Wednesday, August 3, 2011

Previous Trends Continue: More Evidence that Supply Matters

Copyright, The New York Times Company

The supply of various types of workers has increased during the recession, continuing an earlier trend. That such trends continue to be associated with trends for employment contradicts the Keynesian claim that supply suddenly stops mattering during recessions and “liquidity traps.”

A number of bloggers have pointed out that employment in Texas has been rising and has almost reached prerecession levels. Paul Krugman’s explanation is that the supply of people available and willing to work has been increasing in Texas, continuing a previous trend.

One example of that supply is the inflow of immigrants from nearby Mexico; another is the migration of Americans seeking cheaper housing. I might quibble about the details, but I agree that supply trends are crucial for understanding what has happened in Texas.

In previous posts I have pointed out that national employment per capita actually increased among the elderly during the recession. I, and other researchers, concluded that elderly employment deviated so much from the general population because of changes in elderly labor supply.

In reaction to my post, Dean Baker attributed the elderly increase during the recession to a previous trend. Because the previous trend was itself the result of supply, Dr. Baker’s explanation of the recession is essentially a supply increase, too.

So we all agree that in at least two cases labor supply increased during the recession, and in each case the result was more jobs for the affected groups, or at least fewer job losses than in the general population.

Recession-era supply episodes like these are important to identify, because they can prove or reject Keynesians’ fundamental assertion (so far unproven) that supply does not matter during a recession or a “liquidity trap” such as we’ve experienced since the recession began.

Consider, hypothetically, an immigration trend that continued even after the recession. In my view, the market would create jobs for many, but not all, of the immigrants and would continue to do so after the recession.

In the Keynesian view, immigration might create jobs before the recession, but could not create them once the recession began because “what’s limiting employment now is lack of demand for the things workers produce,” Professor Krugman wrote. “Their incentives to seek work are, for now, irrelevant.”

In the Keynesian view, all that extra supply does during the recession is add to unemployment rather than adding to employment. In other words, supply trends normally affect employment, but Keynesians assert that they cease to affect employment during a recession or liquidity trap.

The chart below shows monthly employment (left scale) and unemployment (right scale) in Texas since 2007. Despite the fact that our nation is in a liquidity trap (near-zero interest rates on Treasury bills, the results of the extra supply in Texas since 2009 have been to increase employment much more than increase unemployment.

Data From The Federal Reserve Bank of St. Louis

Or consider that more recent cohorts have found themselves in careers that involve less manual labor, producing a increasing number of people reaching age 65 and still willing and able to continue their work. In my view, elderly employment would rise and might even be rising enough to more than offset a demand reduction during a recession.

In the Keynesian view, all that extra supply does during the recession is add to unemployment rather than adding to employment.

When it comes to analyzing specific events during the recession, fiscal stimulus advocates often take the common sense approach that labor supply affects employment. But when it comes to making promises about the anticipated results of a large fiscal stimulus, they insist, without proof, that supply doesn’t matter.

1 comment:

TGGP said...

Nick Rowe says you can't get to macro conclusions about aggregate supply/demand from micro evidence about relative rates: