Pigou A C. “Unemployment”, pages 29-35. Published 1913 by William and Norgate, London. Lots of really good stuff in this book–lessons any person in the developed world can see and understand, many of which have been better quantified by recent research. You can get the whole thing on The Internet Archive.
Pigou points out the long term effects of even relatively short durations of unemployment on individuals beginning halfway down page 32. The same effects are being rediscovered (and measured) today.
There’s lots of fretting and frowning over the number of folks getting disability payments in the US these days. It seems like everybody’s in on it–established magazines, conservative pundits, educated economists have good theories to explain it, NPR (with a pretty engaging piece), and even WonkBlog has gotten in an explanation (demographics + tough job market, in case you were wondering).
My piece on long-term unemployment got me to wondering–how many long term unemployed, marginally attached, and discouraged workers are leaving the workforce permanently and winding up on disability insurance? In my own work life I’ve known people who really could have qualified for a disability award. But in a solid labor market they were able to find employers who were willing/able to accommodate some special needs. When times are tougher, accommodation above ADA requirements often goes away. So a working person who is technically disabled is pushed out of the workforce by market changes. If I’ve witnessed it myself it can’t be too uncommon. This led me to ask how much it’s going on, and if it’s higher now than in the past.
Fortunately, the Social Security Administration makes figures on disability awards easily available. They also publish the month-to-month number of disability beneficiaries back to 1985, which I copied into Excel and graphed:
I was able to discern four trends in monthly awards in the data:
- An average rate of about 4800 awards per month in the late 1980’s
- That rate to almost 20,000 per month in the early 1990’s
- The rate declined slightly in the mid- and late- nineties and then slightly rose in the aughts
- The average monthly awards fell by 38% to about 12000 awards per month in April of 2012 to present
I attribute the increase in awards in 1990 to a cultural change–Americans began to be more aware and more accepting of individuals with disabilities. Disability accommodation came to be seen as a Civil Rights issue, culminating in the first President Bush signing the ADA. It makes sense that Americans would be more willing to apply for disability benefits, and that the government would be more willing to award them.
Bottom line, folks are bringing up the “explosion” in disability benefits 23 years too late. The rate increase was in 1990. And for the last 15 months, the rate of new awards being added is down, and down by a lot. Sometimes it feels good to go against the conventional wisdom, and this is one of those times.
A piece of Jessica’s art:
Since the late 1970’s the number of US workers unemployed for 27 weeks or more has generally lingered between one and two million, even during recessions. The ’08-’09 recession and recovery period were different: long-term unemployment exploded to a peak of 6.7 million in April of 2010. It lingered above six million for 17 months before falling in October 2011. Since then the level has declined steadily, but very slowly.
There’s a tendency with noisy data to look for linear trends, but I don’t think it’s the right way to analyze long term unemployment. To begin, looking for a job is a job in itself, and when a person is locked out from formal job–>paycheck ways of earning a living, he or she has to find other ways. That means getting public assistance, asking help from friends, family, and community organizations, doing side work or day labor for cash payments, etc. These all take mucho time, and generally have a very low return. For this reason, I assert that being long-term unemployed can be thought of as an occupation in itself. The corollary is that long-term unemployed folks returning to work is a form of occupational mobility.
In addition, if you’re employed there’s a pretty good chance you know very few (if any) long-term unemployed folks…..Unless you’re very active in your church, community, and social networks like LinkedIn, of course. Even then, you’re probably locked out of regular interaction by circumstance. This isn’t a value judgment–it’s just the nature of human interactions. Long-term unemployed people tend to network with others in the same circumstance and share information. Connections tend to play a gigantic role in finding formal work in a slack labor market, but reducing the pool of the long-term unemployed leads to disconnection for those remaining in it. While it would be nice to think that the long-term unemployed would be able to pull their unemployed friends along, this just isn’t the case. Instead, the rate of job finding in the remaining pool slows as information sharing is reduced.
When examining the long-term unemployment trend post-recession, there are two distinct pieces–the relative steady state beginning in April 2010 and the decline beginning in October 2011. Because of the dynamics I described above I decided the best way to analyze + predict from the measured data was with a deterministic trend; as a first-order ODE specifically. I took the measured data beginning in September 2011 and worked out a long-term predictive trend based on it:
The data smooths out to a disturbing trend where an average of 1.715% of the pool of long-term unemployed individuals find work or exit the labor force in any given month. If we assume the recovery continues as it has, the number of people long-term unemployed will decline to about 2.07 million when the current US President leaves office–a number higher the previous ceiling of 2 million and way above what’s been normal during expansions. In my opinion, this shifts the long-term unemployment problem from being just an economic problem to being a political problem. It will be very troublesome for the next Democratic Presidential nominee to have to defend this kind of economic record, and will be an issue the Republican nominee can seize upon.
