Bell and Blanchflower – Unemployment in the OECD

New IZA Discussion Paper.

What Should Be Done About Rising Unemployment in the OECD?
by David N.F. Bell, David G. Blanchflower
(September 2009)

Abstract:
There is a growing belief that the recession has run its course and that the goods market has started a period of slow, but sustainable, recovery. Improvement in the labor market may take some time, but many believe that unemployment will return to its 2007 level in the medium term. In this paper, we argue that recovery is by no means guaranteed and that the consequences for unemployment may be worse than anticipated.

10 thoughts on “Bell and Blanchflower – Unemployment in the OECD”

  1. The section below is the conclusion of the paper. Colm McCarthy has now forcefully argued time and again that additions to current borrowing are not possible given the present fiscal position. Thus, policies to stimulate the youth labour market must take place against this constraint. Internship programmes are gaining some currency in Ireland and this will be one response. It is disturbing that no political party has been able to get a sustained public momentum on this issue, something that may be due to low rates of voter turnout among the 18-30 year old group in Ireland. Indeed, it is somewhat disturbing not even to see large scale reactions among this group themselves. We are in serious risk of creating a generation that is sapped of confidence, wasting decades of sustained educational progress. Wage cuts are hard to take for anyone but the deadening of ambition and spark that comes from not been given a shot at all at getting into the labour market is far worse.

    “Policy makers around the world appear to have understood this need for stimulus. What has been absent from the policy response thus far, though, is a coherent approach to the treatment of younger people who have not yet entered the labor market. We know that these are particularly vulnerable individuals, whose long-term opportunities can be damaged by adverse events early in their labor market experience. We also understand that the discounted social and health costs associated with youth unemployment are extremely high. It is thus extremely important to introduce policies which enhance the skills and capabilities of younger workers and which assist them to join the labor market as quickly as possible. Spells of unemployment while young create permanent scars. Unemployment is higher in the years ahead if a young person doesn’t make a successful toe-hold into the labour market early in their lives. Solving youth unemployment is the most pressing problem governments
    are facing today. Not dealing with the problem of high, and rising levels of youth unemployment hurts the youngsters themselves and has potentially severe consequences for us all for many years to come. The time to act is now. The young must be the priority.”

  2. Liam Delany

    The problem is of colossal proportions. The depression will make these issues worse.

    The US solution is to send them on a long holiday, far away, where they can die bravely, fighting people who object to being invaded. Some Irish kids will join them. Gulf war and balkans war experience suggests PTSD and Uranium poisoning will kill most survivors within ten to twenty years. We’ll ignore the civilians. Won’t we. This solution is no solution.

    Make work is imperative which means spreading wealth. Want to see that happen easily?

    The Celtic cubs will try to impose US tried and trusted solutions to that. Three time loser. Permanent imprisonment for repetitive offences. Higher sentences for the inevitable wave of petty crimes. Prison as uni leading to many more serious crimes. Mandatory 10 years for possession of marijuana, from Mr Rockefeller of New York. Neglected public housing. Adulterated drugs, killing more children. No public health service. Discrimination multiplying as the right people get scarcer jobs. Compulsory drug tests, to weed out the weedies. Accelerated development of certain areas leading to more pollution.

    Nama means that new taxes will be needed just to repay the debts incurred by developers. It also means higher land costs for developers, who will pass those on, making competitiveness more awkward, increasing social division. Ireland is already one of the least equal societies in Europe. Gated communities with private security.

    Keep your BMW doors locked as you drive around. Tiger kidnappings will increase. There will have to be clearing of inner city cess pits, say out to Kilbeggan. Lots more land to be redeveloped there! More brown bags! Construction! Boom! The Celtic Tiger roars again. Miaow!

    Emigrate asap!

  3. The OECD response will be green collar jobs which are make work. They are unproductive, but they may help the young develop so as to avoid this mess. The carbon tax is make work for exFIRE employees.

    The plans for this as you can see, have been in the works for some time….! The global climate is now cooling, since 1998 according to reliable, non-political sources. If there is a solar minimum then the timing has been impeccable.

    The Black Death reduced employees by one third, raising labour prices for a century. Rather than Pneumonic plague, it is likely to have been Anthrax. Wet, damp leather, piled upon failed crops, as a result of a cooler climate.

