Job Openings: What do They Mean?

Copyright, The New York Times Company

A high ratio of unemployed to job openings means that the unemployed are competing a lot for jobs, many news reports say, when in fact it could indicate the opposite.

It’s true that a reduction in labor demand — from, say, a new tax on employers — would motivate employers to get by with fewer employees. As they do, employers would reduce job openings and lay off workers. One result would be fewer job openings and more unemployed people, and thereby more unemployed people per job opening.

But a reduction in labor supply in the form of additional subsidies for unemployed people would have similar effects. Unemployed people would be choosier about the jobs they accept, especially the low-wage ones. With more help for people after layoffs, employers and employees in struggling industries would do less to avoid layoffs, especially layoffs from low-paying positions. Either way the result would be more unemployed people.

Subsidies for unemployed people also make labor more expensive as low-wage jobs are more likely to end by layoff and unemployed people can be choosier about the jobs they take. When labor is more expensive, employers have an incentive to get by with fewer employees and for that reason may well reduce the number of job openings they have.

In this way a reduction in labor supply by itself, a reduction in labor demand by itself or both together can increase the ratio of unemployed to job openings. It makes little sense to point to a high ratio as proof that labor demand is low, because it could just as easily tell us that labor supply is low. All a high ratio tells us is that the labor market has contracted, and that we could readily and more reliably detect without any data on job openings by just looking at the unemployment rate itself, or the ratio of employed to population.

My conclusion is not new to labor economists, who have long understood that supply factors could increase the ratio of unemployed to job openings. Christopher A. Pissarides, a professor at the London School of Economics, literally wrote the book on job openings and unemployment, and his book explains how more generous unemployment compensation would have these effects (see Figure 9.2 from his latest edition; I thank my colleague Robert Shimer for this reference).

The black series in the chart below shows the ratio of unemployed to job openings. The chart also shows in red the marginal tax rate on labor income (the extra taxes paid, and subsidies forgone, as a result of working, expressed as a ratio to the income from working) for a typical head of household or spouse based on the ever-changing eligibility and benefit rules for safety-net programs. The ratio increases fastest between the first half of 2008 and the first half of 2009, just when the marginal tax rate series increases the most. Both series peak in late 2010 and decline thereafter. Neither series has returned to its prerecession level.

Ratio of unemployed per job opening is calculated from Bureau of Labor Statistics seasonally adjusted monthly figures for number of unemployed and total nonfarm job openings, as provided by the St. Louis Fed. Marginal tax rates are as calculated by Casey B. Mulligan in “The Redistribution Recession” (Oxford University Press, 2012).

For the reasons mentioned above, the chart is by no means proof that supply was a major factor during the recession. That proof requires other sorts of analyses, which are shown in my book.

Nevertheless Paul Krugman continues to cite the high ratio of unemployed to job openings as evidence that demand, rather than supply, contracted the labor market: “There are now four job seekers for every job opening, which means that workers who lose one job find it very hard to get another” (see Page 9 of “End This Depression Now!”). He and other economics commentators citing this fact never explain why the very same ratio should not be interpreted as a drop in supply, or as a combination of reduced supply and reduced demand. Instead they contend that the labor market would rebound with still more help for the unemployed.

Believe it or not, Keynesian economics is not the only way to interpret the job openings data.

An Old School Keynesian on Marginal Tax Rates

"Our present system of welfare payments does just that [with 100 percent taxes], causing needless waste and demoralization. This application of the means test is bad economics as well as bad sociology. It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate."

Tobin, James. “On Improving the Economic Status of the Negro,” Daedalus (Fall 1965), 94(4).

Another interesting quote on the marriage tax implicit in welfare programs:

All too often it is necessary for the father to leave his children so they can eat. It is bad enough to provide incentives for idleness but even worse to legislate incentives for desertion.

Undergrad readers of this blog might benefit from this:

Introducing the Hayek Fund for Future Scholars

Do you know great students or recent graduates applying to graduate school this year? IHS wants to help! We can increase their chances of being accepted and funded, by making it more affordable to apply to more schools.

