On multiple levels, in both the Third World and the developed world.
It doesn’t have to be a catastrophe, however, since Western governments can implement a large-scale industrial policy to bring back manufacturing and reverse the trend of de-industrialisation.
The mass unemployment that will result must be solved by government programs to create socially and economically useful work for decent wages, and maintenance of aggregate demand by fiscal policy.
Showing posts with label unemployment. Show all posts
Showing posts with label unemployment. Show all posts
Thursday, May 26, 2016
Monday, October 5, 2015
The 1870s Economic Crisis in America: Reality versus Rothbard
It doesn’t matter how many times Rothbard’s view of the 1870s is refuted, Austrians and libertarians simply continue to shun reality and repeat Rothbard’s errors (such as here and here).
It can’t hurt to review the data.
First, industrial production. The best and most recent index of US industrial production in this era is Davis (2004) (see Hanes 2013: 121), which draws on many more industrial products and services than other, older indices.
The data from Davis shows that US industrial production contacted from 1873 to 1875, then had a modest recovery in 1876, but then stagnated in 1877:
The data on US industrial production are best seen in the graphs below.
As we can see in the graph above, the recession and stagnation in industrial production from 1873 to 1877 are clearly visible as compared with the ten years of growth both before and after this period.
We can also see that the serious take-off in the recovery of industrial production only happened from 1878.
It is evident, then, that something went badly wrong with US industrial production from 1873 to 1877, and this is confirmed by the unemployment estimates from this period from Vernon (1994).
As we see here, unemployment was rising from 1873 and kept on rising until 1878. That would strongly confirm that the US economy was in recession in these years or at the very least was stagnating (another point is that, on the basis of analysis of the 1890s and the likelihood that 19th century labour force participation rates were countercyclical in the sense of rising during recessions, there is at least a reasonable case that Vernon’s data seriously underestimates US unemployment in the 19th century, so that the real unemployment rate for the 1870s may have been considerably higher).
All in all, then, it is not possible to claim that the US economy was booming in these years.
Now compare the facts above with the ignorance of Murray Rothbard:
Moreover, Rothbard is wrong on the following points:
And while Rothbard might claim that he did the best with the data he had at the time (e.g., older and now discredited data from Friedman and Schwartz 1963), that is no excuse for modern Austrians repeating his false and flawed analysis today.
Further Links
“Rothbard on the US Economy in the 1870s: A Critique,” September 24, 2012.
“US Unemployment Graph, 1869–1899,” February 27, 2013.
“Huerta de Soto gets it Wrong on the Gold Standard,” December 20, 2014.
“Libertarian Gold Standard Myths Never Die,” January 13, 2015.
“Real US GDP 1870–2001,” January 13, 2015.
“US Real Per Capita GDP from 1870–2001,” September 24, 2012.
BIBLIOGRAPHY
Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.
Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790-1915,” The Quarterly Journal of Economics 119.4: 1177–1215.
Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.
Friedman, M. and A. J. Schwartz, 1963. A Monetary History of the United States, 1867–1960. Princeton University Press, Princeton.
Hanes, Christopher. 2013. “Business Cycles,” in Robert Whaples and Randall E. Parker (eds.), Routledge Handbook of Modern Economic History. Routledge, Abingdon, Oxon and New York. 116–135.
Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.
Newman, Patrick. 2014. “The Depression of 1873–1879: An Austrian Perspective,” Quarterly Journal of Austrian Economics17.4: 474–509.
https://mises.org/library/depression-1873%E2%80%931879-austrian-perspective
Rothbard, Murray N. 2002. A History of Money and Banking in the United States. Ludwig von Mises Institute, Auburn, Ala.
Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.
It can’t hurt to review the data.
First, industrial production. The best and most recent index of US industrial production in this era is Davis (2004) (see Hanes 2013: 121), which draws on many more industrial products and services than other, older indices.
The data from Davis shows that US industrial production contacted from 1873 to 1875, then had a modest recovery in 1876, but then stagnated in 1877:
US Industrial Index, 1870–1880Even in 1877 US industrial production remained below its 1873 peak. On the basis of this data, Davis argued that there was a recession in the US probably from 1873 to 1875. Strangely, the real GDP estimates in Balke and Gordon (1989) only show a recession in 1874 in this decade, but Davis’s data clearly are a much better guide to what was happening in the US industrial sector then Balke and Gordon’s work, and we should go with Davis.
Index base is 1849–1850 = 100
Year | Index
1870 | 242.97
1871 | 255.29
1872 | 275.74
1873 | 302.17
1874 | 300.7
1875 | 284.2
1876 | 294.0
1877 | 297.8
1878 | 314.0
1879 | 356.4
1880 | 400.9
(Davis 2004: 1189).
The data on US industrial production are best seen in the graphs below.
