Knowing and Making

This New Yorker article about why so many Americans are single reminded me of the debate about unemployment prompted by Casey Mulligan . Here’s why: From the New Yorker: "...do people live alone because they want to or because they have to?" Paraphrasing Mulligan and his critics: “Are workers choosing to be unemployed or are they forced to be?” [actual quotes from Mulligan: " there are sensible people ...who will recognize that 2009 is not the time for them to...commute a long distance to work...[unemployment insurance has] dramatically reduced the costs to them of making this the year they coach junior's baseball team, or do some work on their house, or spend time with an ailing parent" " the market tends to create and allocate jobs for those people who are most interested in working " and " my research has been to examine...changes in the willingness and availability of people to work " versus Dean Baker's " this does not m...

The 2010 Nobel Prize in Economics has been awarded to Peter Diamond (MIT), Dale Mortensen (NWU) and Christopher Pissarides (LSE). Tyler Cowen has written a good concise summary of each prizewinner's work and contribution (linked above). I promised on twitter earlier today to write a post about the application of their research to the 2008-2010 recession. First I'll mention Diamond's book on behavioural economics , which is one of the respected texts in the field and which I've been meaning to order for a while. Today I finally got around to it. The introduction, available here , gives a very clear and perceptive abstraction of the key contributions of behavioural economics as currently practised. It can be summarised in three departures from the standard model: bounded rationality, bounded willpower and bounded self-interest. He (and co-author Hannu Vartainen) also reference the psychological process of decision-making as an important part of behavioural analys...

Stephanie Flanders points out some huge discrepancies in the labour market between older and younger workers, and between the current recession and that of the early 90s. But of the 16-17-year-olds not in full-time education, nearly 41% were economically inactive during the last quarter of 2009. Back in 1992, the figure was less than 15%. ...consider the following astonishing fact. In the second quarter of 1992, two-thirds - 65% - of 16-17-year-olds who were not in full-time education were reported to have a job. Now the figure is 35%. These figures are startling and, especially having got used to economic statistics measured in increments (unemployment 2% higher, inflation 1% lower), really worrying. What's more - though Stephanie surprisingly does not point this out - there is a very clear suspect here: the minimum wage. Like all card-carrying bleeding-hearted liberals, I was in favour of the UK's minimum wage when it was introduced in 1997. I did have some minor rese...

OK, this solution is simple only to the extent that it's also simplistic. But it might just make a contribution. Arnold Kling asks (via Mark Thoma) " Why is the Recovery of Modern Labor Markets So Slow? " Part of the answer - I emphasise it's only a part - is the reluctance of people to accept low paying jobs while they still feel there's a chance to get a better paid opportunity. This means that people burn through their savings, reducing their own economic welfare as well as society-wide GDP, when they may end up having no choice but to take the same low-end job that was available to them when they were first laid off. Why do people act this way? Undoubtedly part of the cause is a cognitive issue: the hit to pride and self-esteem from accepting a lower-paid and lower-skilled job. But another aspect highlighted by Thoma is that they want to spend their time looking for a better job instead of working at a worse one. Now how much time do people really spend lookin...

On this blog, as well as on several others, there's a strand of opinion supporting fiscal stimulus aimed at investment rather than consumption. Of course investment, depending on the multiplier, leads to a certain amount of consumption anyway. But the argument is that direct government spending should be weighted towards investment, either because there is a deficiency of investment in this phase of most recessions; because there has been underinvestment in the last few years which needs to be made up; or because it's a more "responsible" way to spend public money. A typical goal in designing an investment program is to create demand for things that can be provided by currently-unemployed people. This encourages unused resources (people) to be brought into use, so the stimulus gets an economic free lunch instead of diverting resources that are already economically productive. The challenge is that people are unemployed typically because their skills are less useful in...