The impact of unemployment insurance eligibility extensions on long-term unemployment rates
06 Sep 2014 Leave a comment
The role of job sorting and job matching in constitutional political economy
25 Aug 2014 Leave a comment
Recall and waiting unemployment
04 Aug 2014 Leave a comment
in business cycles, job search and matching, labour economics, labour supply, macroeconomics, occupational choice, unemployment Tags: recall unemployment, rest unemployment, temporary layoffs, waiting unemployment, work for the dole
Time use surveys in a range of countries show that the unemployed spend maybe a few hours per week looking for a new job. Krueger and Mueller (2008) found that:
…average search time is highest in the U.S.A., at 32.3 minutes per day, closely followed by Canada.
Europeans search much less, but there is considerable variation across countries.
In France the unemployed search around 21 minutes a day compared with 3 minutes in Finland
A small amount of job search per week is rational for many of the unemployed because a major form of job search doesn’t involve any job search any time soon. Instead, they are waiting for a call.
Also, Anglo-Saxon labour market are much more dynamic with many more vacancies opening every month as compared with the Eurosclerosis dual labour markets. In the European Union’s dual labour markets, it is not rational to search for vacancies that will never be there.
Job searches is an entrepreneurial venture that can involve a considerable amount of biding your time. Job seekers must choose between wider job search that may involve switching to a new industry or new occupation and investing in availability for suitable vacancies in their local labour markets or a recall to employment by old employers.
A spell of unemployment followed by a rehire by an old employer is known as recall unemployment or a temporary layoff.
Demand is less stable and more seasonal in industries such as construction, manufacturing and agriculture. When demand rebounds, recalling an old employee is a faster and cheaper hiring process than screening unfamiliar applicants of uncertain quality and training recruits.
Recall is not certain. Temporary layoffs will forecast their chances of recall and review these forecasts as they discover more about the length of drop in local labour demand and the general state of the rest of the labour market. the majority of unemployed who regard themselves as temporary layoffs are indeed recalled to their old job by their old employer after most downturns.
Better prospects of recall by old employers will reduce the intensity of job searches of temporary layoffs and increase their asking wages for other jobs. Workers with considerable industry and firm-specific human capital are likely to risk waiting longer for recall. Workers will search more intensively for other jobs as their forecasts of their chances of recall to old jobs become less encouraging.
There are more temporary layoffs in milder recessions because the lull in demand is expected to be short and there are fewer business closures. The higher levels of recall unemployment will reduce downward pressure on asking wages and slow the filling of vacancies because many well qualified job applicants are waiting for recall to their old jobs rather than applying more widely for new jobs.
Dixon and Crichton (2006) found that 58% of New Zealand benefit-to-work transitions involved starting with a new employer, 30% continued with an employer for whom they worked part-time in the benefit spell and 12% returned to an employer they had worked for in the past 2 years. The prospect of a recall by an old employer has been important for unemployed workers in countries such as the US, Canada, Demark, Sweden, Austria and Norway.
In the context of work-for-the-dole schemes and activation programmes that involve intensive monitoring of job search by the unemployed on unemployment benefits, requiring workers who are temporarily laid off to search for jobs is in many ways counter-productive.
Developing a screening mechanism to find these temporary layoffs and distinguishing them from permanent layoffs would be quite challenging. Countries which have unemployment insurance premiums spend a lot of try trying to adjust those premiums for temporary layoffs. This is so employers and employees do not take advantage of unemployment insurance to have a week or two off work in slack periods at the expense of the unemployment insurance system and top up their wages in the interim.
A cousin of recall unemployment is rest unemployment or waiting unemployment – job seekers who are waiting for conditions in a depressed sector to improve (Hamilton 1988; Alvarez and Shimer 2008).
Some job seekers may wait for local labour market conditions to improve, rather than search for jobs in other industries and new occupations. A job seeker’s old industry may offer better wage and job finding prospects than other industries If the newly unemployed worker waits a while.
Rest unemployment or waiting unemployment strives to salvage as much of the occupation and industry-specific human capital of the newly unemployed worker as possible.
A significant share of job seekers have been found to be waiting for local labour market conditions to improve rather than searching further afield in different industries or new occupations (Alvarez and Shimer 2008).
Again, rest unemployment or waiting unemployment is a type of job search that cannot be well handled by work-for-the-dole schemes and intensive monitoring of the job search of unemployed workers.