As we can see in the graph above, the recession and stagnation in industrial production from 1873 to 1877 are clearly visible as compared with the ten years of growth both before and after this period.
We can also see that the serious take-off in the recovery of industrial production only happened from 1878.
It is evident, then, that something went badly wrong with US industrial production from 1873 to 1877, and this is confirmed by the unemployment estimates from this period from Vernon (1994).
As we see here, unemployment was rising from 1873 and kept on rising until 1878. That would strongly confirm that the US economy was in recession in these years or at the very least was stagnating (another point is that, on the basis of analysis of the 1890s and the likelihood that 19th century labour force participation rates were countercyclical in the sense of rising during recessions, there is at least a reasonable case that Vernon’s data seriously underestimates US unemployment in the 19th century, so that the real unemployment rate for the 1870s may have been considerably higher).
All in all, then, it is not possible to claim that the US economy was booming in these years.
Now compare the facts above with the ignorance of Murray Rothbard:
“Orthodox economic historians have long complained about the ‘great depression’ that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged ‘monetary contraction’ never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.Rothbard makes the following claim about our relevant period:
It should be clear, then, that the ‘great depression’ of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.” (Rothbard 2002: 154–155).
“Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income.” (Rothbard 2002: 154–155).Of course, if one wants to define “depression” as a fall in real GDP of 10% or more (a definition which I accept), then it is likely that the 1873 to 1879 period was not an era of depression. Rather, it was most likely a period of serious recession (where “recession” means a fall in real GDP of less than 10%) and then stagnation of industrial production and rising unemployment, and probably pessimistic business expectations leading to deficient investment.
Moreover, Rothbard is wrong on the following points:
(1) there was no large expansion of industry in this period: our best data shows industrial production was in recession from 1873 and then stagnated until 1877. Indeed for the 1870s as a whole there were 4 years in 1873, 1874, 1875 and 1877 when industrial production was in recession or essentially stagnating.Our inescapable conclusion is that the Austrian claim – derived from Rothbard – that the 1870s were an uninterrupted era of “prosperity …[,] economic growth, and the spread of the increased living standards” is an outright historical travesty.
(2) if industrial production was in crisis, then it is very difficult to see how there could have been a “large expansion” of “physical output” or “net national product” in these years, despite the real GDP estimates of Balke and Gordon (1989: 84): they estimate that average real GDP growth from 1873 to 1877 was 2.8% (which in any case is far lower than Rothbard’s estimate). If real GDP was experiencing such growth rates, one must ask: which sectors were growing? Clearly the industrial sector was not.
(3) there was no “extraordinarily large expansion of … real per capita income” in the relevant period. Even if one accepts the estimates of Balke and Gordon (in Maddison 2006: 87–89) the average real per capita GDP growth rate from 1873–1879 and even from 1871–1880 was just 1.64%: one of the lowest growth rates of all time in relevant periods of economic and historical significance in US history.
(4) finally Rothbard never considered unemployment, which by one influential modern estimate by Vernon (1994) began rising from 1873 and kept on rising until 1878.
And while Rothbard might claim that he did the best with the data he had at the time (e.g., older and now discredited data from Friedman and Schwartz 1963), that is no excuse for modern Austrians repeating his false and flawed analysis today.
Further Links
“Rothbard on the US Economy in the 1870s: A Critique,” September 24, 2012.
“US Unemployment Graph, 1869–1899,” February 27, 2013.
“Huerta de Soto gets it Wrong on the Gold Standard,” December 20, 2014.
“Libertarian Gold Standard Myths Never Die,” January 13, 2015.
“Real US GDP 1870–2001,” January 13, 2015.
“US Real Per Capita GDP from 1870–2001,” September 24, 2012.
BIBLIOGRAPHY
Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.
Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790-1915,” The Quarterly Journal of Economics 119.4: 1177–1215.
Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.
Friedman, M. and A. J. Schwartz, 1963. A Monetary History of the United States, 1867–1960. Princeton University Press, Princeton.
Hanes, Christopher. 2013. “Business Cycles,” in Robert Whaples and Randall E. Parker (eds.), Routledge Handbook of Modern Economic History. Routledge, Abingdon, Oxon and New York. 116–135.
Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.
Newman, Patrick. 2014. “The Depression of 1873–1879: An Austrian Perspective,” Quarterly Journal of Austrian Economics17.4: 474–509.
https://mises.org/library/depression-1873%E2%80%931879-austrian-perspective
Rothbard, Murray N. 2002. A History of Money and Banking in the United States. Ludwig von Mises Institute, Auburn, Ala.
Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.
Thursday, January 22, 2015
Unemployment in Greece
The graph below shows the unemployment rate in Greece from 2005 to 2014 (the data for 2005–2013 can be seen here, and the rate for October 2014 here).