Of course, “the recovery will continue as it has” is a big assumption. I’ve run the trend line out longer than the data I’m using, which is pretty gutsy to do. However, data from prior expansions show this is a reasonable expectation, and the trend seems to have reached a steady, if undesirable, equilibrium. Anything can happen in the next couple of years to grow the job market, but if history is an indicator, just growing the job market won’t be enough. What will really be needed are more entry level jobs in every industry. As I mentioned previously, entry level jobs have been in short supply, and are simply needed in general. Can the long term unemployed–with all the stigma that has been unfairly attached to them–be expected to compete successfully with the already working? I don’t think they can. In my opinion this is an economic problem that requires a political solution–one that could come in many forms–from tax credits, to paid placement, to direct hiring. If the current administration doesn’t successfully address it, the next one will have to.
The finest GagVid I’ve seen this week….Don’t worry, it’s clean:
“There was a man in the land of Uz, whose name was Job; and that man was blameless and upright, and one who feared God and shunned evil. And seven sons and three daughters were born to him. Also, his possessions were seven thousand sheep, three thousand camels, five hundred yoke of oxen, five hundred female donkeys, and a very large household, so that this man was the greatest of all the people of the East.
And his sons would go and feast in their houses, each on his appointed day, and would send and invite their three sisters to eat and drink with them. So it was, when the days of feasting had run their course, that Job would send and sanctify them, and he would rise early in the morning and offer burnt offerings according to the number of them all. For Job said, ‘It may be that my sons have sinned and cursed God in their hearts.’ Thus Job did regularly.” —Job 1:1-5
Job is probably the oldest book in the Bible and waaay fascinating to boot. If you haven’t read it you’re missing out…and if you haven’t read it critically, you might as well have not read it at all. The best part comes near the end, but I’m not giving it away! The reason for quoting Job is to show that wealth in the ancient world was measured in much more material, meaningful ways than it is today–smart, hard working kids who had themselves survived to reproductive age, herds of livestock with reliable production, lackeys and indentured servants. The first few verses demonstrate the story hales from the early days of agriculture and animal husbandry.
Our post-industrial global society is “richer”, but the definition of wealth has gotten pretty ambiguous. A “mass-affluent” individual or family may have a gang of financial assets and high potential earnings. But whether or not those assets behave as capital, let alone as strategic capital, is dependent on a host of factors. Job’s capital, on the other hand, was measured in animals, workers, land, and family alliances. Anybody who wouldn’t trade a few pieces of paper for that hoard is truly without hope.
Pre-1840 (approximately), relative wealth and income for 90% of the world’s population mostly depended on weather conditions and the rate of nitrogen replacement into the soil. These could not be measured or predicted at the time, and rightly belonged to the realm of the gods. With the use of salt-peter from Chile, and later through the Haber-Bosch process, the nitrogen replenishment limit on agricultural productivity was broken. Thanks to steam- and internal-combustion engines, dependence on weather was overcome through global trade. Fractional reserve banking lifted the precious metal limit on currency production.
Today our conventional notions of wealth and income are measured in currency, which wasn’t the norm even 120 years ago. The value, production, and distribution of currency are entirely social constructs. However, financial and economic systems are damned complex, subject to non-linearity and probability. Because of this, there is a tendency to ascribe human personalities and divine attributes to dumb money. This vestigial tendency shows up in everything from Adam Smith’s “Invisible Hand” to the ultra-hokey modern day “Law of Attraction”.
Bah!–Enough of the garbage! Bill McBride at Calculated Risk has put together a neat-o graphic showing job losses and recoveries in US recessions. It’s shoplifted below:
Bill’s right to focus on employment when discussing recessions. As Dr Hall notes, modern recessions tend to be mild in terms of changes in absolute output, but are as bad as ever–worse even–in terms of job recovery. If this is the case, what can be measured to better understand and “rate” modern recessions and recoveries? Are there trends from past recessions that can help? If interest rates (determined by the Federal Reserve Bank), and fiscal deficits (from the US treasury) can be thought of as control mechanisms, to what extent are they effective?
The current US recovery has been described by some “as the weakest since WWII“. It’s a fair assessment, and I won’t mince words–the human cost has been terrible. But from both Dr Hall’s work and McBride’s graph, it appears that job losses and recoveries have been trending longer since the 1980 recession. This may just be a visual anomaly. To try to score post-WWII US recessions and recoveries in terms of their length and depth, I measured the time from previous employment peak to recovery in months and divided it by the depth of the job loss trough in percent for each recession on Bill’s graph. I call this the Job Recovery Score.
