Costs of unemployment

Simon Wren-Lewis:

…the long term unemployed typically do not think that at least they have more leisure time, so they are not so badly off. Instead they feel rejected, inadequate, despairing, and it scars them for life. Now that may not be in the microfounded models, but that does not make these feelings disappear, and certainly does not mean they should be ignored. It is for this reason that I have always had mixed feelings about representative agent models that measure the costs of recessions and inflation in terms of the agent’s utility.

Models should inform our interpretation of the evidence, but they are rarely complete descriptions of all relevant information.

  • You’d caught Dillow on this, right?

    I think this is one of the reasons Dillow typically comes down against minimum wage laws – the harms of unemployment are greater than the gains from slightly increased wages.

    • No, I hadn’t read that but it’s interesting, thanks. With the Wren-Lewis quote I was aiming more for the general point that incomplete models are difficult to use well when you need to make a policy decision. I sometimes think practitioners are too quick to cast aside models in favour of slogans, but we need to be equally careful of excluding knowledge that hasn’t been integrated into the model. It’s a tricky balance to strike.

    • So Dillow is saying that the long queue at the Auckland City Mission this morning, waiting for food parcels, is partly caused by the existence of the minimum wage?

      I guess a survey of the queue would answer the question as to how many are the working poor already earning the minimum wage, or above.

      • Kimble

        Might be due to the free food.

        • I suppose that fits with the standard supply and demand curves.

  • boristhefrog

    Yes…. the same general point could be made about so called ‘climate’ models… incomplete, unable to capture all relevant information, based on faulty or inconsistent datasets… yet politicians seems to fall over themselves to make far reaching and expensive policies based on them…

    • Models are almost always incomplete representations of the world, but they still provide a lot of valuable information by helping us to interpret what we observe. All I’m saying is that information you don’t filter through your model can still be useful. That doesn’t mean you should throw away scientific results because they disagree with your prior beliefs!

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