Wednesday, June 8, 2011

Labor Supply Always Matters

Copyright, The New York Times Company

As it has for the last three summers, the economy’s regular seasonal cycle will accumulate yet more evidence against Keynesian models of recession labor markets.

Two important seasons in the labor market are Christmas and summer. The Christmas season is an obvious time of high demand — people want to spend more in November and December. Basic economics says that Christmastime demand, while it lasts, raises wages, employment and hours, while it reduces unemployment.

Employment and work hours are also high during the summer, and as you are reading this, employment is likely to be surging well above what it was a month ago (the Census Bureau employment data for June is not due out until July 8, and the July data not until a month after that).

In the past, a few readers of this blog have given demand the credit for the summer job surge. In my view, demand contributes a little to the summer job surge (after all, agriculture, construction and other industries are expected to be more active when the weather is warmer), but supply is the primary reason that jobs are created during the summer.

One basis for my opinion is that people in vast numbers become available for work when school lets out for the summer, and about the same number are no longer available when school resumes. For example, about 20 million people 16 and older are attending school during the academic year, and very few of them are working full time. Nobody knows the students’ intentions for sure, but certainly millions of them would like to work during the summer.

I don’t know of any change in demand occurring over the summer that would number in the millions (even doubling the size of our military overnight would not create much more than a million jobs).

It’s easy to tell the summer supply stories and demand stories apart. The demand story is a lot like Christmas — customers demand, employers want to satisfy customers, so they hire more workers. If the demand story applied to summer, then we should see summer employment and work hours surge, and wages increase, too, while unemployment should dip.

If I’m right that the summer job surge comes from supply — the increased availability of workers — then summer wages and unemployment should follow patterns opposite to Christmas: wages should fall and unemployment surge.

The charts below display three labor market indicators — weekly hours worked, hourly pay for full-time jobs and unemployment — for the two seasons. (I use data from the Current Population Survey Merged Outgoing Rotation Group from January 2000 through December 2009).




The charts show seasonal spikes: the level of the indicator during the Christmas season (November and December) or the summer (June through August), relative to the indicator during the four months near the season. Wages and unemployment are represented as a proportional change from their off-season values, and spikes in hours are expressed as a proportion of a group’s average hours for the entire season and adjacent months.

(A person not at work counts as zero. To create this particular chart — other charts and tables are also available — I focus on people less than 35 years old, because their job turnover rates are greater and thus more visibly display the effects of short-term fluctuations like Christmas or summer. Please note that I have truncated the green hours bar and indicated its actual value with text, because the teenage summer hours spike is 0.295, which far exceeds the scale needed to display the other figures.)

Each group’s hours spike is positive on Christmas. During the summer, the hours spikes are positive only for the two younger age groups, which we expect because those are the groups attending school during the academic year and becoming suddenly available to work in June. All three Christmas wage spikes (middle panel) are positive, while all three summer wage spikes are negative.

It’s hard to believe that summer involves the kind of demand surge we see over Christmas; summer wages and unemployment go in exactly the opposite direction that they do during Christmas.

Thus, the summer job surge is nothing like Christmas. The economy creates jobs in the summer — even during the last several years, when our economy supposedly suffered from a lack of demand — because millions of people become willing and available to work. This is not to say that everything is working well in the labor market — employment is much lower than it should be — it’s just that greater labor supply remains one route to higher employment.

As noted by Greg Mankiw, the Harvard economist, and Gauti Eggertsson of the New York Fed, the fact that, even now, jobs are created when people are willing to work is a big challenge to the Keynesian economic model that assumes that labor supply is irrelevant during recessions, liquidity traps and other labor-market crises.

As Paul Krugman put it: “What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant.”

That’s why Keynesians contend that expanding unemployment insurance can increase employment, even while they know that it erodes work incentives. Yes, unemployment is too high and employment is too low, and I applaud Keynesian economists for trying to understand that.

But they have gone too far and have ultimately given the wrong advice, in assuming without proof that labor supply is irrelevant. The labor market’s seasonal cycle shows pretty clearly that they’re wrong.

28 comments:

DWAnderson said...

Your story seems consistent with Arnold Kling's notion of Patterns of Sustainable Specialization and Trade (or PSST as he often refers to it) See, e.g. http://econlog.econlib.org/archives/2011/06/psst_and_long-t.html

What do you think?

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