Wednesday, August 18, 2010

The Seasonal Job Surge: Supply or Demand?

Copyright, The New York Times Company

Keynesian economists designed a fiscal stimulus law that targets aggregate demand and runs roughshod over supply incentives. Evidence on the seasonal labor market shows why their stimulus was ultimately self-defeating.

Keynesian economists contend that labor supply — the willingness of people to work — doesn’t matter right now (or even that a more willing work force would reduce employment). If they are right, then a stimulus law that increased spending might work even if the law were taking incentives away from people to work and employers to hire.

Under the assumption that the cycle for teenage employment is a supply phenomenon — that is, the seasonal surge is more a result of teenagers’ becoming available for work than it is a change in employer demands — I showed last week that the Keynesians are wrong. Supply matters a lot, even in the depths of this recession, which is why the stimulus law was doomed to failure.

A few readers asserted that the teenage employment surge is a result of labor demand rather than supply. Fortunately, economics offers several tests of whether demand or supply is the dominant factor in the labor market.

First, the supply side of the problem obviously is related to school enrollment: population segments with more school enrollment during the academic year have a greater supply shift when summer arrives. So if supply were an important factor, we should see a larger summer job surge for groups with higher school enrollment rates.

The chart below confirms this hypothesis, using data from 1980-2007: the summer employment spike is a greater percentage for the younger teens, and those are exactly the age groups for whom school enrollment is highest. (The summer employment spike is measured by the log deviation of July’s value from the average of May and September values.)

In fact, there is essentially no employment spike for the 25-to-34 age group, and that group has hardly anyone in school. If summer labor demand were as great as my critics claim, summer ought to bring some extra employment for the 25-to-34 group too.

Summer does involve some demand shifts, but the unemployment data readily show that the summer supply increase dwarfs demand in the labor market for young workers. Figure 2 below displays unemployment spikes for the same age groups.

When school lets out, students storm into the job market and jobs are created for most of them. A few students spend some of the summer unemployed because students, and not their employers, are the ones who suddenly decided that summer is the time when they are available to work. That’s why the summer unemployment spike is positive — unemployment per capita for these groups is greater during the summer than during the academic year, especially for the groups with more school enrollment.

Not surprisingly, summer unemployment is higher than normal even for nonstudents, because many young people out of school compete in the labor market with students who are set free from school each summer.

The Keynesian claim that supply doesn’t matter in recession is quite radical and contradicted by the labor market’s seasonal variation. The sooner we can undo the supply-harming provisions in Obama-era legislation, the sooner our labor market can have a real recovery.

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