told, 7.65 million people received benefits in the week ended July 9, the latest data available.

The number of people seeking benefits remains higher than would be expected in a healthy economy.

So taking the data above as representative of what is happening in the labor market me could make the following testable observations:

1. The number of unemployed in the US is persistently high at over 14 million

2. Over 50 per cent of the persistently unemployed (7.65 million) are receiving some "benefit"

3. The number of unemployed, after declining, seems to be increasing

4. The number of unemployed receiving benefits is declining

Lets assume that observations 1 - 4 are valid.

Then there are a number of policy implications that might be drawn.

Setting aside the interventionist perspective - there are a number of articulate pundits, "economists" and politicians who are well positioned to articulate the Keynesian response to the current labor markets discontinuities.

Thinking about Diamond and the emerging work in search and matching, the evolution of unemployment "benefits" in the US and incentives I am not surprised by points 3 and 4 above.

If an unemployed person has been both long term unemployed and "benefited" long term it seems reasonable that the transactions costs of re entering the job market would be higher the longer the person has been out of the job market. (This too is testable, I would think).

So, setting aside the social safety net function of unemployment "benefits" as well as the disincentive effects it may well be that another consequence of long term unemployment "benefits" (and most observers would, I think, concur that 99 weeks of unemployment "benefit" would be long term) is to exacerbate search and match costs.

Thinking back to the persistent and significant unemployment of the 1930s, unemployment that in terms of persistence and significance was magnitudes greater than today, I am thinking of the duration. I tend to find Higgs et al argument that unemployment duration extended for well over a dozen years and the crisis of the world wide depression, war (both hot and cold), and regime change extended this duration.

So today, the US slowly emerges slowly from the 34th business cycle trough since 1857 - http://nber.org/cycles/cyclesmain.html I wonder about:

1. The public awareness regarding the relative magnitute of the recently ended recession and current recovery. Both deviated from the norm, but neither have been the most severe/slow.

2. The role played by an increasingly complex society on search/match and the role that this complexity plays in the current level of long term unemployment.

3. The role played by the accelerating pace of change on search/match and the role that this pace plays in the current level of long term unemployment. With the pace of change accelerating and the incentive for agents to incorporate this change into both operational planning (both business and individual) and strategic planning I wonder if this might act to lengthen long term unemployment due to search/match.

4. State (government policy) as a force on match/search. Beyond unemployment benefits, minimum wage, credentialing requirements and interaction with special interest groups (unions, environmental groups, nativist groups) and trade policy all act to complicate the match/search process. I am not familiar with the work of Diamond et al, but there appears to be another dimension to the role played by the state in labor markets both in the match/search area and in the stability arena.

5. Regime uncertainty. This is illustrated by the current FAA "situation". On this topic:

A partial shutdown looks increasingly likely because Congress hasn't been able to come to an agreement on legislation to extend the FAA's operating authority, which expires at midnight Friday.

Notice the terms - partial, likely, {no} agreement, expires . . . all strong indicators of uncertainty. Ironically these is a government to government interchange that impacts a small labor market. However, one is left to wonder how this influences other labor market participants who are observing this and other actions by the government that impact the labor markets in the US.

On point I am also thinking about the NLRB intervention in Boeing business operations.