While it is true that unemployment was already moderately high in 2007, the consequences of remaining in the Eurozone and the austerity imposed on Greece have been devastating. The unemployment rate is worse than America’s in 1933 in the last year of the contractionary phase of the Great Depression (which was 24.9% as calculated in official BLS data). The social ills driven by the economic collapse are horrific, and include a huge surge in prostitution, drug use, and HIV and cuts in basic programs for health care and social services.
With an election due in Greece on 25 January, it now seems that the anti-austerity left “Syriza” coalition might win government.
It is unclear, however, what they will do if they win government. They do not even wish to leave the Eurozone, but have pledged to remain inside it. It seems unlikely they could possibly do anything substantive for Greece without leaving the Eurozone.
But the broader implications of a Syriza win in Greece could be devastating for the future of the Eurozone, as noted here. It may well signal the beginning of electoral wins for parties that wish to leave the Eurozone completely such as the French Front National.
In Britain, the UK Independence Party (UKIP) might do very well in the approaching election and split the Tory party. If a Tory-UKIP coalition formed government, the price would be taking the UK out of the EU.
All in all, 2015 might well see another devastating crisis for the Eurozone.
While it is true that unemployment was already moderately high in 2007, the consequences of remaining in the Eurozone and the austerity imposed on Greece have been devastating. The unemployment rate is worse than America’s in 1933 in the last year of the contractionary phase of the Great Depression (which was 24.9% as calculated in official BLS data). The social ills driven by the economic collapse are horrific, and include a huge surge in prostitution, drug use, and HIV and cuts in basic programs for health care and social services.
With an election due in Greece on 25 January, it now seems that the anti-austerity left “Syriza” coalition might win government.
It is unclear, however, what they will do if they win government. They do not even wish to leave the Eurozone, but have pledged to remain inside it. It seems unlikely they could possibly do anything substantive for Greece without leaving the Eurozone.
But the broader implications of a Syriza win in Greece could be devastating for the future of the Eurozone, as noted here. It may well signal the beginning of electoral wins for parties that wish to leave the Eurozone completely such as the French Front National.
In Britain, the UK Independence Party (UKIP) might do very well in the approaching election and split the Tory party. If a Tory-UKIP coalition formed government, the price would be taking the UK out of the EU.
All in all, 2015 might well see another devastating crisis for the Eurozone.
Thursday, February 20, 2014
US Unemployment in the 1890s Again
Just to illustrate the difficulties of studying US economic history in the 19th century, we need only look at the graph below to see the diverging estimates of US unemployment in the 1890s.
Whatever estimates you use, it is clear that the US economy had serious problems in the 1890s (from 1893 onwards) and rising and then high unemployment until 1898.
The actual estimates of unemployment come from
The question of who is right hinges on whether (1) labour force participation rates were countercyclical (in the sense of rising during recessions) before 1914 and (2) whether Okun’s law actually applies to the 19th century.
BIBLIOGRAPHY
Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800. McGraw-Hill, New York.
Romer, C. D. 1986. “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94: 1–37.
Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.
Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.
Whatever estimates you use, it is clear that the US economy had serious problems in the 1890s (from 1893 onwards) and rising and then high unemployment until 1898.
The actual estimates of unemployment come from
(1) Lebergott (1964);We can see the height of unemployment estimates range from 8% (in Vernon) to 18% (in Lebergott).
(2) Romer (1986);
(3) Vernon (1994), and
(4) Weir (1992), with two unemployment measures:(1) a standard civilian unemployment rate (deducting employment in the armed forces), and
(2) a “private nonfarm unemployment” rate that deducts agricultural and government employment.
The question of who is right hinges on whether (1) labour force participation rates were countercyclical (in the sense of rising during recessions) before 1914 and (2) whether Okun’s law actually applies to the 19th century.
BIBLIOGRAPHY
Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800. McGraw-Hill, New York.
Romer, C. D. 1986. “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94: 1–37.
Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.
Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.
Thursday, May 16, 2013
The Essence of Post Keynesian Theory of Unemployment
Here it is in one paragraph:
The level of employment of labour is more than just a simple function of labour supply and demand curves, as in neoclassical theory, where demand is the marginal revenue product of the labour factor (Lavoie 1992: 219) and zero unemployment means a clearing of the labour market (Davidson 2011: 202).
In fact, the demand for and supply of labour are not “well behaved” in a neoclassical sense (Lavoie 1992: 217). In aggregate terms, “one should not expect to find a continuous negative relationship between the demand for labour and the aggregate real wage” (Lavoie 1992: 217). Although excessive wage growth does induce inflation, wages in real world market economies do not need to be, and normally are not, market-clearing wages, and economies can have high employment, strong real output growth and productivity growth without them.
Another fundamental insight is that work does not necessarily have to “carry disutility” (Lavoie 1992: 218). Work can be rewarding, enjoyable and satisfying to some people in certain occupations (Lavoie 1992: 218).