Job finding rates under work for the dole when there is involuntary unemployment
03 Aug 2014 6 Comments
in business cycles, job search and matching, labour economics, labour supply, macroeconomics, welfare reform Tags: Active labour market programs, Jeff Borland, mandatory work requirements, search and matching, welfare reform, work for the dole
Jeff Borland is a critic of work for the dole. He points out that they do not improve the job finding rates of participants and in fact reduce the amount of job search because work for the Dole participants are busy undertaking work for the dole requirements:
The main reason is that participation in the program diverts participants from job seeking activity towards Work for the Dole activity. Research on similar programs internationally has come up with comparable findings.
This made me wonder. If unemployment is caused by deficient aggregate demand, and otherwise is involuntary, how can work for the dole increase unemployment or reduce the rate at which people exit unemployment?
‘Involuntary’ unemployment occurs when all those willing and able to work at the given real wage but no job is available, i.e. the economy is below full employment. A worker is ‘involuntary’ unemployment if he or she would accept a job at the given real wage. Keynesians believe money wages are slow to adjust (e.g. due to money illusion, fixed contracts or because employers and employees want long run money wage stability), and so the real wage may no adjust to clear the labour market: there can be ‘involuntary’ unemployment.
Under the deficient aggregate demand theory of unemployment, people have no control over why they are unemployed – that’s why their unemployment is involuntary.
Sticky wages are no less sticky when work for the dole is introduced and people search more intensively for jobs. Deficient demand unemployment is no less deficient when there is an increase in job search intensity.
Work for the dole must be carefully defined, of course, to differentiate it from the failed active labour market programs of the past that attempted to improve the employability of the unemployed. By work for the dole, I simply mean mandatory work requirements simply make it more of an ordeal to be on unemployment and thereby encourage people to find a job.
Mandatory work requirements simply tax leisure. By taxing leisure, mandatory work requirements change the work leisure trade-off between unemployment and seeking a job with greater zeal and a lower asking wage more attractive option. More applicants asking for lower wages will mean employers can fill jobs faster and at lower wages, which means our create more jobs in the first place.
The probability of finding a job for an unemployed worker depends on how hard this individual searches and how many jobs are available: Chance of Finding Job = Search Effort x Job Availability
Both the search effort of the unemployed and job creation decisions by employers are potentially affected by unemployment benefit generosity and mandatory work for welfare benefits requirements.
Modern theory of the labour market, based on Mortensen and Pissarides provides that more generous unemployment benefits put upward pressure on wages the unemployed seek. If wages go up, holding worker productivity constant, the amount left to cover the cost of job creation by firms declines, leading to a decline in job creation.
Everything else equal under the labour macroeconomics workhorse search and matching model of the labour market, reducing the rewards of being unemployed exerts downward pressure on the equilibrium wage. This fall in asking wages increases the profits employers receive from filled jobs, leading to more vacancy creation. More vacancies imply a higher finding rate for workers, which leads to less unemployment. The vacancy creation decision is based on comparing the cost of creating a job to the profits the firm expects to obtain from hiring the worker.
When unemployment benefits are less generous or more onerous work requirements are attached, some of the unemployed will become less choosey about the jobs they seek in the wages they will accept. a number of people at the margin between working or not. An example is commuting distance to jobs. A number of people turn down a job because is just that little too far to commute. A small change in the cost of accepting that job would have resulted in them moving from being unemployed to fully employed.
Unemployment is easy to explain in modern labour macroeconomics: it takes time for a job seeker to find a suitable job with a firm that wishes to hire him or her; it takes time for a firm to fill a vacancy. Search is required on both sides of the labour market – there are always would-be workers searching for jobs, and firms searching for workers to fill vacancies.
In a recession, a large number of jobs are destroyed at the same time. It takes time for these unemployed workers to be reallocated new jobs. It takes time for firms to find where it is profitable to create new jobs and find workers suitable to fill these new jobs.
Recessions are reorganisations. Unemployed workers look for jobs, and firms open vacancies to maximize their profits. Matching unemployed workers with new firms firms is a time-consuming and costly process.
Calmfor’s Iron Law of Active Labour Market Policy.
31 Jul 2014 Leave a comment
in applied price theory, fiscal policy, job search and matching, labour economics, labour supply, macroeconomics, welfare reform Tags: Active labour market programs, Lars Calmfors, welfare reform, work for the dole, workfare
Lars Calmfors is a Swedish economist whose main interest is labour makets.
His iron law of Active Labour Market Policy (ALMP) refers to a characteristic of make work schemes, like the WPA that operated in the United States in the 1930s.
The characteristic or problem with these schemes is that if people are attracted to these schemes by generous pay or conditions, their motive to search for regular work is necessarily reduced.
