The Beveridge Curve and COVID-19

There are those that see the problem of unemployment in most economies (but especially the US) as a structural issue. This refers to the mismatch between the jobs that are available and the skills that people have. Cyclical unemployment can be reduced by boosting demand – dropping taxes and increasing government spending (fiscal policy) and lowering interest rates (monetary policy). However, if unemployment is mainly structural patience is needed to wait for the market to sort things out, and this takes time.

The Beveridge curve is an empirical relationship between job openings (vacancies) and unemployment. It serves as a simple representation of how efficient labour markets are in terms of matching unemployed workers to available job openings in the aggregate economy. Economists study movements in this curve to identify changes in the efficiency of the labour market. It is common to observe movements along this curve over the course of the business cycle. For instance, as the economy moves into a recession, unemployment goes up and firms post fewer vacancies, causing the equilibrium in the labor market to move downward along the curve (the red arrows in the figure above). Conversely, as the economy expands, firms look for new hires to increase their production and meet demand, which depletes the stock of the unemployed – see graph below.

Careful analysis of Beveridge Curve data by economists Murat Tasci and John Lindner at the Cleveland Federal Reserve shows that it’s behaving much the way it has in previous recessions: there are as few job vacancies as you’d expect, given how desperate people are for work – see graph below. The percentage of small businesses with so-called “hard-to-fill” job vacancies is near a twenty-five-year low, and open jobs are being filled quickly. And one recent study showed that companies’ “recruiting intensity” has dropped sharply, probably because the fall-off in demand means that they don’t have a pressing need for new workers.

The Beveridge Curve and COVID

The graph below shows the Beveridge Curve pre and post covid. The pre-covid curve is a typical which relates to theory above, however the post-covid curve has become a lot steeper in showing that changes in the unemployment rate are not as responsive to changes in the vacancies. If the matching process between workers and firms becomes less efficient,  employers need to post more vacancies to fill a given number of positions. In terms of the model, an outward shift of the Beveridge curve can therefore be explained by a decline in match efficiency. Since match efficiency has declined, any reduction in unemployment now requires a much higher job opening rate than before the pandemic. During the pandemic, job creation has become more difficult, and firms have had to recruit more aggressively to find workers. Looking forward, a reduction of the unemployment rate to pre-COVID levels would require job openings to be at twice the level they were before.

Source: Revisiting the Beveridge Curve: Why has it shifter so dramatically. Economic Brief October 2021

 

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New York economy driver of inequality.

Another article by James Surowiecki in the New Yorker came up with some interesting statistics about the New York economy. The financial industry accounts for approximately 40% of all wages paid in Manhattan and 25% of the city’s GDP – that doesn’t include the legal industry which services the financial hub. Wall Street’s dominance curtails what can be done to reduce inequality but it is noteworthy that the top 1% of earners pay 43% of the NYC’s income tax.

Bill de Blasio, who won the Democratic mayoral primary in September, argued that to reduce inequality you need to increase the New York’s middle class which has fallen dramatically in the past few decades.

Where did the middle class jobs go?

For 30 years between 1969-99, NYC lost 400,000 jobs and ultimately workers. This was due to improved infrastructure and cheaper labour being enticed to the Sun Belt (a region of the United States generally considered to stretch across the South and Southwest) – latterly jobs in the manufacturing industry have gone overseas. Also with city policies designed to focus more on the financial sector and real estate, 51% of the remaining manufacturing jobs were lost in the last decade.

What does constrain the creation of middle income jobs is the cost of living – energy costs, taxes are steep, and rent is three times the national average. 30% of New Yorkers pay more than 50% of their income in housing costs.

Read the full article by clicking link below:

Coring The Big Apple

Below is an image from a website that shows how the heights of the buildings reflect the net worth of the people that are in them. There are a lot more images like this on the website below:.

Re-envisioning The Manhattan Skyline To Reflect The City’s Jarring Income Inequality

Greenspan the Keynesian?