BIBLIOGRAPHY
Davidson, Paul. 2011. Post Keynesian Macroeconomic Theory: Foundation for Successful Economic Policies for the Twenty-First Century (2nd edn). Edward Elgar Publishing, Cheltenham.
King, J. E. 2002. “Some Elements of a Post Keynesian Labour Economics,” in Sheila C. Dow and John Hillard (eds.), Keynes, Uncertainty and the Global Economy. Beyond Keynes, Volume Two. E. Elgar, Cheltenham, Northampton, MA. 68-87.
Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.
Pheby, John. 1989. New Directions in Post-Keynesian Economics. Edward Elgar, Aldershot, England.
“It is hardly necessary to say that Post Keynesians reject the ‘old classical’, ‘Bastard Keynesian’ and ‘New Keynesian’ argument that unemployment is due to the existence of a real wage above the equilibrium or ‘market clearing’ level owing to the trade union or government interference in the operation of the free market for labour. They also dismiss the ‘New Classical’ notion that unemployment is the (voluntary) result of intertemporal income-leisure choices by individual workers. As was demonstrated above, neither claim is supported by micro foundations; and neither has any macro foundation whatsoever. A Post Keynesian theory of unemployment would instead start from the proposition that in aggregate the level of employment depends on the level of output, which is itself determined by aggregate demand and therefore heavily influenced by macroeconomic policy. Unemployment is simply the difference between the level of employment and the aggregate supply of labour, which may – as explained earlier – safely be regarded as invariant in the short run with respect to the real wage, but variable with respect to the number of job opportunities.” (King 2002: 84).In short, it is, above all, aggregate demand that drives output and the level of employment. The existence of vast and important fixprice markets in any modern capitalist economy means extra demand generally increases output and employment. The inducement to invest is obviously an important factor.
The level of employment of labour is more than just a simple function of labour supply and demand curves, as in neoclassical theory, where demand is the marginal revenue product of the labour factor (Lavoie 1992: 219) and zero unemployment means a clearing of the labour market (Davidson 2011: 202).
In fact, the demand for and supply of labour are not “well behaved” in a neoclassical sense (Lavoie 1992: 217). In aggregate terms, “one should not expect to find a continuous negative relationship between the demand for labour and the aggregate real wage” (Lavoie 1992: 217). Although excessive wage growth does induce inflation, wages in real world market economies do not need to be, and normally are not, market-clearing wages, and economies can have high employment, strong real output growth and productivity growth without them.
Another fundamental insight is that work does not necessarily have to “carry disutility” (Lavoie 1992: 218). Work can be rewarding, enjoyable and satisfying to some people in certain occupations (Lavoie 1992: 218).
BIBLIOGRAPHY
Davidson, Paul. 2011. Post Keynesian Macroeconomic Theory: Foundation for Successful Economic Policies for the Twenty-First Century (2nd edn). Edward Elgar Publishing, Cheltenham.
King, J. E. 2002. “Some Elements of a Post Keynesian Labour Economics,” in Sheila C. Dow and John Hillard (eds.), Keynes, Uncertainty and the Global Economy. Beyond Keynes, Volume Two. E. Elgar, Cheltenham, Northampton, MA. 68-87.
Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.
Pheby, John. 1989. New Directions in Post-Keynesian Economics. Edward Elgar, Aldershot, England.
Monday, April 8, 2013
Thatcher’s Passing
Margaret Thatcher has passed away, and no doubt that is a tragedy for her family and friends.
But one can maintain a quiet respect without succumbing to the torrent of hyperbole and gushing propaganda about her economic policies that is already being unleashed by her supporters now she is no more.
While I am minded to write a longer post on Thatcherite economics, just one important metric will do for now: unemployment.
An honest economic verdict on Thatcher’s years is revealed starkly by these graphs of unemployment in the UK. The first is a long-run graph from 1870 to 1999, and the second a post-WWII graph from 1946 to 1999. The data come from Boyer and Hatton (2002). The first simply omits unemployment statistics from the two World Wars. Compare the graphs with the data in the Appendix below.
Remember that Thatcher was Prime Minister of the United Kingdom from 1979 to 1990.
They both paint a damning picture: unemployment under Thatcher was the second worst in modern British history, second only to the Great Depression. I hope we will hear all about this as the obituaries appear.
Appendix: UK Unemployment, 1971–1999
Boyer, George R. and Timothy J. Hatton. 2002. “New Estimates of British Unemployment, 1870–1913,” The Journal of Economic History 62.3: 643–667.
But one can maintain a quiet respect without succumbing to the torrent of hyperbole and gushing propaganda about her economic policies that is already being unleashed by her supporters now she is no more.
While I am minded to write a longer post on Thatcherite economics, just one important metric will do for now: unemployment.
