Does the Welfare State screw the poor?

Milton Friedman’s complaints about rent control and the minimum wage are cliche. These programs hurt the people they’re intended to help. Unintended negative consequences are the first things I look for when I think about a policy intended to help the poor. I just took their existence as an empirical fact.

But I never really thought about the structure of these unintended consequences. So I second Karl Smith’s recommendation to read Beaulier and Caplan’s paper on the subject.

Poverty policy might hurt the poor because:

  1. Poor people pay more for it than they get. E.g. poor people live shorter lives suggesting they get less social security benefits and social security taxes are regressive.
  2. There may be inter- or intra- family externalities. E.g. a welfare program may make a dad better off by leaving his family but his absence may make the rest of the family worse off.
  3. Poor folks are lead to make bad decisions (where bad is relative to a neoclassical norm) for themselves because of the program. E.g. affirmative action leads minority students to choose “higher ranked” schools whereas they would have had better outcomes if they choose less prestigious schools.

The point of the paper is to show that the third possibility is untenable in the neoclassical framework (where expanding a person’s choice set can only make them better off) but it becomes tenable if results from behavioral economics are taken seriously. Plus, deviations from rational expectations may be especially pronounced among the poor.

Labor mobility

If labor was perfectly mobile and suddenly there were massive dislocations requiring workers to relocate, you’d expect an uptick in the number of workers moving, right? A corollary is that if you do not see an up-tick in the number of workers moving, then either there was no massive dislocations or there is not perfectly mobility. Take the second case: with imperfect immobility workers would like to take jobs in other places, but they can’t. This looks like sticky wages. Sticky wages make aggregate demand effects important. These data suggesting labor mobility did not increase in the last recession, then, are consistent with both structural and cyclical problems in the labor market.

A link everyone will find useful

I was at a practice job talk at a nearby university on Friday. As preface to my work ((I’ll post on it as soon as I get my job applications sent)), I pointed out that workers change careers many times, 3 or 4 times, over their lifetimes where career change is defined as an occupation change that requires different tasks performed on the job, e.g. taxi driver to nurses assistant. BTW, workers change occupations about once every five years so only about a third of these are career changes. One of the audience members, an academic, objected saying that nobody he knows has ever changed occupations (not just careers, occupations).

On that note, I am sure everyone would find this MR linked paper useful: goofy titles get cited less often. At the link, its suggested that this is because “science is serious business”, but in my experience this result stems from the fact that most of these titles are “funny” but not funny. The problem is that the paper only looks at the effect of average “funny” titles. Since the average “funny” title isn’t funny, just “funny”, its picking up the effect of being “funny” not funny. I’m sure there are some really funny titles that get extra cites because of it.

Which paper titles are funny and not just “funny”?

Increase inflation AND combat structural issues

Inflation is below target. Increasing output and decreasing or stagnant inflation is an indication that inflation expectations are becoming unanchored. That’s bad. Inflation should not spend too long, too far from its implicit target of 2%.

Structural unemployment is high right now. Instead of just dumbly extending UI benefits and scratching our heads on why unemployment among the young is increasing after three subsequent increases in the real minimum wage, we should do something about it.

Politically — I’m only guessing because I’m no expert — dealing with structural unemployment would be cheaper. The Fed, more than anyone else, knows how to increase inflation and they have figured out the cheapest way to do it. You might think, however, there are personnel issues at the Fed, i.e. too many hawks, that make “doing the right thing” impossible. And so, you might think, political pressure would have an effect on policy in the short run. I’m not sure why you think that. The FOMC meets only ever so often and they never take radically new action one way or the other. Policy stickiness is one of the most reliable facts about Fed policy. According to Goodfriend and King, even Volcker’s radical disinflation started over a year after he became chairman (and it took another 1/2 year to start to see employment effects). BTW, we’re not changing the chairman for a long while and even supposing Bernanke was suddenly reborn a Sumnerian, how do you think employers would react if the Fed announced bold action one way or the other? Ditto for massive institutional changes at the Fed.

In any case, with the Bernanke Put getting close to its strike price, the monetary policy car is going in the right direction. Given the current institutional framework, political pressure is not going to speed the car up.

But we can do more about structural unemployment. All it would take is for some enterprising think-tank researcher to buddy up with a promising young politician ((I’m thinking there may be an “only Nixon can go to China” effect here, but I’m sure a charming Democrat could pull it off too)) and to come up with a bold plan to deal with it. Radical changes to the UI system. Radical policies to deal with labor immobility. Radical interventions in the housing market. If engineered and sold to help reduce unemployment and as a package deal, these policies would be supported by both sides.

PS – We shouldn’t look to Europe for examples for good labor market institutions… the EU’s unemployment rate is higher than the US’s right now.

Did you know?