The Hayek Fund for Future Scholars awards up to $300 for grad school application fees.

Please pass this along to the promising, liberty-oriented people you might know applying for full-time doctorate or master's degree programs in the US for the 2013-14 academic year. They can find out more at www.TheIHS.org/grad-application.

Cheers,
Keri

Keri Anderson
Student Coordinator
Institute for Humane Studies
www.TheIHS.org

My Neighbors Know

In my precinct, 79 percent of registered voters voted (I was one of the voters).  Of the voters in that precinct, only 31 percent voted for Congressman Jesse L. Jackson, Jr (I was not one of those). Nevertheless, thanks to the many other precincts, the Congressman got 70 percent of the total votes in his Congressional District shortly before heading for prison.

In case you were wondering, that same precinct cast 59 percent of its votes for Obama-Biden.

 

Blind Squirrel Finds No Food

It's a good sign that there are critics of The Redistribution Recession, and that so far every one of them admits that he hasn't read any of it. I'm trying to think about how I could encourage such behavior, because any citation is a good citation.

With enough attempted criticisms and a little luck, the law of large numbers predicts that non-reading critics will eventually put forward something that might be valid. That's what's impressive about this admitted non-reader's piece: it makes quite a few claims about the book and every single one of them is false! I'm sure because I HAVE read the book ... many times.

(please click through to take a look: it has a nice picture and page views are the reward I mentioned above)

Example: The book allegedly does not address specific criticisms (without reading a book, how do you know what's missing from it?), when in fact I anticipated these criticisms years ago and devote entire chapters of the book to them.  (Oxford owns the copyright, and I will not steal from them in order to further help non-readers by reprinting or paraphrasing those chapters here or elsewhere on the internet.)

I understand that reading takes time, so in order to help the blind squirrels find an acorn every once in a while, I have prepared a www page (with Oxford's permission) with a brief summary of the book, a brief Q & A about the book, and a short video presentation.

Another alternative, or prelude, to reading: take a look at the opinions of some people who have read the book, or are currently reading it:

• Stephen Moore at the Wall Street Journal
• Tyler Cohen at Marginal Revolution
• Matt Kahn at Green Economics
• Robert Barro
• Jerry Hausman: "...an innovative analysis of our current economic woes which should cause most economists to rethink their views of what has gone wrong."
• David Neumark
• Stephen Bainbridge

"Rethinking one's views" is even more costly than regular reading, which is one more reason to talk, blog, or curse about the book without actually reading any of it.  Even opening to page one could prove to be expensive. 

You too Suffolk?!

Suffolk County NY begins gas rationing.  Suffolk County has a lot to brag about, but their regulations are not  among them.

I have an idea: while Suffolk County official require boaters to take a boat-operator's course, the county should require their officials to take an economics course -- at the University of Chicago!

Gas Lines are Unnecessary

Copyright, The New York Times Company

When it comes to making the last week unpleasant, Hurricane Sandy got some help from government officials.

As the water from the storm began to recede, people in the New York metropolitan area wanted to repair, rebuild and get back to normal, But one of the most visible obstacles has been 1970s-style lines for gasoline. Many customers waited in line for hours only to learn that fuel had run out. Gasoline was rationed in New Jersey, where license plate numbers determined which days drivers were permitted to purchase fuel.

Waiting in line is a waste of time. The people there were certainly not helping bring more gasoline to the region and could instead be helping rebuild or could be productive in other ways.

Economists on the right and on the left agree that market prices – prices that reflect both supply and demand location by location – are much better at allocating scarce resources in extreme situations like the storm’s aftermath. But state and local government regulations, in the form of antigouging laws, effectively outlawed market pricing.

Early on, Steve Bellone, the executive of Suffolk County on Long Island, warned suppliers that he would punish anyone charging prices that were too high. Gov. Chris Christie of New Jersey sent similar messages. In New York City, federal officials interfered with the market by giving gasoline away; those lines were so long and contentious that New Jersey decided not to use that strategy.