An honest economic verdict on Thatcher’s years is revealed starkly by these graphs of unemployment in the UK. The first is a long-run graph from 1870 to 1999, and the second a post-WWII graph from 1946 to 1999. The data come from Boyer and Hatton (2002). The first simply omits unemployment statistics from the two World Wars. Compare the graphs with the data in the Appendix below.
Remember that Thatcher was Prime Minister of the United Kingdom from 1979 to 1990.
They both paint a damning picture: unemployment under Thatcher was the second worst in modern British history, second only to the Great Depression. I hope we will hear all about this as the obituaries appear.
Appendix: UK Unemployment, 1971–1999
Year | Unemployment RateBIBLIOGRAPHY
1971 | 3.4%
1972 | 3.7%
1973 | 2.6%
1974 | 2.6%
1975 | 4.1%
1976 | 5.6%
1977 | 5.7%
1978 | 5.6%
1979 | 5.2%
1980 | 6.7%
1981 | 10.2%
1982 | 11.9%
1983 | 13.0%
1984 | 14.1%
1985 | 14.5%
1986 | 14.8%
1987 | 13.3%
1988 | 10.7%
1989 | 8.3%
1990 | 7.7%
1991 | 10.6%
1992 | 12.7%
1993 | 13.4%
1994 | 12.2%
1995 | 10.8%
1996 | 9.8%
1997 | 7.4%
1998 | 6.3%
1999 | 5.8%
(Boyer and Hatton 2002: 667).
Boyer, George R. and Timothy J. Hatton. 2002. “New Estimates of British Unemployment, 1870–1913,” The Journal of Economic History 62.3: 643–667.
Thursday, February 21, 2013
The Easiest Argument for a Minimum Wage
I find all the endless debate about the merits of a minimum wage tiresome and mostly a waste of time.
Why? Let me put the case for a minimum wage in the easiest form I can imagine.
Suppose we concede that minimum wages will cause some significant degree of unemployment (and, yes, this concedes a lot to the opponents of the minimum wage that I don't actually think needs to be conceded).
First, one of the major arguments for a minimum wage is a moral one: people should not be working for wages under the poverty line. The minimum wage is the wage below which people start to struggle to live: they must face an existence below the poverty line. Minimum wages are set roughly at the poverty line, but ideally slightly above it. Many state real (inflation-adjusted) minimum wages in the US have fallen below the poverty line, and for a long time now (Pollin et al. 2008: 17). Secondly, a decent society does not let its unemployed starve: it gives them (ideally) a decent unemployment benefit. So, even if you think that a minimum wage will cause some degree of unemployment amongst youth, that is not a disaster.
In that respect, a minimum wage might be rather like health and safety regulations or regulations on pollution, which might cause some unemployment too, given that they raise the costs of doing business. But this is called civilisation, a tradeoff for more civilised life.
Thirdly, will youth unemployment really be a problem if the economy is run properly? Not if we really had full employment, Keynesian fiscal policy: whatever unemployment that resulted from a minimum wage would be swamped by the effects of massive government fiscal policy. Unemployment would be low.
Problem solved.
If you do not believe that argument, then why in the classic era of Keynesianism (1946-1970s) when minimum wages were generous (often above the poverty line in many countries), did we have very high employment? - indeed historically unprecedented high employment.
Also, as I have said above, my argument concedes a lot to the opponents of the minimum wage. But I do not need to concede much of what I have conceded.
People can cite empirical evidence that minimum wages have caused some higher degree of youth unemployment in such-and-such a region or state at such-and-such a time, but other empirical evidence can be cited that disputes this.
Overall, the empirical evidence against the minimum wage is weak or just non-existent. Bill Mitchell explains:
The minimum wage is a floor concept: the floor is roughly the poverty line (or slightly above it). That is where you set it, and not well above it.
Not even Post Keynesians deny that excessive wage increases can feed into cost push inflation – wages being a big factor in input costs. But a rise from, say, $7.25 to $9 is quite small. In the real world, whole swathes of the market have corporations and businesses that actively set prices and control them by price administration. They leave prices unchanged for significant periods of time, even when mild to moderate demand changes happen, or even when mild price increases affect their factor input costs. Of course, it could be said in reply that most businesses that are affected by the minimum wage are small businesses. Yet small business is not really the source of cost push inflation: the real cause is serious increases in factor input costs amongst the medium-scale and large corporations.
And many small businesses face much greater competition than large corporations, and their prices are constrained to a great extent by the need to compete.
BIBLIOGRAPHY
Pollin, R., Brenner, M., Wicks-Lim, J. and S. Luce. 2008. A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States. Cornell University Press, Ithaca, NY.
Why? Let me put the case for a minimum wage in the easiest form I can imagine.
Suppose we concede that minimum wages will cause some significant degree of unemployment (and, yes, this concedes a lot to the opponents of the minimum wage that I don't actually think needs to be conceded).
