Monday, April 06, 2009

Mean Duration of Unemployment

Yes, unemployment is up to 8.5% (and WILL break 10%).

Yes, this is going to be one heck of a recession and I'm sticking with my prediction that it will be worse than the Volker Recession, but not as bad as the Great Depression.

But there is another scarier aspect to this recession and that is the duration of unemployment - ie - how long the average person is out of work. And what is particularly disturbing is not so much the actual length (which is almost at an all time high) but rather the trend in how long people stay unemployed. It's going up.



Now there are many plausible explanations, but let me be that rugged, renegade economist who just shoots from the hip and tells you why without bothering to waste his time running correlation coefficients and R-squares and testing for statistical significance and makes off with the scantily-clad girl on his motorcycle while the rest of the quants and policy wonks tweak their outliers and models and tisk tisk me for being so brash;

1. Americans are getting lazier. Again, unlike the republicans blaming the CRA for the economic problems we face today and unlike the democrats blaming "evil corporate America" for all our economic woes, I'm blaming the American people because, in short this whole economic debacle was caused by the simple fact Americans were too lazy to work for what they purchased. You compare the average guy during WWII, fresh back from Europe, HAPPY to have the opportunity to major in engineering and HAPPY to be alive to his modern day "Sam" equivalent that wants everything paid for, well geez, do I really need to statistically prove this? I'm getting on my motorcycle with Bambi the Economist Sex Goddess. Of course this is closely related to...

2. Unemployment benefits. Well, when you pay people for not working, guess what they do? They tend not to work! What's the rush to go back into the job market if everything is going to be paid for. 1/10 on food stamps. Financial help for bailing dead beats out of their mortgages. Free tuition. Energy assistance. Heck, the Captain has a hard time finding reason or rationale in working as does seemingly everybody else. It's called rational behavior.

3. Not so much a reason, but more an observation, the economy is becoming more rigid. If you look at GDP growth it's becoming less and less volatile over time. However, the long term growth has also been decreasing. This is because we Americans cannot suffer 2 successive quarters of economic growth. We will do everything in our power, including undermining our overall, long term economic growth capacity to keep us from going into recession. We'll sell our children and eat horse meat before suffering (GASP) 2 successive quarters of economic decline. Oh sure, over the long run, we will be poorer than otherwise, but hey, we're Americans, we like stability, not success.

The problem, however, in exchanging growth for stability, is that the real world, the real economy doesn't work that way. If you let resources go where they may, freely, yes that free flow of funds will result in more chaotic markets, but you will have resources move faster and more efficiently to their optimal economic purpose resulting in higher economic growth. And yes, if resources are allowed to move freely, you will have sharper and more dramatic increases in unemployment. However, as resources are moved to their optimal purpose stints in unemployment will be shorter (could you imagine how quickly this recession would be over if we just let the damn banks fail and not bothered with this bailout BS?)

But I know, I know. This is not what America wants. They wanted safety, not success. Stability, not excellence. They wanted to be taken care of and didn't care if they were better off in the long run, as long as they were promised a long run. Japan circa 1990's, here we come.

3 comments:

Anonymous said...

Alas, this is a flaw in the political system. Neither party can really come out and say the truth, namely that people made bad decisions about their debts and their ability to pay them, that they're lazy, etc. Nobody wants to hear that it's their fault, even if the nattering harridan is his own mother, and even when he knows she's right. The party that puts the blame where it belongs will be the party that loses the next election. So, we'll keep seeing nonsensical explanations like, "the deregulation policies of the Bush administration" (when there was no deregulation) or, "it's all Barney Frank's fault" (in fact, while a player, he couldn't do it all himself).

Jaime Roberto said...

Maybe it's because it is more expensive now to get rid of someone. Severance pay, layoff warning periods, risk of lawsuits, etc. If you can't get rid of someone easily, you'll think long and hard before hiring anyone.

Hot Sam said...

Yes, Yes, and Yes.

The time it takes for jobs to recover after GDP recovers has been steadily increasing in the past century. This is because firms make permanent structural changes following recessions which make them more capital intensive. So it takes longer for the economy to absorb the excess labor.

Increasing the length of unemployment benefits prolongs the duration of unemployment for low-skilled workers. Since unemployment benefits are a relatively high proportion of their previous wages and their expenditures, they can "afford to be picky." High skilled, high wage people earn only a small fraction of their pre-unemployment wages, so their opportunity cost is too high.

The internet would seemingly have made the job search easier. Unfortunately, it only reduced the application "costs" for prospective job seekers. An application is usually just a few clicks away. This means employers are inundated with applications, increasing their sifting costs and time.