    Interesting times. The electro-magnetic effects of the closest star in minimum are unknown. If a similar flare to Eddington occurs, then we will need to rebuild the electrical grids and all wiring world wide. I recommend a career in electricity, engineering etc., to those who ask for advice! And no, I do not believe 21/12/12 has any significance!

  4. The OECD response will be green collar jobs which are make work. They are unproductive, but they may help the young develop so as to avoid this mess. The carbon tax is make work for exFIRE employees.

    The plans for this as you can see, have been in the works for some time….! The global climate is now cooling, since 1998 according to reliable, non-political sources. If there is a solar minimum then the timing has been impeccable.

    The Black Death reduced employees by one third, raising labour prices for a century. Rather than Pneumonic plague, it is likely to have been Anthrax. Wet, damp leather, piled upon failed crops, as a result of a cooler climate.

    Interesting times. The electro-magnetic effects of the closest star in minimum are unknown. If a similar flare to Eddington occurs, then we will need to rebuild the electrical grids and all wiring world wide. I recommend a career in electricity, engineering etc., to those who ask for advice! And no, I do not believe 21/12/12 has any significance!
    OH! You’re my new favorite blogger fyi

  5. Many thanks, Liam, for highlighting this timely and relevant paper. Kevin O’Rourke’s post on US job losses evidences the severe job-destroying impact of this downturn. Paul Krugman, in the NYT (http://www.nytimes.com/2009/10/02/opinion/02krugman.html?ref=todayspaper) is on the same track.

    The US has some scope to borrow its way out of recession – but not so much as it once had as the dollar’s position as the international reserve currency is becoming precarious and increased globalisation equals increased leakage. I think Colm McCarthy is merely highlighting that this option is not available to Ireland – and is even less feasible given the scale of economic policy imbecility over the last decade.

    In addition, the devaluation option – used so effectively in 1986 and 1993 – is out, so it appears that engineering the economic equivalent of a devaluation and “rectal fiscitude” (Barry Desmond’s resonant description) are all that are on offer. And even if funds were available for a classic fiscal stimulus, it appears that there are no “shovel-ready” projects that would have the required short-term impact. And to cap it all, the tried and trusted emigration safety valve removes a lot of the political pressure that would build up in the larger, but much less open, economies.

    It is also becoming increasingly apparent that the current political and policy-making configuration is approaching moral and intellectual bankruptcy. The leavening of this stodgy lump by the inputs of economists such as Colm MacCarthy and Alan Ahearne merely highlights its gross ineffectiveness and the focus on minimising reputational damage and on ensuring political survival. Policy is being made on the hoof without any set of guiding principles.

    Nevertheless, in the narrow space between Beckett’s alternatives of presumption and despair, it is possible to envisage the application of some imagination and courage. This may not have the desired short-term impact on unemployment, but it would alter the terms of engagement in a positive and forward-looking way. In my view, it would comprise

    (a) cutting a deal with the Anglo and Nationwide bondholders with a view to an orderly winding up of these banks – thereby halving the current scope of NAMA and leading to propeerty prices reaching their economic levels (with knock-on economy-wide benefits). It may need increased recap of the remaining banks – and some write-off of recently acquired mortgages – but cleaner banks should allow a profitable (and more rapid) disposal of the recap. It would also minimise public indebtedness and the extent of support required from the ECB.
    (b) Restructuring and selective privatisation of semi-states to release funds that could be leveraged to finance R&D and investment in key infrastructure and utility areas. Linking this with various EU initiatives could support and generate employment and the development of skills and training.
    (c) a comprehensive restructuring of competition law, economic regulation and consumer representation – and enforcement – to tackle restrictive practices and the capture of surplus profits in the sheltered sectors. Stripping out unjustified costs and implicit taxes would reinforce the devaluation effect required – and make reductions in nominal levels of pay more palatable.

    Of course, all of these are off the current political and policy-making agenda. It appears that the political and policy-making establishment was taken aback by the quality and cohesion of the NAMA critique – drawing on the best of international theory and practice – mounted by contributors to this site. The Taoiseach has defended the economic record of governments since 1997 by asserting that decisions were based on the “best policy advice”. In many instances this was provided by external consultants responding to a ToR that were so tightly drawn that they could only generate recommendations that confirmed the policy-makers’ prejudices. No dissent or independent thought was allowed. We are now reaping the fruits of this group-think and narrow-mindedness.