First, one of the major arguments for a minimum wage is a moral one: people should not be working for wages under the poverty line. The minimum wage is the wage below which people start to struggle to live: they must face an existence below the poverty line. Minimum wages are set roughly at the poverty line, but ideally slightly above it. Many state real (inflation-adjusted) minimum wages in the US have fallen below the poverty line, and for a long time now (Pollin et al. 2008: 17). Secondly, a decent society does not let its unemployed starve: it gives them (ideally) a decent unemployment benefit. So, even if you think that a minimum wage will cause some degree of unemployment amongst youth, that is not a disaster.
In that respect, a minimum wage might be rather like health and safety regulations or regulations on pollution, which might cause some unemployment too, given that they raise the costs of doing business. But this is called civilisation, a tradeoff for more civilised life.
Thirdly, will youth unemployment really be a problem if the economy is run properly? Not if we really had full employment, Keynesian fiscal policy: whatever unemployment that resulted from a minimum wage would be swamped by the effects of massive government fiscal policy. Unemployment would be low.
Problem solved.
If you do not believe that argument, then why in the classic era of Keynesianism (1946-1970s) when minimum wages were generous (often above the poverty line in many countries), did we have very high employment? - indeed historically unprecedented high employment.
Also, as I have said above, my argument concedes a lot to the opponents of the minimum wage. But I do not need to concede much of what I have conceded.
People can cite empirical evidence that minimum wages have caused some higher degree of youth unemployment in such-and-such a region or state at such-and-such a time, but other empirical evidence can be cited that disputes this.
Overall, the empirical evidence against the minimum wage is weak or just non-existent. Bill Mitchell explains:
“The winds of change strengthened in the recent OECD Employment Outlook entitled Boosting Jobs and Incomes, which is based on a comprehensive econometric analysis of employment outcomes across 20 OECD countries between 1983 and 2003. The sample includes those who have adopted the Jobs Study as a policy template and those who have resisted labour market deregulation. The report provides an assessment of the Jobs Study strategy to date and reveals significant shifts in the OECD position. OECD (2006) finds that:There is another objection that has been going the rounds (mostly on libertarian blogs): if we make the minimum wage $9, then why not $900? That objection is, quite frankly, brainless.
- There is no significant correlation between unemployment and employment protection legislation;
- The level of the minimum wage has no significant direct impact on unemployment; and
- Highly centralised wage bargaining significantly reduces unemployment.”
http://bilbo.economicoutlook.net/blog/?p=1010
The minimum wage is a floor concept: the floor is roughly the poverty line (or slightly above it). That is where you set it, and not well above it.
Not even Post Keynesians deny that excessive wage increases can feed into cost push inflation – wages being a big factor in input costs. But a rise from, say, $7.25 to $9 is quite small. In the real world, whole swathes of the market have corporations and businesses that actively set prices and control them by price administration. They leave prices unchanged for significant periods of time, even when mild to moderate demand changes happen, or even when mild price increases affect their factor input costs. Of course, it could be said in reply that most businesses that are affected by the minimum wage are small businesses. Yet small business is not really the source of cost push inflation: the real cause is serious increases in factor input costs amongst the medium-scale and large corporations.
And many small businesses face much greater competition than large corporations, and their prices are constrained to a great extent by the need to compete.
BIBLIOGRAPHY
Pollin, R., Brenner, M., Wicks-Lim, J. and S. Luce. 2008. A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States. Cornell University Press, Ithaca, NY.
Skidelsky on Robots and Unemployment
An interesting article here:
If you accept that market economies have no tendency to full employment equilibrium, then it follows logically that large-scale automation is most likely to cause serious structural unemployment and a chronic aggregate demand shortfall.
And it will not do to say, “oh, well, enough new jobs will be created designing and maintaining the machines.” For a while they might. But the inexorable march of artificial intelligence means that eventually there is no reason why machines will not design and maintain other machines.
Machines will eventually design, manufacture, test and provide maintenance for new generations of machines, with minimal human supervision.
Robert Skidelsky, “The Rise of the Robots,” Project-syndicate.org, February 19, 2013.Some people complain that Skidelsky is being a Luddite, but that is utterly unfair, as he does not oppose automation per se.
If you accept that market economies have no tendency to full employment equilibrium, then it follows logically that large-scale automation is most likely to cause serious structural unemployment and a chronic aggregate demand shortfall.
And it will not do to say, “oh, well, enough new jobs will be created designing and maintaining the machines.” For a while they might. But the inexorable march of artificial intelligence means that eventually there is no reason why machines will not design and maintain other machines.
Machines will eventually design, manufacture, test and provide maintenance for new generations of machines, with minimal human supervision.
Sunday, January 6, 2013
Why was there no Mass Unemployment Problem amongst returned G.I.s after 1945?