Recently John Cassidy in the New Yorker wrote a piece about Alan Greenspan’s new book “The Map and the Territory: Risk, Human Nature, and the Future of Forecasting” in which Greenspan admits to flaws in the neo-classical model that people and financial institutions act in their own self-interest. He has finally come round to admitting that people’s actions are often driven by “Animal Spirits” (originates from Keynes) and rather than behaving like calculators they respond to fear, greed, euphoria, and impatience. He identified 10 traits which he calls “Inbred Propensities”. It seems that during his tenure as Fed Chairman Greeenspan rarely mentioned Keynes although he studied it at Columbia University in the 1950’s. As John Cassidy points out by the time he met Ayan Rand he was of the neo-classical orthodox. The article is worth a look – plenty of good debate.

Alan Greenspan Rediscovers Keynes – Sort Of

Remember the difference between the two schools of thought

A glut of lobsters but why are prices in restaurants still high?

This week James Surowiecki in The New Yorker addressed the issue of the bumper lobster harvests but the high prices of lobster in restaurants. In the state of Maine, on the east coast of the US, lobsters off the boat were selling for US$6 / pound in 2005 in contrast to today where the wholesale price is as low as US$2.20. Therefore why have the prices in restaurants stayed high when you consider the wholesale price?

One logical reason is that ff there is a bad harvest and prices rise, restaurants might find it hard to sell expensive lobster to customers who have got used to it being cheaper.

Lobster is more like a luxury good than a commodity and therefore has a range of psychological factors:

1. High lobster prices became an important image on the menu – studies have shown that people enjoy cheaper wine when they do blind taste tests. If lobster was priced like chicken people wouldn’t enjoy it as much.

2. Customers often correlate price with quality. As the majority are not aware of what is happening on the lobster wholesale market they could presume that the quality of your lobster is not as good as your competitors – low price creates suspicion.

3. By making lobster expensive it make other items on the menu look more reasonably priced. A classic experiment described by Itamar Simonson and Amos Tversky showed that if you asked people to choose between a mid-priced microwave oven and a lower-priced one sales of the products were roughly split. But adding a higher-priced oven to the mix increased sales of the mid-priced product by forty per cent—the mere presence of a more expensive option made the moderate one look like a better buy. So any restaurant that cuts lobster prices significantly runs the risk of making that sesame-crusted tuna look too pricey.

4. Finally. although there is a lot of competition amongst restaurants very few customers would pick restaurants on the price of lobster.

The graph below is from James Surowiecki’s blog on The New Yorker website.

Structural Unemployment – The Beveridge Curve

There are those that see the problem of unemployment in most economies (but especially the US) as a structural issue. This refers to the mismatch between the jobs that are available and the skills that people have. Cyclical unemployment can be reduced by boosting demand – dropping taxes and increasing government spending (fiscal policy) and lowering interest rates (monetary policy). However, if unemployment is mainly structural patience is needed to wait for the market to sort things out, and this takes time.

The Beveridge curve is an empirical relationship between job openings (vacancies) and unemployment. It serves as a simple representation of how efficient labour markets are in terms of matching unemployed workers to available job openings in the aggregate economy. Economists study movements in this curve to identify changes in the efficiency of the labour market. It is common to observe movements along this curve over the course of the business cycle. For instance, as the economy moves into a recession, unemployment goes up and firms post fewer vacancies, causing the equilibrium in the labor market to move downward along the curve (the red arrows in the figure above). Conversely, as the economy expands, firms look for new hires to increase their production and meet demand, which depletes the stock of the unemployed – see graph below.

Careful analysis of Beveridge Curve data by economists Murat Tasci and John Lindner at the Cleveland Federal Reserve shows that it’s behaving much the way it has in previous recessions: there are as few job vacancies as you’d expect, given how desperate people are for work – see graph below. The percentage of small businesses with so-called “hard-to-fill” job vacancies is near a twenty-five-year low, and open jobs are being filled quickly. And one recent study showed that companies’ “recruiting intensity” has dropped sharply, probably because the fall-off in demand means that they don’t have a pressing need for new workers.

According to James Surowiecki from The New Yorker structural issues aren’t irrelevant, of course; there are certainly plenty of construction workers who are going to have start plying a new trade. But what defined the recent recession was the biggest decline in consumption and investment since the Depression. Dealing with that is the place to start if we want to do something about unemployment. The structural argument makes government action seem irrelevant.

