Friday, July 30, 2010

trying to explain the current labor market through a historical lens

Compare this to this and this. And thanks to Memoirs of an Economics Student for the links and conversations!

(By the way, I updated my UMass econ bloggers post once again to include Anastasia -- who, judging from recent posts, is finishing this upcoming year and planning on going to grad school.)

To sum up the current links, which I would call highly indicative of general catastrophe in the field of economics: a lot of debate is going around the blogosphere about the fact that job openings seem to keep increasing while at the same time no one is hiring. Combine this with relatively good profit postings from companies and you have the makings of a quite confusing scenario. The latest reports from the Financial Times on global equity markets are also strong.

Interestingly, Greg Mankiw was one of the first in the blogosphere to take up one this topic (though a bit tangentially), on 16 July. In this thought-provoking post he notes the rise in median duration of unemployment and discusses the effects it might have on inflationary pressures. He then says we should expect to see a lot of research on this in the coming years. This is an important part of the story of the labor market: if the predicted effects of a rising median duration of unemployment are inflationary, and what we're seeing now is precisely the opposite (worries of deflation through lower-than-expected core inflation), well...
Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year. Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years. The slack in labor and product markets has damped wage and price pressures, and rapid increases in productivity have further reduced producers' unit labor costs. (Ben Bernanke, Semi-Annual Monetary Policy Report to Congress, 21 July 2010)
As an economic historian, of course my first question is: what kind of theories or historical models do we have out there to compare this situation to? Surely Mankiw's post is only tangentially related to the key concern of Krugman and others, but my suspicions are that they aren't considering enough of these tangents in their own stories.

What a weird situation.

Here is the clincher, the money question in my book: to what extent is the experience we're going through now similar to the GD? Is this structural unemployment or a cause for radical Keynesian intervention? (Or both.) I think it's safe to say that monetary policy is not a central policy question at this point, and as several liberals have pointed out, it's likely the stimulus simply was not big enough to boost AD out of the slump.

When asking historical questions (or really, any scientific question), a popular method to employ is to start off by thinking about what your "ideal data set" might look like. If you had all relevant data available to you, how would you make your argument? If I could employ any data set how would I make the argument that what we're experiencing now is very much like the case of the GD?

I'm going to put that question out there, see if anyone has thoughts after reading more about the current situation (as well as dig up my copy Kindleberger and a few other studies of the GD), and post some ideas early next week.

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