This question is closely related to the reasons why there were no serious economic problems after 1945 that some economists and the general public expected.
Of course, the boom in private investment after 1945 employed many men. But that is by no means the only reason.
Before 1945, about 14 million men served in the US armed forces, but by summer 1946 that number had been reduced to just over 2 million, although this decreased further in the course of the 1940s (Adams 1967: 161).
So, first, it can be seen that the creation of a standing army employed some 2 million men.
What about the other 12 million? Were they all just suddenly dropped into the labour market? The answer is no.
What happened is that – because of the G.I. Bill – many G.I.s undertook education and training programs after 1945 and did not seek full-time employment:
Instead of some 12 million men looking for work, the figure was reduced to about 6 million, and the investment boom after 1945 was capable of absorbing this level of labour. But would the private economy after 1945 have been able to employ some 12 million men? I doubt it. I suspect there would have been an unemployment problem in the absence of the G.I. Bill.
Furthermore, the welfare provisions of the G.I. Bill had a significant effect on economic activity, not only in terms of placing a floor on the income of returned men, but also by maintaining demand for goods and services while they were undertaking education programs.
BIBLIOGRAPHY
Adams, D. K. 1967. America in the Twentieth Century: A Study of the United States Since 1917. Cambridge U.P, London.
Of course, the boom in private investment after 1945 employed many men. But that is by no means the only reason.
Before 1945, about 14 million men served in the US armed forces, but by summer 1946 that number had been reduced to just over 2 million, although this decreased further in the course of the 1940s (Adams 1967: 161).
So, first, it can be seen that the creation of a standing army employed some 2 million men.
What about the other 12 million? Were they all just suddenly dropped into the labour market? The answer is no.
What happened is that – because of the G.I. Bill – many G.I.s undertook education and training programs after 1945 and did not seek full-time employment:
“While World War II was still being fought, the Department of Labor estimated that, after the war, 15 million men and women who had been serving in the armed services would be unemployed. To reduce the possibility of postwar depression brought on by widespread unemployment, the National Resources Planning Board, a White House agency, studied postwar manpower needs as early as 1942 and in June 1943 recommended a series of programs for education and training. The American Legion designed the main features of what became the Serviceman’s Readjustment Act and pushed it through Congress. The bill unanimously passed both chambers of Congress in the spring of 1944. President Franklin D. Roosevelt signed it into law on June 22, 1944, just days after the D-day invasion of Normandy.So nearly 6 million returned G.I.s, in the 7 years following the passing of the G.I. Bill, received education in colleges, universities or schools, and this prevented a major supply shock in the labour market. And that means nearly half of returned servicemen (of course, it also inaugurated the era of mass, higher education).
American Legion publicist Jack Cejnar called it ‘the GI Bill of Rights,’ as it offered Federal aid to help veterans adjust to civilian life in the areas of hospitalization, purchase of homes and businesses, and especially, education. This act provided tuition, subsistence, books and supplies, equipment, and counseling services for veterans to continue their education in school or college. Within the following 7 years, approximately 8 million veterans received educational benefits. Under the act, approximately 2,300,000 attended colleges and universities, 3,500,000 received school training, and 3,400,000 received on-the-job training. The number of degrees awarded by U.S. colleges and universities more than doubled between 1940 and 1950, and the percentage of Americans with bachelor degrees, or advanced degrees, rose from 4.6 percent in 1945 to 25 percent a half-century later.”
http://www.ourdocuments.gov/doc.php?flash=true&doc=76
Instead of some 12 million men looking for work, the figure was reduced to about 6 million, and the investment boom after 1945 was capable of absorbing this level of labour. But would the private economy after 1945 have been able to employ some 12 million men? I doubt it. I suspect there would have been an unemployment problem in the absence of the G.I. Bill.
Furthermore, the welfare provisions of the G.I. Bill had a significant effect on economic activity, not only in terms of placing a floor on the income of returned men, but also by maintaining demand for goods and services while they were undertaking education programs.
BIBLIOGRAPHY
Adams, D. K. 1967. America in the Twentieth Century: A Study of the United States Since 1917. Cambridge U.P, London.
Friday, December 30, 2011
Why isn't Ireland’s Unemployment Higher?
The answer is: a mass exodus from a country devastated by neoliberal austerity. Ireland’s unemployment rate is currently 14.5%, and it would be much worse without this outflow of the labour force.
Is this supposed to be what the West’s economies can look forward to under neoclassical economics? Depopulation and a generation lost to emigration.
Is this supposed to be what the West’s economies can look forward to under neoclassical economics? Depopulation and a generation lost to emigration.
