–Does unemployment actually stimulate the economy?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.
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Those who understand Monetary Sovereignty know the federal deficit/debt issue is phony, created by the Tea (formerly Republican) Party as an election ploy and/or out of sheer economic ignorance. It’s an issue I predicted would come back to bite the Tea Republicans as specifics about what’s to be cut became understood. Hello Medicare, Social Security, the military, and on and on and on.

So, I anticipate the right wing will begin to focus on a better issue, and that issue will be: unemployment. We all can empathize with those who want income but can’t find a job. Presumably this issue will make more sense than cutting the money supply to stimulate the economy, Rep. Boehner’s latest bit of desperation nonsense.

One problem is definitional. What exactly is unemployment? Is it:
–people who don’t have jobs?
working age (whatever that is) people who don’t have jobs?
–people seeking employment?
–people seeking employment, and whose separation/unemployment benefits have run out?

Other factors include:
–length of unemployment
–age of those unemployed
–relationship to population size
–definition of a “job” (This one can be especially complex. For instance, do home workers have jobs? Do part-time workers have jobs?)
–Cash workers who don’t pay taxes and are “invisible” to the government statisticians

All these thoughts came to me when I looked at this graph.

graph 1

It shows the total number of unemployed (blue line) and the Civilian Employment / Population Ratio (red line).

The number of unemployed remains near its all-time high, which is an important election issue. But population too is at its all-time high. So, the red line is more revealing, simply because it takes population into consideration.

And it shows something rather interesting. The ratio of employment to population, while relatively high is nowhere near its all-time high, which occurred in 2000. In fact, the Civilian Employment-Population Ratio is higher than it was during all the years from WWII through 1983.

Even more interesting: Unemployment has tended to fall during the years preceding recessions, then climb during recessions, only to fall again when recessions ended. This could indicate that unemployment does not precipitate recessions, but rather is a result of recessions.

Neither curing unemployment nor increasing employment, seems to prevent recessions. On the contrary, based solely on these data, one could make the case that employment efforts are economically counter-productive.

I don’t have good evidence to explain this counter-intuitive result, but as a businessman, I have a hunch: When business improves, companies hire too many people. They create excessive employment. Then, because payrolls become excessive, companies pare down. And this, along with reduced federal deficit growth, leads to a recession.

I am not saying the federal government should encourage unemployment or even neglect it. Rather, I believe reduced unemployment works in parallel with reduced federal deficit spending to cause recessions.

graph 2

Rather than trying to attack unemployment directly, the federal government should increase deficit spending on many fronts, which will stimulate the overall economy and thereby, counteract the negative economic effects of what seem to be periods of excessive employment.

As I said, I don’t have proof for this conjecture, other than the data shown above. Perhaps you have a different explanation.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up my future.”

MONETARY SOVEREIGNTY

27 thoughts on “–Does unemployment actually stimulate the economy?

  1. So, the percentage of people employed vs. the population is actually higher now, at the bottom of this recession, than it was in the best years of the 1950s and 60s, before the rise that started in the 1970s (which I suppose represents the increase of women in the workforce). Interesting.

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    1. Yes, as I said, we run into the definitions of “unemployment.” If a husband is working and his wife is a homemaker, caring for children but also looking for a job, is that unemployment?

      Questions like these make one wonder how big the unemployment problem really is. Could interpretations of data be overstating the problem? Or understating it?

      Rodger Malcolm Mitchell

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  2. Well, how do payrolls become excessive? As long as demand keeps up, companies don’t need to downsize, right?

    The federal government should hit unemployment head on by providing jobs to the unemployed.

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    1. You may be right. MMT would agree with you, because they favor government as employer of last resort. And I hate seeing people struggling to find jobs.

      Yet I am bothered by the data showing declines in unemployment precede recessions. What is your feeling about those data?

      Rodger Malcolm Mitchell

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      1. Does correlation imply causation? If declines in unemployment lead to recessions, we will never be able to get out of recessions.

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        1. Fields,

          I responded to you on a similar comment earlier, so I’ll keep it pithy:

          You might want to reread the blog entry (and my other response).

          On another note, it is interesting to look at. I’d be curious as to what, if any, correlation there is.

          Nathan

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      2. Mr. Mitchell,

        I’d be interested in seeing what, if any, correlation there might be. However, on initial analysis, I don’t think there’s anything suspicious here.

