Unemployment:Issues & Concerns

Dr. D. Foster – Spring 2014 – ECO 285

What is Ur? The BLS reports 6 measures.

But, the various series do move together. So, while we can’t say what Ur is, we seem to be able to say whether it is going up or going down.

Moral Hazard & unemployment insurance.

Moral Hazard: One party to a contract changes their One party to a contract changes their behavior that adversely affects the other party.behavior that adversely affects the other party.

Examples:•Ben Roethlisberger signs a big contract and then Ben Roethlisberger signs a big contract and then rides a motorcycle without a helmet.rides a motorcycle without a helmet.•A bank makes a home loan to someone working who A bank makes a home loan to someone working who then quits.then quits.•AIG buys lots of sub-prime home loans because they AIG buys lots of sub-prime home loans because they know that they are “too big to fail.”know that they are “too big to fail.”•Depositors flock to Lincoln S&L to earn high rates of Depositors flock to Lincoln S&L to earn high rates of interest on sketchy loans because of the FDIC.interest on sketchy loans because of the FDIC.

Moral Hazard & unemployment insurance.

• UI benefits had been limited to 26 weeks.• Benefits extended 2008-2009 to 99 weeks.• San Francisco Fed chart showing % of labor force

unemployed for 6 months or longer:• Big jump in long term Ur with this extension.• Moral hazard?• 2014 – efforts to extend by 3 months fails.

A tale of 2 surveys – can’t we just all get along?

• Household survey – 60,000 HH per month, yields Ur.• Payroll survey – 390,000 firms per month, yields

jobs.• BLS adjusts the HH survey to “better match” payroll

data.• But, Ur is most widely watched indicator.• Issue: Ur is too discretionary & unreliable:• “affected by assumptions regarding the character, affected by assumptions regarding the character,

motives or incentives facing the unemployedmotives or incentives facing the unemployed.”• Furor “over the extension of unemployment benefits … over the extension of unemployment benefits …

has derailed discussion of policies aimed at direct job has derailed discussion of policies aimed at direct job creationcreation.”

137.5

132.5

From Jan. 2001 to Jan. 2014, jobs are up 5 million … but population is up 35

million!!!

Shadow stats – add in long term Shadow stats – add in long term discouraged workers with U-6…discouraged workers with U-6…

But … what exactly is a “discouraged” worker?

Our economic core – the private sector

Jan. 1949 to Jan. 2014

Interpreting the UInterpreting the Urr rate.rate.

• It understates unemployment• Disguises underemploymentunderemployment.

• Discounts discouraged workersdiscouraged workers.

• It discounts other marginally attached marginally attached workers.

• It overstates unemployment• Includes moral hazard effect to collect benefits.

• Based on HH survey versus payroll survey.

• Builds in assumptions about motivation.

• Even with adjustments, est. rate from 3% to 22%!!!

Unemployment Unemployment Types:Types:

The Usual SuspectsThe Usual Suspects• Frictional UnemploymentFrictional Unemployment• People between jobs (quit, fired, new entrants, reentrants)

• Normal and necessary (!)

• Most unemployed find jobs quickly.

• Structural UnemploymentStructural Unemployment• Permanent job loss (technological change, trade effects)

• Economic growth exacerbates this.

• Cyclical UnemploymentCyclical Unemployment• Temporary unemployment due to recession.

• Generally, the focal point of government fiscal policy.

• Seasonal UnemploymentSeasonal Unemployment• Examples: Snowbowl, Agriculture …

• Data adjusts for seasonal variation.

• Induced UnemploymentInduced Unemployment• Due to government policies.

• Examples: Min. wage, Housing regs., ObamaCare

• May work the other way: Airline deregulation in 1980 boosted employment about 50% soon thereafter.

Unemployment Unemployment Types:Types:

Special Cases

Unemployment:Issues & Concerns

Dr. D. Foster – Spring 2014 – ECO 285