Assuming unemployment is anywhere near NAIRU, the effect of this reduced aggregate labour supply will be inflationary, which means that demand will have to be reduced, which in turn means that the jobs created by the make work scheme will be, at least to some extent, at the expense of regular jobs.
Alternatively, if people are coerced into joining make work schemes because of what might be called a “workfare” sanction, their job search efforts are not reduced, thus the jobs created by the make work scheme have a better chance of not being at the expense of normal jobs.
via RALPHONOMICS: Calmfor’s Iron Law of Active Labour Market Policy..
Is unemployment voluntary or involuntary?
27 Jun 2014 Leave a comment
in business cycles, job search and matching, labour economics, macroeconomics, unemployment Tags: Alan Manning, Armen Alchian, Robert Barro, Robert Lucas, unemployment
Robert Lucas in a famous 1978 paper argued that all unemployment was voluntary because involuntary unemployment was a meaningless concept. He said as follows:
The worker who loses a good job in prosperous time does not volunteer to be in this situation: he has suffered a capital loss. Similarly, the firm which loses an experienced employee in depressed times suffers an undesirable capital loss.
Nevertheless the unemployed worker at any time can always find some job at once, and a firm can always fill a vacancy instantaneously. That neither typically does so by choice is not difficult to understand given the quality of the jobs and the employees which are easiest to find.
Thus there is an involuntary element in all unemployment, in the sense that no one chooses bad luck over good; there is also a voluntary element in all unemployment, in the sense that however miserable one’s current work options, one can always choose to accept them.
I agree that we all make choices subject to constraints. To say that a choice is involuntary because it is constrained by a scarcity of job-opportunities information is to say that choices are involuntary because there is scarcity.
Alchian said there are always plenty of jobs because to suppose the contrary suggests that scarcity has been abolished. Lucas elaborated further in 1987 in Models of Business Cycles:
A theory that does deal successfully with unemployment needs to address two quite distinct problems.
One is the fact that job separations tend to take the form of unilateral decisions – a worker quits, or is laid off or fired – in which negotiations over wage rates play no explicit role.
The second is that workers who lose jobs, for whatever reason, typically pass through a period of unemployment instead of taking temporary work on the ‘spot’ labour market jobs that are readily available in any economy.
Of these, the second seems to me much the more important: it does not ‘explain’ why someone is unemployed to explain why he does not have a job with company X. After all, most employed people do not have jobs with company X either.
To explain why people allocate time to a particular activity – like unemployment – we need to know why they prefer it to all other available activities: to say that I am allergic to strawberries does not ‘explain’ why I drink coffee. Neither of these puzzles is easy to understand within a Walrasian framework, and it would be good to understand both of them better, but I suggest we begin by focusing on the second of the two.
Another way to understand unemployment is to use a device at the start of Alan Manning’s book on labour market monopsony:
What happens if an employer cuts the wage it pays its workers by one cent? Much of labour economics is built on the assumption that all existing workers immediately leave the firm as that is the implication of the assumption of perfect competition in the labour market.
In such a situation an employer faces a market wage for each type of labour determined by forces beyond its control at which any number of these workers can be hired but any attempt to pay a lower wage will result in the complete inability to hire any of them at all
Suppose workers offered to work for 1 cent. Would employers accept? Many do because they have intern and work experience programmes for students, but is this result of general application?
Understanding the reallocation of labour at the end of the recession requires careful attention to the 1980s writing of Alchian on the theory of the firm. Alchian and Woodward’s 1987 ‘Reflections on a theory of the firm’ says:
… the notion of a quickly equilibrating market price is baffling save in a very few markets. Imagine an employer and an employee. Will they renegotiate price every hour, or with every perceived change in circumstances?
If the employee is a waiter in a restaurant, would the waiter’s wage be renegotiated with every new customer? Would it be renegotiated to zero when no customers are present, and then back to a high level that would extract the entire customer value when a queue appears?
… But what is the right interval for renegotiation or change in price? The usual answer ‘as soon as demand or supply changes’ is uninformative.
Alchian and Woodward then go on to a long discussion of the role of protecting composite quasi-rents from dependent resources as the decider of the timing of wage and price revisions.
Alchian and Woodward explain unemployment as a side-effect of the purpose of wage and price rigidity, which is the prevention of hold-ups over dependent assets. They note that unemployment cannot be understood until an adequate theory of the firm explains the type of contracts the members of a firm make with one another.
