Or maybe I should have prefaced my title with “Skeptical Dajeeps” because part of being inquisitive means having a healthy skepticism about nearly everything until the preponderance of evidence all points in the same direction. And on the popular dissection of the composition of unemployment and the labor force, Scott Sumner has an interesting new piece posted that seems like some of the conclusions require a leap in logic. It might be that I am just missing a finer understanding of the subtleties, however, as I surely do not claim to be anything more than a systems engineer with a hobby in economics and history.

In the post there are some assumptions about the condition of the labor force applied to a musical chairs analogy, and I am having trouble figuring out where some of the assumptions come from because they don’t seem to fit my understanding of the cause of headline unemployment in a recession – or perhaps for clarification – in the Great Recession.

The assumptions I haven’t been able to fit into the grand landscape are:

1)      Extended UI has a significant negative impact on the unemployment rate

2)      Retirement of boomers has a large impact on the size of the labor force (at least. Although, in the post there is some ambiguity regarding whether he subscribes to the popular linkage to long term unemployment).

3)      Unemployment behaves the same way from recession to recession

Other issues with the analogy are that are related to the assumptions listed above:

Reduction in the number of “chairs” as being detached from the cause of both high unemployment and labor force shrinkage, i.e. the fall in the price level. It’s a mouthful and I hope I can walk you through how I turned my brain inside out to arrive at my conclusion that the musical chairs analogy is the wrong one.

  • Sticky wages might be more of a practical matter than money illusion, having to do with nominal debt. Suppose that nominal debt payments established for a household prior to a bout of deflation equal $2,000 per month and income for the household is $2,200 per month. The household is still responsible for $2,000 per month regardless of whether the price level falls. But because the price level falls, $100 is shaved off monthly nominal income for each spouse (or SO)… and the bills still have to be paid. It really isn’t so much different than sticky prices and the prospect of having to sell securities or commodities at a nominal loss. On paper the seller might still be bankrupt; and imagine all of these things happing simultaneously in an economy the size of the US. It’s in the realm of chaos theory that cannot be wrapped up in a neat package that pins the bulk of the problem on demographic issues and UI as a concession.

i.   The “balance sheet recession” people do have a point; they simply mistake a symptom as a cause.

  • Labor is a market and is impacted by supply and demand disequilibria like most others. It would likely be better for the sake of discussion to collapse sticky wage theory into sticky prices and insert it into the discussion about the impact of UI because not all recessions are created equal.

Clarity that retired people are no longer attached to the work force is needed. When reading the post I sensed a conflation of unemployment and the retirement situation, leaving a sort of fuzzy gray area there regarding exactly what was being asserted. If taking a supply/demand approach to the argument regarding disequilibrium in the labor market some clarity that retirement of boomers has little or nothing to do with the current employment situation can be provided. There is a possibility that it could be reducing the unemployment rate slightly because the things the boomers were doing have to be done by someone else; and there isn’t any way to be certain about what is happening to those tasks.

There are also other what I call behavioral irregularities regarding the unemployment situation that can provide clues that the bulk of the problem is supply/demand disequilibrium. Some of them that at least Marcus Nunes has documented are:

  • The notable rise in employment for the 50-65 age group over the last five years
  • Extension of average search time from 13 to 46 weeks
  • Tapering effect of time on chances of exiting unemployment; i.e. if an unemployed person has been out of work 6 months or longer the chances of becoming reemployed start to taper down quickly regardless of age.

Overall I am a little disappointed with impression I got reading Sumner’s post. At this point I prefer alternate explanations because I haven’t seen convincing evidence that retirement of the boomers can explain anything given the suddenness of the bulk of the employment problem and the fact the job creation rate per month is scarcely enough to cover population growth let alone make up for those who were displaced.

In summary, I lean toward the bulk of the problem with the employment situation as being unmitigated deflation and all the associated effects combine to form a critical mass. In my line of work, approaching a problem with the 80/20 rule generally gets the job done, meaning that solving factors forming 80% of the undesired effects reduces the severity of the other twenty that can then be the focus of mitigation. Therefore, my suggestion is to stay focused like a laser beam on monetary regime change and worry about the rest later.