More points on long-term unemployment

A while ago I touched on the issue of long-term unemployment, and youth unemployment, from the persistent recession in NZ.

This isn’t an issue we can yell at the RBNZ to fix, so what exactly could we do if we think this situation is leading to specific costs?  Costs that we fear the market will not deal with, given firms unwillingness to look at long-term unemployed, and concerns about skill-mismatch.

Well Via Noah Smith we spotted this by Kevin Hassett, with five policy suggestions at the end.

  1. Government hiring of long-term unemployed (Note:  A “working for the dole” scheme would fit into this – it is also unclear how much of the “signalling this gets rid of”)
  2. Policies to deal with geographical mismatch (Note:  It isn’t clear whether this is really the case for long-term unemployment in NZ – but separating the Auckland (bad), Canterbury (tight) and rest of the nation (meh) labour markets is useful).
  3. Privatised training (Note:  This is interesting in the NZ context, as we already have wide scope for people to “choose training”.  The key question is whether people have good information on the returns to skills)
  4. Work subsidies
  5. Work share programs

This isn’t to agree with any of these – just to point out that we need to ask where issues in the labour market have appeared that are due to the persistence of the slowdown, and how government policy actions can improve outcomes given this.  The long-term unemployed are the people in society that have experienced significant bad luck due to this unfortunate event, there is a rationale to help people out given this – or even better, to help form institutions (such as WINZ) who are set up to automatically provide assistance given the perceived drivers of long-term unemployment.

Note:  Paul Walker has also discussed these points here and here.

  • Luc Hansen

    I’ve been through a few of these cycles, I’m afraid to say, and it really is a case a deja vu all over again every time 🙂 wrt stuff like unemployment (skills mismatch) and those “welfare bludgers”.

    What I have observed is that the fuss over skills mismatch disappears when the economy cranks up again, but that is not because the skills mismatch issue has gone away, It’s more to do with the fact that full employment (taking into account natural rate and all that) removes those dole queues, and employers, buoyed by the high aggregate demand that has shrunk the aforementioned queues, take on more responsibility for training people up or sourcing them from overseas. I’ve done this stuff myself.

    So while I understand where Noah is coming from, and would have advocated these actions myself over the years, I now look more to the basic causes. In this case, we have low demand in the economy, and even with plenty of scope to use other nations savings to provide a kick start, the government is determined to persist with pro-cyclical policies – the fact that our GDP figures are being cushioned by high export prices and perhaps a rebuild after a natural disaster obscures what is happening outside those two sectors of the economy.

    Construction is a prime example, and feeds into your discussion on house prices. I saw on the RBNZ website that construction dropped like a stone starting from 2007. The government took no action to shore up this sector when it could easily have instigated a state house building project, for example, with right wingers mollified by providing an avenue for the tenants to purchase the house over time. As we saw in the decades after 1950, this has a strong flow through effect on the rest of the economy.

    Other examples: we need more water storage and more rapid rail, and when we can easily borrow at record low rates, why not now?

    This is a time for strong government action at the aggregate level. Keynes fingered full employment as the single most important factor for a healthy economy and society (as does Krugman) and although that may bolster my priors, the evidence in favour of this view seems to be pretty solid.

    I have been reading a few studies lately that indicate targeting regimes do not work, implying, for example, universal income schemes over micromanaging people, and at the macro level, concentrating on boosting aggregate demand. Time series graphs show just how quickly what seems to be intractable problems disappear relatively quickly with good policies.

    • Good comment – and on a lot of the principles I agree with you.

      Without the issue of demand weakness, a lot of this would go away – and in so far as we already have training schemes available households have scope to shift around their skills somewhat.

      Any government scheme aiming to limit a distortion in the economy will likely just cause its own distorion – economies are dynamic, and they exist through time when change occurs constantly. I think policy settings based on insuring against pain, and providing a minimum standard of living, are paramount in that context … and I have little faith in the government to directly intervene to “fix” unemployment.

      However, now and again we hit a situation where there has been a “co-ordination failure” in the general economy. Where there will be a period of hefty harm in the labour market due to something such as a persistent recession. In that context, having targeted policy that is available off the shelf makes sense to me as well.

      • Luc Hansen

        Thanks Matt

        Of course, I’m not arguing against those policies per se, just that they shouldn’t take the focus away from the failure of governance that caused those policies to be needed in the first place.

        But in my opinion, our current “co-ordination failure” is nothing more mysterious than economic actors – businesses, households, government – understandably taking stock/paying down debt after a big shock to the global financial system. In this scenario, the government needs to be the adult in the room.

    • Blair

      Luc, I agree with 80% of what you say. However, I’m sceptical about the ability to fine-tune demand through public investment other than in extremis (e.g. the banking system has collapsed). I think this is better done through monetary policy. Although NZ has some excellent bureaucrats, getting infrastructure right is hard and I think any loosening of the normal cost-benefit disciplines could lead to waste (I fully support public investment that stands on its own merits). While I admire the way the Japanese avoided widespread despair post 1990, I think it is very sad that they did it by concreting over every river, stream and creek in the land.

      That brings us to monetary policy. While our flexible inflation targeting regime looks pretty good, it is notable that many of our OECD peer central banks seem to have undershot their target on inflation and overshot on unemployment, for year after year after year. It’s also interesting that NZ’s NGDP growth averaged about 6 per cent from 1995-2008 and maybe a bit over 2 percent since 2009. On balance though I put my faith in the RBNZ over Treasury to maintain aggregate demand.