If officials had allowed the price system to work, it would have alleviated lines in a number of ways. As suppliers seek the maximum profit, temporary and extraordinary prices encourage them (and make it affordable for them) to go to extraordinary lengths to get the electricity and fuel needed to have gasoline available to customers where it is needed the most.

Were they permitted, high prices would also have encouraged customers to economize creatively on their usage and acquisition of gasoline. If it had cost $10 or $15 a gallon, some people on those lines might have been willing to delay vehicle usage, leaving more for people who were willing to pay that price or who had no other choice.

Of course, many suppliers and customers take prudent steps because they want to be helpful during a time of emergency. But why not let the market bring forth more supply and more customer conservation by adding a financial reward?

Instead, officials resorted to begging customers to conserve – Gov. Andrew Cuomo of New York said, “Now is not the time to be using the car if you don’t need to” – and spending law enforcement resources dealing with hoarding, gouging and other crimes that would not exist if the price system had been allowed to work.

Mistakes of economics will happen sometimes, but it is too bad that government officials in the New York area are making so many when residents can least tolerate them.

Flashback: Don't Read This Until Nov 7

from last week:

If your candidate lost yesterday, I'm sorry. If you lament because you assumed that your candidate would have implemented superior public policies, then you can feel better already because your sorrow is based on a false assumption.

Democrats and Republicans clearly have different rhetoric. But rhetoric is not policy. Republicans talk a great game when it comes to cutting government spending, but President Clinton's administration had one of the lowest ratios of government spending to GDP. President Bush added immensely to Medicare spending with the Prescription Drug Act. Democrats talk a great game about helping the poor, but they pushed through a bill to tax America in order to bail out Wall Street. FDR started Social Security, but Nixon did the most to increase its spending. Democrats talk about limiting the power of the state when in comes to the death penalty, but a Republican Governor (Ryan in IL) put a moratorium on the death penalty.

Do you remember when Democrats were devasted because Roe-v-Wade would be overturned once President Reagan made his Supreme Court appointments? Well, those appointments happened and Roe-v-Wade still stands. I could go on and on with examples.

Economic theory suggests that political party might not affect policy, but instead merely reflect public policy preferences of the citizens. With some exceptions (see below), political parties compete with each other. Obama was one of the most liberal U.S. Senators because he faced little contest in Illinois, but became quite middle-of-the-road when it came to the Presidential race. Politicians are politicians first and (at best) ideologues second. A public opinion shift may give one party or another a small advantage and thus create a correlation between public policy and party-in-power, but this does not mean that political party itself has a significant impact on policy. Indeed, it would be inefficient if it did.

A number of economic studies have failed to find a correlation between party-in-power and public policy. Others have found a correlation (Professors Besley and Case have a nice survey in the JEL), but even there the implied impact is quite small. For example, Besley and Case look at state governments (where spending is about 1000 1982-dollars per capita per year) and find that governor's party is not correlated with spending and that a 10 percentage point increase in the Democratic party's share of the state legislature is associated with additional state government spending in the amount of $10 per capita per year. $10 per capita per year could be less than the cost of voting itself! Furthermore, effects at the state level may be larger than they would be at the national level because state-legislature elections are often uncontested and the whole economic logic cited above presumes competition.

Professors Snowberg, Wolfers, and Zitzewitz tried to look at situations in which party-in-power was significantly different even when citizen preferences were not. They found some effects, but they were also quite small. Eg., a Bush administration (rather than Kerry or Gore) was expected to increase stock prices by 2-3%. That is pretty trivial, given that the stock market fluctuated that much in the 20 minutes it took me to type this entry (back in October 2008).

Professor Quiggin Could Learn a Lot from My Book

I recently criticized Paul Krugman's recent book for ignoring marginal tax rates, which were hiked by the stimulus law and would be further hiked by the bigger stimulus that he proposes in his book. Moreover, I asserted that high marginal tax rates are responsible for a lot of the U.S. labor market's recent depression, and that Krugman's plan would have depressed it further.