QE2 – why all the fuss?

The Federal Reserve (US central bank) second round of quantitative easing (QE2) has its critics – the Chinese and German governments, economist Joseph Stiglitz, and most Republican congressmen. The Fed is currently running out of options and once interest rates can’t be cut anymore it is resorting to buying up longer-term government bonds. This will hopefully keep long-term interest rates low and create more money in the economy and make investments other than government bonds more appealing. Therefore why all the fuss?

– China and Germany are worried that QE2 will increase the supply of US$ on the market and therefore weaken its value. This will make Chinese and German imports more expensive and US exports more competitive which ultimatley means job growth.
– Joseph Stiglitz says that economies always recover but without a stimulus it will take a long time. Short-term unemployment needs to fall and this requires more government spending – not quantitative easing (QE2). As Keynes said in the long-run we’ll recover but in the long-run we are all dead.
– The Republicans basically object to QE2 because it is there job to make sure that Obama is a one-term President. Would they be criticising Fed Chairman Bernanke if the Republicans were in office? I think not.

According to James Surowiecki of The New Yorker the attacks on QE2 are hysterical and people are accusing the Fed of injecting high-grade monetary heroin into the system which they assert will generate artifically high stock and commodity prices around the world. The reality is that stock prices have fallen over the last few weeks since QE2 as American banks have trillions of dollars to lend but consumers are continuing to reduce their debt. The biggest risk to the US is not that the economy will experience high levels of inflation in a couple of years (pipeline effect) or a stock market bubble or currency war. The reality is that there could still be well over 15 million people unemployed.

Loosening monetary policy

I came across this cartoon in the New Yorker which in a way could be used to show quantitative easing as well as lower interest rates. Rather than Ben Bernanke’s helicopter drop how about opening the money pipe. Is that Ben Bernanke showing people around with Tim Geithner (US Treasury Secretary) adjusting the flow? New caption – “These two guys have been doing this for well over a year now”

As we know an expansionary monetary policy involves lowering the rate of interest set by a country’s central bank. This should influence the rate of growth of aggregate demand, the money supply and ultimately price inflation. However growth and inflation still eludes the US economy.

New Documentary Movie – ‘Inside Job’

I came across a review of the “Inside Job” in the New Yorker magazine. It is billed as a comprehensive account of the financial crisis and seen as a cross between Fahrenheit 9/11 and a History Channel primer, with a dash of indignation. Below is a review from The Dim Post

Instead of being a reporter or Michael Moore style muckraking provocateur documentary maker Charles Ferguson is very much a part of the world his film is about. This gives him access to interview subjects other documentary makers could only dream of: central bankers, hedge fund multi-billionaires, senior economists, finance lobbyists, former investment bank CEOs, Wall Street prostitutes, the Prime Minister of Singapore . . . For a movie about economics and finance it’s a surprisingly funny movie but most of the humor is laughter in the dark: Ferguson’s interview subjects try to spin their own moral complicity and moral bankruptcy and he skewers them expertly. It’s a brilliant film.

Boosting inflation isn’t the right policy, but it may just be the correct one.

There is an excellent article in this week’s New Yorker magazine by James Surowiecki in which he explains, with the help of Yale Professor Robert Shiller (co-author of Animal Spirits), the costs of inflation but also the need for prices to rise in the US economy. Surowiecki suggests that if the Fed were to raise its inflationary target from around 2% and commit to higher prices it might change people’s behaviour especially as debt burdens would be reduced and money would lose value in the future. But central bankers are more concerned with stable prices than with lost jobs and they tend to look after the interests of lenders, for whom inflation is generally bad news.

Inflation helps debtors and spenders at the expense of creditors and savers and it seems to reward those who have conducted themselves irresponsibly, and to penalise those who were more cautious. But, according to Surowiecki “the economy doesn’t exist, in the end, to reward virtue and punish vice. It exists to maximize our well-being, and, currently, doing that may require helping the undeserving and irresponsible, if only because there are so many of them.”

Click here for the full article.

New Yorker animations

I often go to the New Yorker website for articles and to look at their latest animations that are quite amusing. Here are a couple on explaining the financial crisis and another way of paying for a domestic flight in the US.