Friday, June 10, 2011
Roosevelt’s Record on Unemployment: The Myth and Reality
We have all seen the unemployment graphs showing the level of joblessness in the 1930s under Roosevelt. Such graphs typically show that unemployment fell form 25% in 1933 to 15% in 1937. But in fact these official statistics do not include the employment provided by emergency and relief work provided by the US federal government. And the reason for this was nothing but an ideological bias on the part of Lebergott who compiled these figures.
When employment provided by relief work is included in the employment figures, unemployment under Roosevelt came down from 25% to just under 10% by 1937. This is a much better record on unemployment than the official statistics reveal. More information can be found on this issue here:
BIBLIOGRAPHY
Carter, S. B. 2006. “Labor force, employment, and unemployment: 1890–1990,” Table Ba470-477, in S. B. Carter, S. S. Gartner, M. R. Haines, A. L. Olmstead, R. Sutch, and G. Wright, Historical Statistics of the United States, Earliest Times to the Present: Millennial Edition, Cambridge University Press, New York.
Darby, M. R. 1976. “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84.1: 1–16.
Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800, McGraw-Hill, New York.
Mitchell, B., “What causes mass unemployment?,” January 11th, 2010
http://bilbo.economicoutlook.net/blog/?p=7261
“(Very) short reading list: unemployment in the 1930s,” October 10, 2008
http://edgeofthewest.wordpress.com/2008/10/10/very-short-reading-list-unemployment-in-the-1930s/
Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.
When employment provided by relief work is included in the employment figures, unemployment under Roosevelt came down from 25% to just under 10% by 1937. This is a much better record on unemployment than the official statistics reveal. More information can be found on this issue here:
Mitchell, B., “What causes mass unemployment?,” January 11th, 2010.The unemployment rate soared again when Roosevelt cut government spending in 1937, but the adjusted figures show it rising from under 10% to about 12.5% in 1938, and not to around 19% in the old figures.
“(Very) short reading list: unemployment in the 1930s,” October 10, 2008.
BIBLIOGRAPHY
Carter, S. B. 2006. “Labor force, employment, and unemployment: 1890–1990,” Table Ba470-477, in S. B. Carter, S. S. Gartner, M. R. Haines, A. L. Olmstead, R. Sutch, and G. Wright, Historical Statistics of the United States, Earliest Times to the Present: Millennial Edition, Cambridge University Press, New York.
Darby, M. R. 1976. “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84.1: 1–16.
Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800, McGraw-Hill, New York.
Mitchell, B., “What causes mass unemployment?,” January 11th, 2010
http://bilbo.economicoutlook.net/blog/?p=7261
“(Very) short reading list: unemployment in the 1930s,” October 10, 2008
http://edgeofthewest.wordpress.com/2008/10/10/very-short-reading-list-unemployment-in-the-1930s/
Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.
Monday, April 25, 2011
Jonathan Finegold Catalan on Idle Resources
I have just read this post on Mises.org:
This type of Austrian analysis falls flat on its face.
And those of us who reject the fable of natural rights/natural law arguments for anarcho-capitalism have ethical arguments justifying government intervention on moral grounds alone. Catalan could say very little in reply, except get drawn into a debate on moral theory.
Catalan’s conclusion contains a completely unsupported assertion:
Jonathan M. Finegold Catalan, “Government Spending Is Bad Economics,” Mises Daily, March 31, 2011.One of Catalan’s arguments is that idle resources are not a problem and there is no need for government use of those resources in recessions:
“Idle resources are means of production that are seemingly being left unused — an obvious example is an unemployed laborer. If these means of production are ‘idle’, what harm is there in government employing these resources? …. The correct answer to this question is the one that explains why the supposed problem of ‘idle resources’ is actually not a problem at all, because resources are not purposelessly left idle .... That some goods may not be applied toward the attainment of a specific end does not mean that these resources are now idle and valueless. It simply suggests that these resources are better saved for the attainment of another end.”There you have it. All those unemployed people are “better saved for the attainment of another end.” It doesn’t matter one iota that these people want to work, that people don’t want to lose their houses, live on the street or under bridges because of financial hardship, or that the social and economic losses under high involuntary unemployment make society poorer.
This type of Austrian analysis falls flat on its face.
And those of us who reject the fable of natural rights/natural law arguments for anarcho-capitalism have ethical arguments justifying government intervention on moral grounds alone. Catalan could say very little in reply, except get drawn into a debate on moral theory.
Catalan’s conclusion contains a completely unsupported assertion:
“Government, in fact, is a large disequilibrating force on the market. It forcibly redistributes economic goods, removing them from a process of economization and instead investing them toward the realization of less important, or less preferred, ends.”How would he know that a democratically-elected government’s spending program does not reflect the important, preferred goals and wants of the community? If the majority of people have voted for such a program, then clearly these are ends that command wide support. If, say, a fiscal program is supported by 55% or 60% of the community, then it is a realization of the important and preferred goals of a majority of people.
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