Intrigued by the title of the blog post by Tim Worstall, “How do we solve unemployment,” in my WordPress reader, I opened it thinking it might be a good read. But this is what it says (which includes a Sumner quote):

It appears that the correct method to reduce unemployment is to reduce unemployment benefits, increase in work benefits, abolish the minimum wage and insist that those unemployed take a job, any job, at any price.

After all, that’s what Germany has done and the German unemployment rate fell dramatically as a result of doing just that. Scott Sumner has the detail:

So what’s the real explanation for the German success? That’s pretty obvious; the Hartz reforms of 2003 sharply reduced the incentive to not work, and sharply increased the incentive to take low wage jobs. As a result, today Germany has lots of very low wage jobs of the type that would be illegal in France or California. ….So the one major success story among developed countries has achieved its success by doing essentially the exact opposite of what progressives want. Germany has no minimum wage, reduced its incentives to live off welfare, and has a level of wage inequality that is increasing even faster than in the US. It’s no wonder that progressives prefer to focus on things like “vocational training programs,” which were just as common during the 30-year period of steadily rising German unemployment.

I agree with the premise put forward by Sumner as the Hartz reforms of 2003 reduced wage stickiness. But I disagree with opening of the post that posits that “the correct method to reduce unemployment is to reduce unemployment benefits, increase work benefits, abolish the minimum wage and insist that those unemployed take a job, any job, at any price,” because that is only one piece of the puzzle.

Notice that the Hartz reforms took effect in 2003, and unemployment was significantly reduced from a high of about 12.3% in 2005 to a low of just above 6% five years later in mid-2008 before the financial crisis. It then went back up to just over 8% in 2009 to sink down to under 6% in 2010. Additionally, if we look at a chart of NGDP for Germany that I have shamelessly “borrowed” from Marcus Nunes we can see that German NGDP has evolved around trend, with the spikes in unemployment occurring with brief down troughs in NGDP, even though it was plummeting elsewhere in the EZ.

GermanU6

jurgen-stark_1

 

My objection to the entire blog post by Worstall then is twofold with the first part being this: If, as in the case of Germany, the labor force is regulated as such as to allow wage flexibility that has a stabilizing effect on NGDP, it does not mean that the countries that did not have like reforms in place on the onset of the Great Recession can solve unemployment by doing all of these things after the monetary “egg” has already been broken – because the low wage jobs are not there, the damage has already been done. The evidence I have that it isn’t about incentive after the monetary egg has already been broken is the chart I made of labor force changes in South Carolina that eliminated Federal extensions of UI benefits in 2013.

The second part of my objection is: If like Hartz reforms are not in place, the management of monetary policy should be different than for areas where they are in place. I find it highly inappropriate for monetary authorities to push issues/reforms that should be decided upon politically and democratically by deciding to manage monetary policy as if those reforms were in effect, driving their necessity. It’s the undemocratic tail wagging the dog that results in incalculable financial suffering for millions of innocent people that should never happen in a civil society.

In summary, one cannot solve persistently high unemployment caused by bad monetary policy with the assumption that it is purely an issue of incentives, because if demand has already become inadequate as such that NGDP has plummeted, the jobs people are expected to take for any wage at all just simply are not there. Doing so would only exacerbate the humanitarian disaster in the medium run.

 

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