    And there is no evidence that any change is being contemplated.

  6. Paul Hunt above absolutely nails it. In addition for the Taoiseach to talk about having acted on ‘best policy advice’ is nonsense on stilts. Besides given what’s happened to the fiscal side the advice, whatever it was, was not even OK let alone ‘best’. In any case there were plenty of people pointing out that ramping up gov’t spending as a percentage of an already misleading GDP (‘misleading’ in the sense that it didn’t reflect domestically-originated activity ) was akin (as I said some where else) to pitching your tent on a dried out river bed at these start of the rainy season.

    Also I believe that even without the international crisis that Ireland was headed here anyway. It wouldn’t have been this year but it would, given, the way they were spending, have happened at some stage.

    It would be interesting, if I’m not going off topic, to extrapolate the state of Ireland’s finances by a certain date, given trends in its economic and fiscal management, even without the crisis.

  7. Thank you, Paul. I think we may be going off-piste, but your suggestion is valid and might be picked up in another post. The credit crunch, similar to Warren Buffett’s tide going out, revealed who was swimming naked.

    Staying on the unemployment issue, I might add that stripping out unjustified costs and and implicit taxes would reduce the prices that drive high nominal wages. Falling nominal wages, even if higher in real terms, would reduce firing and increase hiring. And, as Richard Tol (on another post) and others have pointed out, shifting the balance of taxation from labour and expenditure (labour taxes and VAT) to the taxation of “bads” such as carbon emissions, would have a similar effect.

  8. I suppose I shouldn’t be surprised, but everytime a post is kicked off which seeks to generate some dicussion of possible policies to deal with unemployment – and, particularly, unemployment among young people it generates very little reaction. For goodness sake, a slightly dodgy NYT cartoon generates more traffic. We’ve done NAMA, an BSN, fiscal adjustment, taxation and negative equity to death, but the huge waste and future costs of unemployment seem to barely register.

    The consensus seems to have been pithily expressed by John FitzGerald (already picked up inanother post):
    http://www.tribune.ie/business/news/article/2009/oct/04/john-fitzgerald-shock-therapy-needed-sooner-rather/

    (I’m sure an excitable Tribune subbie decided on the strap-line.)

    I have no major disagreement with the “sort the banks, effect a rapid and major fiscal adjustment, implement the economic equivalent of a devauation and the economy will rebound on the international up-swing” line, but I fear we are leaving too much to chance in terms of both the human and physical capital necessary to allow Ireland to take full advantage of this upswing.

    Right across the board the urge to return to “business-as-usual” is understandably strong, but if anything is to be gained from this traumatic economic experience, it should be the widespread recognition that major and deep-seated reform of democratic governance, of the formulation and implementation of economic policy and of the structure and process of regulation (including the development and enforcement of competition law).

  9. The European Industrial Relations Observatory is a useful resource to document the different comparative approaches that both government, employers and unions are adopting to the current economic crisis.

    Slovakia offers one interesting comparison to Ireland. The government has adopted 60 different policy measures to alleviate the impact of the economic crisis. Interestingly, trade unions and government have managed to negotiate a common platform on how to handle the crisis.

    http://www.eurofound.europa.eu/eiro/2009/04/articles/sk0904019i.htm

    Most of the ‘anti-crisis’ policies are directed toward maintaining employment. These include the temporary provision of insurance allowances (provided by the state to employers for up to 60 days), to flexible working time arrangements. You can read more about it here:

    http://www.eurofound.europa.eu/eiro/2009/08/articles/sk0908019i.htm

    The main point to be taken though, is that a comparative analysis of what other EU countries are doing (in terms of industrial relations, social policy and labour market policy) can be illuminating for our response to the crisis.

  10. thanks Aidan. Some of the current policies are discussed also in the paper and in the report referenced by the European Foundation for the Improvement of Working and Living Conditions. The youth unemployment rate in Ireland is now simply staggering, particularly for young men so any ideas that come from other countries should be looked at closely.

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