      BTW Did you see Bran Caplan’s recent piece on this? (http://econlog.econlib.org/archives/2013/04/the_grave_evil.html)

      • Luc Hansen

        Hi Blair

        Thanks for your reply.

        I would point to an obvious difference between Japan and us in that our infrastructure is positively deficient in so many ways, from filthy streams and rivers to aging sewers in central Auckland, that we have a lot of spending to do before we have to concrete over the aforesaid streams to provide one more job!

        I’m not sure of the actual definition of ‘fine tuning’ in this context, but I would hesitate to apply that term to, say, the example of the collapse of the construction industry in New Zealand – my prescription would be more blunderbuss than fine.

        Your comment on OECD CBs is on the mark, and it includes ours. Our target is 1-3%. I would rather we were ducking under the odd high wave than bottom bouncing on 0.9%. If nothing else, we would feel richer!

        And regarding your faith in monetary policy, I would point out that even Ben Bernanke laid down the law to the US Senate when he begged for fiscal assistance to promote demand in the economy, so if I were you, I would tend to let go of faith and look to expertise and empirical evidence. Governments can do a lot.

        The link above is broken but I found Caplan’s article, courtesy of Google, that I presume you were referring to, the one on the evils of unemployment, and I was right on board till after this: “Instead of downplaying the grave evil of unemployment, we free-market economists should urge governments to redouble their efforts to fight it…regulations…minimum wage…blah, blah, blah…”

        If that’s the best the free market has to offer, it may be time to dust off Das Kapital!

        Cheers.

        • Blair

          Yeah I think Caplan calls himself a Hayekian so you have to take some of the free market sermonising with a pinch of salt. That said, I still think there are a lot of crazy regulations (e.g. height limits on buildings, minimum parking requirements) we could safely do without. Do we have a burning need for more infrastructure? That would be a good essay topic for Matt!

          Ben Bernanke’s call for fiscal stimulus is very interesting as you point out. I took this as code for “I have a lot of conservative Midwestern governors on the FOMC and don’t have the votes to to fully implement an expectations-based policy regime that I would like”. In the NZ the Governor has more power from memory so we have more key man risk than committee risk.

          OK here’s one for you. What if the govt had done a China-style stimulus in 2009 – 16% of GDP? How high would inflation have been? Wouldn’t the RBNZ have raised rates massively? What would the NZD/USD have got to? I don’t know, but it does seem back in the old days, when unemployment came down very fast out of recessions, that inflation would have to run pretty hot for a while, say 5-6%. Not many central banks would allow that these days.

          • Luc Hansen

            Blair, let’s not be silly. We have plenty of headroom (thanks to Michael Cullen) for stimulus of the magnitude I’m thinking of – say 2% of GDP per year until we are out of this funk. By the way, what did happen to inflation and interest rates in China after 2009?

            Here’s an interesting morsel of (boring big data) I sought out this morning that may help you understand my thinking. In the 1997 govt accounts we owed 42b, 46.5% of GDP, and the estimated interest payable was 3.1b. In the 2013 govt accounts, we owed 74b, 35.5% of GDP, and the est. interest is 3.8b. And that interest payable is decreasing with every bond tender!

            My basic priors: inflation expectations are well and truly lowered over the entire ex-colonial world, sorry, advanced economies, for the foreseeable future, and global interest rates will stay low for a long, long time, end of story, until austerity has run its course.

            I say, make hay while the sun shines (my old uni holiday job, now mechanised out of existence, sadly) and yes, there IS a free lunch for the brave!

            By the way, Dillow pretty much dealt to Caplan.

            http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2013/04/on-wage-led-growth.html

            The links don’t seem to work but I’m sure you will find the article 🙂

  • Paul Walker

    As I have noted here and here unemployment is bad for employment. The problem I highlighted is on the demand side: research suggests that employers will almost never consider hiring people who have been out of work for a long period. The research looks mostly at more than 26 weeks..If this is true then its not clear what policies are needed since there is a need to effect employer expectations.

    • Luc Hansen

      That’s easy, Paul. Stimulate aggregate demand. Employers will respond because to do so is in their rational self interest.

      • Paul Walker

        They may employ someone but its unlikely to be one of the long-term unemployed. One worry here is that the current cyclical unemployment problems could become structural and very long-lasting.

        • Luc Hansen

          And I understand why we would worry about that scenario, Paul. It just seems like commonsense, really. And that should ring alarm bells 😉

          Funnily enough, I took a year off work when our daughter was two – I was made redundant, thankfully, I had so little to do – so my wife returned to her job and I became a househusband. That was a truly rewarding experience! But when I started to actively seek work, the issue of outdated skills just didn’t arise and I basically got the first one I applied for.

          So what I would say is yes, it could happen that way, that we end up with a lost generation of long term unemployed, but that would be a policy choice, not an inevitable event. When I was active as an employer, I worked with government agencies to hire, for example, released prisoners and the intellectually impaired, so to me, it’s something an engaged government could address .

    • Indeed. I’d view it as employers rationally using a “signal” that comes from someone being out of the labour force at a time when it may not be appropriate. Only real policy response I can see are measures that improve information and reduce reliance on this signal.

  • Rithu Sarker

    Less unemployment is a curse for any nation.

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