My interpretation is the majority of employment relationships are capital intensive long-term contracts. Employers spend a lot of time searching and screening applicants to find those that will stay longer. In less skilled jobs, and in spot market jobs, employers will hire the best applicant quickly because job turnover costs are low. Back to Manning again:
That important frictions exist in the labour market seems undeniable: people go to the pub to celebrate when they get a job rather than greeting the news with the shrug of the shoulders that we might expect if labour markets were frictionless. And people go to the pub to drown their sorrows when they lose their job rather than picking up another one straight away. The importance of frictions has been recognized since at least the work of Stigler (1961, 1962).
Whatever may be among these frictions, wage rigidity is not one of them. Wages are flexible for job stayers and certainly new starters.
See What can wages and employment tell us about the UK’s productivity puzzle? by Richard Blundell, Claire Crawford and Wenchao Jin showing that in the recent UK recession 12% of employees in the same job as 12 months ago experienced wage freezes and 21% of workers in the same job as 12 months ago experienced wage cuts. Their data covered 80% of workers in the New Earnings Survey Panel Dataset.
Larger firms lay off workers; smaller firms tended to reduce wages. This British data showing widespread wage cuts dates back to the 1980s. Recent Irish data also shows extensive wage cuts among job stayers.
See too Chris Pissarides (2009), The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer? arguing the wage stickiness is not the answer since wages in new job matches are highly flexible:
- wages of job changers are always substantially more procyclical than the wages of job stayers.
- the wages of job stayers, and even of those who remain in the same job with the same employer are still mildly procyclical.
- there is more procyclicality in the wages of stayers in Europe than in the United States.
- The procyclicality of job stayers’ wages is sometimes due to bonuses, and overtime pay but it still reflects a rise in the hourly cost of labour to the firm in cyclical peaks
How do existing firms who will not cut wages survive in competition with new firms who can start workers on lower wages? Industries with many short term jobs and seasonal jobs would suffer less from wage inflexibility.
Robert Barro (1977) pointed out that wage rigidity matters little because workers can, for example, agree in advance that they will work harder when there is more work to do—that is, when the demand for a firm’s product is high—and work less hard when there is little work. Stickiness of nominal wage rates does not necessarily cause errors in the determination of labour and production.
The ability to make long-term wage contracts and include clauses that guard against opportunistic wage cuts should make the parties better off. Workers will not sign these contracts if they are against their interests. Employers do not offer these contracts, and offer more flexible wage packages, will undercut employers who are more rigid. Furthermore many workers are on performance pay that link there must wages to the profitability of the company.
How can downward wage rigidity be a scientific hypothesis if extensive international evidence of widespread wage cuts since the 1980s and 30%+ of the workforce on performance bonuses is not enough to refute it?
Alchian and Kessel in “The Meaning and Validity of the Inflation-Induced Lag of Wages Behind Prices,” Amer. Econ. Rev. 50 [March 1960]:43-66) tested the hypothesis that workers suffered from money illusion by comparing the rates of return to firms in capital intensive industries with those of labour intensive industries. Labour intensive industries were not more profitable than capital intensive industries. Employers in labour intensive industries should profit from the misperceptions of workers about wages and future prices, but they did not. Alchian and Kessel found little evidence of a lag between wage and price changes.
In Canadian industries in the 1960s and 1970s, wage indexation ranged from zero to nearly 100%. Industries with little indexation should show substantial responses of real wage rates, employment and output to nominal shocks. Industries with lots of indexation would be affected little by nominal disturbances. Monetary shocks had positive effects but an industry’s response to these shocks bore no relation to the amount of indexation in the industry. Shaghil Ahmed (1987) found that those industries with lots of indexation were as likely as those with little indexation to respond to shocks.
If the signing of new wage contracts was important to wage rigidity, there should be unusual behaviour of employment and real wage rates just after these signings, but the results are mixed. Olivei and Tenreyro (2010) used the tendency of contracts to be signed at the start of years to show that monetary policy had significant effects in January but little effect in December because the effects were quickly undone.
Alchian (1969) lists three ways to adjust to unanticipated demand fluctuations:
• output adjustments;
• wage and price adjustments; and
• Inventories and queues (including reservations).
Alchian (1969) suggests that there is no reason for wage and price changes to be used regardless of the relative cost of these other options:
• The cost of output adjustment stems from the fact that marginal costs rise with output;
• The cost of price adjustment arises because uncertain prices and wages induce costly search by buyers and sellers seeking the best offer; and
• The third method of adjustment has holding and queuing costs.
There is a tendency for unpredicted price and wage changes to induce costly additional search. Long-term contracts including implicit contracts arise to share risks and curb opportunism over relationship-specific capital. These factors lead to queues, unemployment, spare capacity, layoffs, shortages, inventories and non-price rationing in conjunction with wage stability.
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