        While I would chalk it up to “excessive employment” as you state, I’d say that the relationships you’re implying are a little off. If business is still good, why not still hire (Just as you state there’s a problem defining “unemployment,” I’d say there’s an equally pressing problem of defining “excessive employment.”)?

        I’d say that it’s “excessive employment” given the money supply and not necessarily the specific business climate (although you could also be right on this one too, but for different reasons). Let me explain…

        When businesses are doing well, there’s an increased demand for labor. This, of course, causes an increased demand for money (and this cycle, of course, continues as long as there’s enough money in the total money supply to go around). When the politicians, Fed, Treasury, etc. decide to get their panties in a wad over the “debt” and “deficit,” the money supply decreases. This, in turn, causes layoffs. Additionally, if there’s no more money in the money supply to go around, businesses just have to stop hiring (and maybe even “pare down” as you say in an attempt to free up the capital necessary to keep growing as they’d like).

        Basically, I think the things you’re describing can still go on without the exact relationships you’re describing (Businesses, in fact, might “pare down” as you say and maybe even why you say, but maybe they don’t fully know why they’re doing it. They assume “excessive employment” is dragging them down, but it’s actually the money supply that’s the problem.).

        Anyway, I said all of that to say this: I’d posit that there’s an employment equilibrium given the current money supply level. Everyone not employed would get money (a.k.a. welfare) via the “employer of last resort” that you referred to and that MMTers advocate.

        However, as I’m relatively new to a lot of this, I could be very wrong, so please bear with me if I sound crazy.

        What do you think?

        Nathan

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    1. Fields,

      That’s not what he’s saying. From the entry:

      “I believe reduced unemployment works in parallel with reduced federal deficit spending to cause recessions.”

      It seems he’s saying that unemployment may only be a factor (and a factor worth investigating).

      Nathan

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      1. Then I was confused by his statement “In fact, the Civilian Employment-Population Ratio is higher than it was during all the years from WWII through 1983.”
        The graph doesn’t seem to support it.

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  3. Rodger,

    Over the years, since the 1970’s real income per hour worked has been declining – thus the number of hours worked for wages per family has increased. This has resulted in average hours worked per family per week to have increased from about 45 in 1950 to around 65 in 2005. Compounding, as well as muddying the issue has been the increase in single parent families.

    See – Changes in the Distribution of Family Hours Worked Since 1950

    The above phenomenon continued till the collapse of 2008.

    The above

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    1. Clonal Antibody,

      I just looked over the source you provided. I’m not trying to be a jerk here, but it seems like you didn’t even read it (I genuinely mean no offense here. I’m honestly confused as to how you could’ve come to the conclusion you did if you, in fact, read the source.). Let me explain….

      1) Your “per family” assertion…

      As per the “Abstract” section:

      “This paper describes trends in average weekly hours of market work per person and per family in the United States between 1950 and 2005. We disaggregate married couple households by skill level to determine if there is a pattern in the hours of work by wives and husbands conditional on either husband’s wages or husband’s educational attainment. The wage measure of skill allows
      us to compare our findings to those of Juhn and Murphy (1997), who report on trends in family labor using a different data set. The educational measure of skill allows us to construct a longer time series. We find several interesting patterns. The married women with the largest increase in market hours are those with high-skilled husbands. When we compare households with different
      skill mixes, we also find dramatic differences in the time paths, with higher skill households having the largest increase in average hours over time.”

      This doesn’t quite mesh with the assertion you made due to the fact that the patterns they found are dependent on the skill level of the household. You didn’t extrapolate the data correctly. The study is concentrating on skill level, not families.

      2) The specific “declining…increased” trend you’re implying.

      I found at least two graphs in the study that showed increased and decreased hours for some groups over the time frame you’re suggesting (pgs. 6-7). Additionally, the report specifically says that hours for lower skilled men decreased (pg. 2). The trend you’re implying simply doesn’t exist.

      2) Time frame.

      The time frame measured by the study doesn’t go past 2005. It says nothing of the years 2006-2008, so the assertion you made about what happened until “the collapse of 2008” is unfounded.

      Could you refer me to where exactly in your source you found the information that supports your assertion? I had a very hard time finding it and, if your assertion is in fact correct, I’d be interested to see the data that supports it. Thanks.