I put the scores and the years of recession-starts into Excel and graphed. To score the 2007 recession, I used Bill’s job recovery projection. I don’t normally include Excels goofy rolling trendlines in real work, but this time it highlights a pattern in the data that’s hard to see from the data points alone:
When analyzing recessions, there are always a few problems. For starters, the data set is small. Furthermore, recessions are often caused and mitigated by extraneous events. For example, the 1969 recession began at the same time as the Tet Offensive in Vietnam. The 1974 recession started with the loss of Middle Eastern petroleum exports to North America and Europe. Martin Feldsman’s data shows that it ended with growth in agricultural exports from the United States to the USSR, America’s first experiment in the “Oil for Food” trade. Job recovery after the 2001 recession was delayed by the terrorist attacks of 9/11 and the march to war in Iraq. Nevertheless, there’s a roller-coaster like pattern to the job recovery scores over time, and the scores of the last ~20 years are much more negative than those before them. I isolated the “peak points” and labeled them in red, and the “trough points” and labeled them in green. I did a linear fit of those data points:
I was surprised to see strong correlations–0.964 for the peaks, and 1 for the troughs. While it can be hoped that the next recession will have a less-negative job recovery score, based on this analysis we can expect that it won’t. If the pattern holds, the next employment recession will be shallower, and the relative recovery much slower than the current one. Why this is happening–have monetary and fiscal responses become less robust over time? I obtained the historical Federal Funds Rate data and compared it with the recession score graph:
The Federal Reserve tends to raise interest rates during expansions to reduce inflation, and drops them during recessions to promote recovery. Based on the Federal Funds Rate, it’s pretty obvious that this policy response has been relatively mute since about 1990, but it has fallen more and risen less. On the whole, interest rates have been much lower over the last 20 years than during the time from the late 1960s to early 1980s. The next image shows the fiscal response in the form of Federal deficit spending as a percentage of nominal GDP:
Based on this chart, we can see that the fiscal response to recessions has, in fact, been proportionately stronger since 1970 than it was from 1946-1969. Based on policy interest rate data and the Federal deficit data, I think the policy responses have not weakened since the 1948 recession; they have just become less effective. This may be the least desirable conclusion of all. Tax cuts and spending increases at the Federal level, even coupled with aggressive monetary policy from the Federal Reserve, have not been sufficient to solve the problem of long employment recessions in the United States.
In light of these problems, it’s tempting to point to trade deficits and uncontrolled immigration as causes of the seeming impotence of public policy to promote post-recession employment recovery. Unfortunately, the data on these effects are mixed at best. While there are many social problems caused by these issues, worker displacement for starters, it’s doubtful that they are the driving force of policy impotence. It’s clear also that privately owned and managed institutions have not solved the problem either.
To end this post, I will barf out a few of my own opinions. Feel free to stop reading now if you don’t want to hear it. At the tail end of a May 20, 2013 discussion of economic inequality and growth at the City University of New York, Paul Krugman noted that the two periods with the highest economic growth in the US coincided with the Gilded Age (1870-1900) and the Post-WWII boom (1946-1973). During the Gilded Age inequality grew fast, and during the Post-WWII Boom inequality declined. He expected a closer relationship between inequality and growth, whether it was positive or negative. I think Dr Krugman’s statement has to be examined from the perspective of real capital formation. During the Gilded Age, the policy of the US government was to distribute land to settlers who were willing, able, and (unfortunately) racially favored to work it. We should not kid ourselves–the Homestead Acts were coupled with one of the most horrific campaigns of genocide against a native population ever seen in human history. But from an economic perspective they were a transfer of capital in the form of land into the hands of relatively cash-poor individuals. The financial inequality of the Gilded Age was mitigated by the largely agrarian nature of society and the availability of free or cheap land. Even if a homesteader could not profitably work a claim, he or she could reasonably expect make money by selling it.
My conjecture is that the employment problem we face is symptomatic of a rising difficulty in the accumulation of strategic capital. Sure, there’s plenty of liquidity and corporate money in the US and around the globe. But the flow is mainly controlled by a relative few individuals, and since they are a small group, their knowledge and interests are inherently too small to fill all potential markets. For people of average means or less, there are few, if any, routes to acquiring the skill, equipment, land, and cash one needs to start a viable, profitable business. Furthermore, there are virtually no simple ways for a person of modest means, education, and average health to build his or her real income. A few policy proposals that may be worth considering are:
- Sponsoring increased mentoring and small business grants to potential entrepreneurs in low- to moderate-income areas
- Increase public or public-private employment opportunities, such as one where government covers half the cost of employing low income individuals. My first job was actually through a program like this.
- Develop programs and partnerships to assist low- and moderate-income households with the purchase of solar panels or wind turbines, and grant consumers the right to sell power back to the grid
- Encourage profit-sharing programs in mid-sized businesses, and dividend-paying stock compensation for workers in publicly traded companies
- Fund modest lifetime income payments which could be earned by low-income and long-term unemployed workers through paid or volunteer work. Payments could be managed through insurance annuities.
Anyway, interesting topic that I’d thought about for a while and finally had time to look at. Disclaimer: economics isn’t my specialty and I really didn’t derive anything. What are your thoughts?
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