Blinder’s writing on unemployment and inflation were very
interesting. He provides a hard headed argument for why we should care more
about unemployment and less about inflation. Specifically, both he and Krugman
argue that (moderate) inflation may not be all that bad. This makes the
question, is unemployment that bad? I think the answer is yes. Here is why.
The most obvious is the relationship between unemployment
and GDP. This alone might be enough to end the argument. Okun’s law implies a
real tradeoff between unemployment and GDP growth. More people working means
more stuff produced. More stuff produced means a better life.
The two more reasons I want to discuss don’t have to do
(directly) with this output relationship. There have been a number of recent
studies quantifying the psychological and physiological ill effects of
unemployment. Additionally, there is a real concern with hysteresis losses over
long periods of unemployment.
First health. A 2010 Pew study shows the increasing negative
impact on a variety of quality of life measures for the unemployed. It is worth
noting these numbers are much higher for unemployed than for those employed,
and are significantly worse for the long term unemployed.
People who are laid-off actually have shorter lives as well,
quoting from a 2009 study: “We find that for high-seniority male workers, mortality rates in
the year after displacement are 50%–100% higher than would otherwise have been
expected. The effect on mortality hazards declines sharply over time, but even
twenty years after displacement, we estimate a 10%–15% increase in annual death
hazards. If such increases were sustained indefinitely, they would imply a loss
in life expectancy of 1.0–1.5 years for a worker displaced at age forty.”
This study controlled for selective displacement of less healthy workers by
focusing on mass layoffs and also controls for industry, firm, and premiums.[1]
Other studies and metastudies found similar results. Unemployed individuals had
a variety of both psychological and physical impacts.[2]
In fact, even children of the unemployed face significant negative impact, with
an expected earnings 9% lower.[3]
Apart from the more obvious ill-health correlated with simply having less
money, there are additional negative effects of unemployment on health impact.
Both Krugman and Blinder (as well as just about every other
writer we’ve read) mention the gap in output associated with unemployment, a
real gap that will not likely be made up for in future years. But there are additional
negative impacts for future production given a loss of skills for the
unemployed. When individuals have been out of work for a long period of time,
there are often hysteresis losses. Studies have shown unemployed people lose
the ability to read over time, but this is just a single example of one type of
hysteresis. The fear over hysteresis is that it will cause short-term
unemployment to impact NAIRU. That is, over time, temporary unemployment can
become structural. [4]
There is some question over whether hysteresis has played a large role in the
history of the United States, but there are new worries that it is having a
large impact given the recent spike in long-term unemployment associated with
the recession. [5].
There are other interesting reasons to be concerned about
the long-term unemployed. Those who are unemployed for longer periods of time
are less likely to be able to find new work in the future. In some ways, being
out of work is associated with a negative signaling mechanism with the labor
market. This type of loss demonstrates a real cost to unemployment, as a lower
output for workers who are faced with friction in the labor markets.
Hard heads and soft hearts dictates concern over both output
and health impact of unemployment especially long term unemployment.
P.S.
Interesting link on tax consensus amongst economists:
General Sources
http://pewresearch.org/pubs/1674/poll-impact-long-termunemployment
http://www.clevelandfed.org/research/trends/2012/0412/01labmar.cfm
http://economix.blogs.nytimes.com/2012/03/28/the-enduring-consequences-of-unemployment/
[1] www.columbia.edu/~vw2112/papers/sullivan_vonwachter_qje.pdf
[2] http://www.ncbi.nlm.nih.gov/pubmed/15641890
[3]homes.chass.utoronto.ca/~oreo/research/compositions/the_intergenerational_effects_of_worker_displacement.pdf
[4] http://delong.typepad.com/sdj/2012/06/macro-advisors-policy-focus-may-31-2012-hysteresis.html
[5] http://voices.washingtonpost.com/ezra-klein/2010/11/the_long-term_scarring_of_hyst.html
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