Although not the author I was criticizing, Professor Quiggin recently wrote that

1. I was obviously wrong because of what happened in other countries,
2. The very recent (last 6 months or so), withdraw of some of the 99 weeks of UI benefits proves that marginal tax rates don't matter, and
3. "As for food stamps, the expansion in the number of recipients is not due to changes in policy."

All of these points are addressed  in my book, before Professor Quiggin even wrote them.  Even if he had not read my book, a little investigation would have quickly shown him that his claims are incorrect. I take the points in reverse order.

3.  SNAP (aka, food stamps). Professor Quiggin has been repeatedly refuted by the US Department of Agriculture (it administers SNAP), most recently in its Sept 2011 report where it says "The continued growth in SNAP participation from 2009 to 2010 is likely attributable to the slow recovery from the recent economic recession, expansions in SNAP eligibility, and continued outreach efforts."  [emphasis added]  My book agrees that all three were a factor, provides estimates of their separate quantitative importance (Table 3.4), and discusses the academic literature on the subject.

One way to quickly see how Professor Quiggin is wrong about food stamps is to look at SNAP participation as a ratio to either (a) persons in poverty, (b) persons on Medicaid, (c) persons on SSI, or (d) persons on SSDI.  Of course a "bad economy" expands participation all of these things, but why would SNAP grow so much more than the others?  The answer is simple: SNAP policy changed, while the definition of poverty was constant and the policy rules for Medicaid, SSI, and SSDI were relatively constant.

2.  99 weeks no more.  As of October 2012, unemployed people could not collect 99 weeks UI, thanks to UI rule changes going into effect this spring.  But they still could collect 60+ weeks, not to mention remain on Medicaid, SNAP, and other programs indefinitely.  My book quantifies all of these factors, and finds that the difference between 60+ weeks and 99 weeks (actually, 96 weeks was the national average) is real but fairly small (extending UI from 26 to 52 weeks is a big deal).  So my model predicts that, adjusted for age and other factors, the labor market would rebound slightly during 2012, which is exactly what happened.  (There are also issues of timing here, which are discussed in my book).

3.  Austerity depresses the economy.  I agree (see also here) that European governments have typically failed to revive their economies, and probably further depressed them.  But austerity is not opposite of redistribution (ie, hiking marginal tax rates).  Think of how austerity might be implemented in the U.S.: we might cut Medicare and Social Security, but only for the more successful beneficiaries.  Regardless of whether redistribution is achieved by withholding benefits from families with high incomes, providing more subsidies to families with low incomes, or both, an essential consequence is the same: a reduction in the reward to activities and efforts that raise incomes.  Many kinds of austerity enhance redistribution, and that’s an important reason why austerity depresses the labor market.

With that said, I am very much in favor of cross-country comparisons.  I would love it if Professor Quiggin or anyone else measured marginal tax rate time series for any country that we could compare to my series for the U.S.  But Professor Quiggin has failed to do that, and instead  claims without evidence that marginal tax rates were constant (or falling) everywhere outside the U.S.

Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.?  Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.

Added: I have heard the claim that the ratio of SNAP to Medicaid increased so sharply because Medicaid was cut sharply, rather that SNAP changing its rules.  The claim ignores the help that Medicaid got from ARRA and, more important, that Medicaid spending and participation per person in poverty was pretty flat.  Why don't the allegedly sharp Medicaid cuts result in sharply less Medicaid per person in poverty?  The answer is simple: Medicaid cuts, if any, where nowhere near the magnitude of SNAP expansions.  For more on SNAP expansions, see The Redistribution Recession.

WSJ reviews The Redistribution Recession!!

“What if Keynesian economics is a bankrupt theory and the massive "stimulus" bill in 2009 made the economy worse, not better? Those are among the questions that Casey Mulligan asks in "The Redistribution Recession," a biting analysis of our current economic malaise.”

Click here for Stephen Moore's favorable review

http://online.wsj.com/article/SB10001424052970204712904578093021310711016.html