After Kockerlakota dared suggest there are substantial structural problems in the labor market (right wing scum!), the very next paragraph was:

Given the structural problems in the labor market, I do not expect unemployment to decline rapidly. My own prediction is that unemployment will remain above 8 percent into 2012. Persistently high unemployment of this kind will impose considerable losses on many of our citizens. Good public policy requires that we help mitigate their losses via a well-designed unemployment insurance program. Recent economic research, including some done at the Federal Reserve Bank of Minneapolis, shows that such a program will not feature the termination of benefits after 26, 52, or 99 weeks. Instead, a good insurance program should offer constant benefits over the entire duration of an unemployment spell, however long. It should provide incentives only through the level of those benefits, not through their timing.

and then he cites Shimer/Werning (2008). That paper shows just what Kockerlakota suggests above, i.e. if the unemployed have good access to liquidity (i.e. a part-time job, bridge loans or savings) there should be no cut-off of unemployment benefits (left-wing nut job!).


All the heat on the issue of AD policy overshadowed and even delegitimized discussion of policy to deal with structural issues in the labor market. Suppose the latter policies were cheaper economically and politically. In this case, while the benefits are smaller (only 1/3rd of unemployment would be addressed according to RA) the cost/benefit analysis would still come out in favor of policies addressing the structural issues.

Was the acrimony and name-calling worth it?

What is structural unemployment?

There seems to be a disconnect between how economists (and Fed economists in particular) use this term and how bloggers (and left bloggers in particular) use it.

Some definitions:
“The unemployment resulting from wage rigidity and job rationing is sometimes called structural unemployment.” — Mankiw’s intermediate text

“Frictional unemployment [w.a. where the only other kind of unemployment they mention is cyclical unemployment] is the unemployment that exists when the economy is at full employment.” — Dornbusch, Fischer and Startz

“The part of unemployment associated with the institutional features of an economy, including hiring and firing costs and the structure of the unemployment compensation system.” — Jones’ intermediate text

There may be confusion about this term because there seems to be such a multitude of definitions (wikipedia’s definition talks about skill mismatch). I like Jones’ definition the best, but the point I want to make is that the lefty bloggers are reading more into these definitions than necessary.

There’s no reason to think the relationships between “wage rigidity”, “full employment”, “institutions” or “skill mismatch” and unemployment are constant over the business cycle. You can make good arguments that the mechanisms producing these relationships are responsive to overall conditions in the economy (I won’t). And… and!… estimates of structural unemployment suggest that it is time-varying: higher during recessions and lower during booms (anyone have a good cite for an estimate of time-varying NAIRU?).

When the Fed folks say structural unemployment is high right now (e.g. Altig or Kocherlakota), they’re not saying its permanently high. They’re not trying to pull an inception making us feel like permanent high unemployment is ok. They’re observing momentarily high structural unemployment that fits in a pattern consistent with historic experience.

The heartbeat of America

Here’s all the Jolts data (minus job openings):
These are not seasonally adjusted so that’s why you get the inverted-U shape every year for the hiring and quits series and the inclined saw shape for firings. Still, you can see something happened the last two or three years. Firings (the pink line) spiked in early 2009 but several months before that quits (blue) and hirings (green) declined by about 20 to 30% each. Here’s a close-up of the most recent period:
A couple things that strike me about these graphs:
1. Firings had a one month spike in January 2009 (a month with a high number of firings to begin with) but the series has stayed about where it usually is (maybe 10% higher if you ignore the recent dip). The story of this recession isn’t of people losing their jobs.
2. Looking at the dramatic decrease in hirings, the story of the recession is that people aren’t finding new jobs.
3. However, because there’s much, much fewer people quitting their jobs the job market isn’t as tight as it could be.

One of the things I do in my dissertation is treat changing jobs as an investment decision. When a worker quits their old job and looks for a new one (maybe not in that order), they are forgoing human capital that made them productive at their old job and they’re investing in new human capital to make them productive in their new job. One possibility — given the JOLTS evidence and thinking of job switching as investment activity — is that like employers who are holding back on new invests (and thus holding back on hiring), workers are holding off on making new investments as well.

I’m not sure about the implications for aggregate demand, but I’m pretty sure this is bad for growth prospects.

Who are the long term unemployed?

A few weeks ago, Mike was asking me about the long term unemployed. I’m running some regressions using CPS data so I have the data he asked about just hanging out on my desktop. Public service:

The unemployed during this recession ((I looked at 2008 and 2009 data for folks that worked one week or more)) are different than those that don’t become unemployed. They’re younger, less educated, more likely to be male and less likely to be married.

Now, the long-term unemployed (greater than 25 weeks unemployed) are different from the short-term unemployed. They are even less educated, less likely to be white, less likely to be married and slightly older.


The never unemployed average 40.1 years old, the short-term unemployed 35.5 and the long-term unemployed are 36. Contrary to Tyler Cowen, unemployed workers above 40 with a college degree are not much more likely to be long-term unemployed (they’re 24% of the 40+ long-term sample compared to 21.9% of the 40+ short-term unemployed sample). Relative to all college educated workers, college educated workers older than 40 are just more likely to be unemployed.

More on immigration

Ok. I can’t wait anymore. Someday this paper (co-written with my advisor) will show up here. The paper reviews trends in immigration in California and summarizes the findings of one of Peri’s working papers. In that more technical paper, Peri found a clever way to control for all three confounding effects I’ve discussed before that can contaminate estimates of the effects of immigration on native employment outcomes. Consistent with most of the literature, he finds no negative effects of immigration in this respect.

Also, here’s Peri talking about immigration: