Unemployment: Issues & Concerns Dr. D. Foster – Spring 2014 – ECO 285

What is Ur? The BLS reports 6 measures. But, the various series do move together. So, while we can’t say what Ur is, we seem to be able to say whether it is going up or going down.

Moral Hazard & unemployment insurance. One party to a contract changes their behavior that adversely affects the other party. Moral Hazard: One party to a contract changes their behavior that adversely affects the other party. Examples: Ben Roethlisberger signs a big contract and then rides a motorcycle without a helmet. Ben Roethlisberger signs a big contract and then rides a motorcycle without a helmet. A bank makes a home loan to someone working who then quits. A bank makes a home loan to someone working who then quits. AIG buys lots of sub-prime home loans because they know that they are “too big to fail.” AIG buys lots of sub-prime home loans because they know that they are “too big to fail.” Depositors flock to Lincoln S&L to earn high rates of interest on sketchy loans because of the FDIC. Depositors flock to Lincoln S&L to earn high rates of interest on sketchy loans because of the FDIC.

Moral Hazard & unemployment insurance. UI benefits had been limited to 26 weeks. Benefits extended to 99 weeks. San Francisco Fed chart showing % of labor force unemployed for 6 months or longer: Big jump in long term Ur with this extension. Moral hazard? 2014 – efforts to extend by 3 months fails.

A tale of 2 surveys – can’t we just all get along? Household survey – 60,000 HH per month, yields Ur. Payroll survey – 390,000 firms per month, yields jobs. BLS adjusts the HH survey to “better match” payroll data. But, Ur is most widely watched indicator. Issue: Ur is too discretionary & unreliable: affected by assumptions regarding the character, motives or incentives facing the unemployed “affected by assumptions regarding the character, motives or incentives facing the unemployed.” over the extension of unemployment benefits … has derailed discussion of policies aimed at direct job creation Furor “over the extension of unemployment benefits … has derailed discussion of policies aimed at direct job creation.”

From Jan to Jan. 2014, jobs are up 5 million … but population is up 35 million!!!

Shadow stats – add in long term discouraged workers with U-6…

But … what exactly is a “discouraged” worker?

Our economic core – the private sector Jan to Jan. 2014

Interpreting the U r rate. It understates unemployment underemployment Disguises underemployment. discouraged workers Discounts discouraged workers. marginally attached It discounts other marginally attached workers. It overstates unemployment Includes moral hazard effect to collect benefits. Based on HH survey versus payroll survey. Builds in assumptions about motivation. Even with adjustments, est. rate from 3% to 22%!!!

Unemployment Types: The Usual Suspects Frictional Unemployment Frictional Unemployment People between jobs (quit, fired, new entrants, reentrants) Normal and necessary (!) Most unemployed find jobs quickly. Structural Unemployment Structural Unemployment Permanent job loss (technological change, trade effects) Economic growth exacerbates this. Cyclical Unemployment Cyclical Unemployment Temporary unemployment due to recession. Generally, the focal point of government fiscal policy.

Seasonal Unemployment Seasonal Unemployment Examples: Snowbowl, Agriculture … Data adjusts for seasonal variation. Induced Unemployment Induced Unemployment Due to government policies. Examples: Min. wage, Housing regs., ObamaCare May work the other way: Airline deregulation in 1980 boosted employment about 50% soon thereafter. Unemployment Types: Special Cases

Unemployment: Issues & Concerns Dr. D. Foster – Spring 2014 – ECO 285