      Nathan

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      1. Nathan,

        If you look at Figure 2B in the paper, and look at Figure 2B. Average Weekly Hours Per Person of Married Men and Women — you see will see the figures that I cite

        In 1950 average weekly hours for married men were 42 hours a week – for married women 7 hours per week — A total of 49 hours

        In 2005, average weekly hours for men were 38, and for married women 25, a total of 63 hours per week

        This data is reflected in Figure 1, where the average weekly hour go from 25 hrs/wk to 32 hrs/wk for all people between the ages of 25 to 64

        THe abstract is not what I was talking about, but just an item of data from the paper. The overall focus of the paper was not on this aspect of the data.

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        1. Clonal Antibody,

          I’m not disagreeing with you on specific numbers for specific groups. My main point was that, again, I think you’re extrapolating the data incorrectly given your assertions. The comment you made isn’t in line with the source you cited. The paper differentiates between married and unmarried, skilled and unskilled. Your original comment doesn’t. Additionally, you’re off on your original assertions themselves (From what I read in it, unskilled men, married or not, had their hours decrease.).

          Thanks for pointing out where in the paper you’re reading but, again, if you could point out how any of that supports your original comment, I’d be interested in seeing it. Thanks again.

          Nathan

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          1. See also Robert Reich’s take on this –
            The Truth About the American Economy

            How America Kept Buying: Three Coping Mechanisms

            Coping mechanism No. 1: Women move into paid work. Starting in the late 1970s, and escalating in the 1980s and 1990s, women went into paid work in greater and greater numbers.

            Coping mechanism No. 2: Everyone works longer hours. By the mid 2000s it was not uncommon for men to work more than 60 hours a week and women to work more than 50. A growing number of people took on two or three jobs.

            Coping mechanism No. 3: Draw down savings and borrow to the hilt. After exhausting the first two coping mechanisms, the only way Americans could keep consuming as before was to save less and go deeper into debt.

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  4. Rodger

    There is no such thing as excessive employment in a fair society.

    Please,see Kalecki

    Click to access Courvisanos_c.pdf

    Going further…

    Aren’t the following expressions odd?

    Human resources – like iron, copper, oil, apples, wheat, machines… just they happen to be “human”???

    Labor market – can labor be traded? I mean if labor is traded, is it still human???

    David Ellerman has a good analysis of these and related questions at his site, namely

    Click to access P&C-Book.pdf

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  5. Mr. Goss,

    You don’t sound crazy. Not at all. You make good points.

    I suspect (meaning, can’t prove) that there is an “overshoot” phenomenon. That is, when businesses begin to hire, they wind up hiring too much, which eventually cuts profits. And when they begin to fire, they wind up firing too much, which temporarily adds to profits.

    Each overshoot sets the stage for a rebound.

    It’s the explanation with which I feel most comfortable so far, for the data shown in the graph. Yes, I agree money supply is the prime mover, though “overshoot” may be involved.

    Rodger Malcolm Mitchell

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    1. Mr. Mitchell,

      I guess what I was trying to say is that, if the growing money supply keeps an appropriate pace with the growing economy, there wouldn’t necessarily be an “overshoot.” In theory, businesses could keep hiring because there would be enough money to go around.

      However, after thinking about it more, you could be right. After all, what happens at “full employment” (which, again, may be just as hard to define given that we’re having trouble defining “excessive employment” and “unemployment”)? If our economy and money supply keeps growing but, for whatever reason, our working population doesn’t keep pace, maybe businesses do in fact start handing out pink slips under the assumption (on a microeconomic level) that the “excessive” employees are hindering growth, when in fact the lack of human capital (on a macroeconomic level) is the problem. The temporary increase in profits may encourage more of the same behavior, causing the downward “overshoot” of the “employment equilibrium.” This overshoot may cause a decreased demand for money, and therefore cause the government to decrease the money supply (or, as has been said, they could’ve just as easily gotten all upset about the “debt” or “deficit” first).

      Anyway, I guess it’s possible that business actions can help cause the problem. Without the macro view (aside from the financial services industry, I don’t know of many industries or businesses that care that much about monetary policy), they get forced into a sort of “Prisoner’s Dilemma” Game Theory situation.

      It seems to come down to these pesky “employment” definitions. What is the “employment equilibrium?” I was taught in ECON 101 that it’s where the supply and demand curves meet in the labor market but, as far as I remember, it was only theoretical and in no way took money supply into consideration (or I guess we at least assumed that the perfect supply of money was available). What is “full employment,” and should we even want it, whether via private sector or the government “employer of last resort?” That might mean a necessary recession.

      Very interesting….

      Nathan

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  6. I think the definition of unemployed, and underemployed is pretty easy. Someone who wants to work, but can’t find any, or is working part time but wants more hours.

    What is interesting is why an extra 7-8% of the population compared to the postwar boom, want to work now. Is it the result of feminism changing the culture and allowing more women to enter the workforce, or is it because in real terms average male full time salaries have gone a bit backwards and this has meant that more people need to work to maintain family living standards. Could it even be more competition from women entering the workforce is what has driven down male hours & pay resulting in a self reinforcing cycle of women needing to work.

    Does this increased participation rate justify the higher natural rate of unemployment many economists say we have now? It’s a real can of worms when you get into it.

    Another thing it makes me think of, is if the economy could function entirely satisfactorily for the post WWII boom on that lower participation rate, does this mean that fears of the ageing population causing labour shortages are somewhat unfounded?

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    1. Hamish,

      So, how would you define a mother who is taking care of her kids full-time but is also looking for full-time work with the expectation of taking her kids to daycare once she becomes employed full-time? Remember, if she didn’t take care of her kids, the government would pay someone to take them away from her and then give someone else subsidies (tax breaks) to adopt the kids. If the kids aren’t adopted, they become public charges (a.k.a. government pays to take care of them).

      These definitions aren’t as easy as you think they are….

      Nathan

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      1. If she is seriously looking for work but can’t find any, she is unemployed. I don’t know about the situation in America, but there is this thing called childcare in Australia to look after the kids when she is at work, so your suggestion that she is abandoning her children seems completely absurd to me. Whether or not it is worth her while financially to have to pay childcare whilst she is at work is something for her to decide. As far as proving whether or not she is seriously looking for work we use ongoing activity statements where they have to prove they are looking for work, or are required to undergo full time training to improve their employability. If they fail to comply, their benefits are cut off.

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  7. Additionally, there is the question of how the government knows these details. How do they know who works 2 hours vs 4 hours vs 6 hours, from home or away. How do they know who actually is looking for a job vs not-looking-but-would-accept-a job?

    All the definitions of unemployment vs employment are highly suspect.

    Rodger Malcolm Mitchell

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  8. First: I define unemployment as any one person wanting a job and not finding one. I also consider it a crime by the gov’t against that one individual, as declared in the UN declaration of human rights of 1948. Mass unemployment is when it becomes an epidemic and cannot be considered frictional, which is essentially anything persistently above 2% total unemployment. But, as you say, maintaining a labor force of that size requires accommodating that level of growth by increasing the money supply fast enough. Yet, it has been done before, so it can be done again.

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  9. HarPe,

    Sounds easy in theory, but collecting the data may be a problem. Consider:

    1. I’d like a job, but I’m too lazy, sick, old, young, mentally challenged, frightened — or hiding from an arrest warrant — to look for one. Am I unemployed? How does the government know about me to count me as unemployed?

    2. I’m 90 years old. I’d like a job, but I can’t do the kinds that MMT has in its ELR program. Am I unemployed?

    3. I own a business that hasn’t had a customer for a while. Am I unemployed? How does the government know?

    4. I’m Brad Pitt between movies. Am I unemployed?

    Rodger Malcolm Mitchell

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  10. Given the time frame of the change, it is hard to believe that the rise of feminism and accompanying entry of women into the labor force is not responsible for the rise in participation. (It might be interesting to look back at 1941-45 and see the effects of “Rosie the Riveter” on this stat.)

    Other cultural changes include delayed marriage and childbearing, and increasing divorce rates.

    But, if both spouses work, does the family consume more or does it save a LOT more? What happens when income (production) rises but aggregate demand does not? Unsold output. Unemployment.

    As for high employment preceding recessions, I see no reason to look beyond the business cycle. Employers hire when business is improving, and new hires have a steep productivity curve. Sales may even keep rising, but if productivity rises faster, the result is excess inventory and employers then seek to reduce their work force.

    Just like high temperatures are always followed by snowfall a few months later, it’s a cycle.

    A Martian landed at McDonald’s and observed the customers. The fat people were eating salads, and the skinny people were eating double cheeseburgers. The Martian concluded that salads make earthlings fat, and cheeseburgers keep them thin.

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  11. In my opinion, there are no business cycles. “Cycle” implies inevitability and regularity. Recessions are not inevitable. They are caused mostly by bad economics, and only occur as a result of economics.

    “Cycle” is the excuse for economic ignorance.

    Rodger Malcolm Mitchell

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