Bryan Caplan’s Unemployment Wager

In response to a recent paper that was somewhat bullish about the benefits of the European employment model, Bryan Caplan proposes the following bet. It has since been taken up by John Quiggin.

“I’m going to offer the following bet to the authors of the CEPR report:

The average European unemployment rate for 2009-2018 (i.e., the next decade) will be at least 1% higher than U.S. unemployment rate. The bet will be resolved when Eurostat releases its final numbers for 2018.

I’m happy to bet each of the three authors $100 at even odds. Will they accept?

P.S. By 1% I of course meant 1 percentage-point.”

Remembrance of things past

The title of Colm McCarthy’s Post Goodbye to All That is Robert Graves’ account of his experiences in the Great War. This evoked in me some nostalgie de la boue so I had a look at a graph of Ireland’s unemployment rate.

 

Looking at the early years in the graph, it seemed that the surge in unemployment in the first half of the 1980s got built into the structure of the economy. Indeed, an influential comparative study of unemployment in OECD countries estimated that the Irish equilibrium or “natural” unemployment rate had risen from 9 per cent over the period 1969-79 to 13.1 per cent between 1980 and 1988 (Layard, Nickell, and Jackman, Unemployment: Macroeconomic Performance and the Labour Market, Oxford University Press. 1991). As if to vindicate this claim, after a faltering improvement in the early 1990s, the unemployment rate was headed for 16% in 1994, some five years after growth had resumed.

There was, of course, a lot of debate about how genuine the unemployment – especially the Live Register (LR) – figures were. In 1996 the CSO undertook a special inquiry that showed less than half of those registered as unemployed were unemployed in the ILO (Labour Force Survey) sense of the term. As a result after September 1998 all those who have been unemployed for six months were called for interview to assess whether they suitable for an existing vacancy or in need of training. To cite the OECD, “nearly half either failed to attend the interview or refused intervention, and 28 per cent were struck off the rolls . . .”. This helped close the very large gap that had emerged between LR unemployment and unemployment as measured in the Labour Force Survey. However, it would not affect the ILO estimates shown in the Graph and its timing does not coincide closely with the rapid fall in unemployment that began in 1994.

Once it started, the decline in unemployment was spectacular. By 1999 the rate had fallen to 4% and it remained close to this level for the next six years. At the same time our emigration was reversed and large-scale immigration became a feature of our economy. Behind all of this was a rate of employment growth that has few parallels in any country.

I hope Colm will permit some nostalgia for these years.

It would be nice to be able to draw lessons from this period that would serve us now that we are experiencing such an extraordinary reversal of fortunes on the labour market front. I tried to do so in a chapter over-optimistically entitled “When Unemployment Disappears: Ireland in the 1990s” [Chapter 8 in Martin Werding, (ed.), Structural Unemployment in Western Europe: Reasons and Remedies, MIT Press, 2006]. My conclusion at the time was that “The exceptional performance of the Irish labour market during the 1990s was not triggered by radical structural reforms”. This despite the fact the a new emphasis on active labour market policies did make some contribution. Note that these policies have not averted the unprecedented rise in unemployment over the last two years.

A Keynesian story does better as an explanation – increases in aggregate demand fuelled by global growth, inward FDI, competiveness etc.

These conclusions point to a gloomy prognosis for our unemployment rate as the macroeconomic conditions of the late 1990s are unlikely to reappear for some time.

ICTU Employment Document

ICTU’s employment document is an interesting addition to the debate. However, it is not fully clear where the one billion figure comes from and, in general, it would be worth thinking further about costing. The overall thrust of the document is important though, in particular their correct emphasis on the urgent need to address full unemployment.

linked here

Unemployment Up to 11.4% in April

Today’s release shows that the standardised unemployment rate, which is based on the Live Register, rose to 11.4% in April from 11% in March. 

I’m tempted to greet the four-tenths increase as a sign that the pace of slowdown is moderating relative to the disastrous increases observed in January and February.   This is pretty cold comfort—this is still consistent with an annualised pace of increase in the unemployment rate of almost 5%—but I guess second derivatives have to turn negative before we reach a global maximum. 

On the whole, though, I still reckon we’re looking a double digit rate of decline for average-over-average GDP this year.

Unemployment Up to 11% in March

Today’s release shows that the standardised unemployment rate, which is based on the Live Register, rose to 11% in March from 10.4% in February.  Over the past three months, the unemployment rate has risen by 2.4%, compared with an increase of 1.4% over the previous three months.

In terms of projecting GDP for the year, these figures suggest to me that the current “consensus” figure of something like a 6 percent (average-over-average) decline for 2009 is highly optimistic.  It is hard to see this huge jump in unemployment as consistent with anything other than a substantial contraction in output in first quarter.  With output having fallen by around 7 percent on a Q4-over-Q4 basis last year (whether measured on a GDP or GNP basis) the cumulative loss in output from peak has perhaps already reached 10 percent as we speak.

Once you factor in the contractionary effect of the upcoming budget, it is hard to see the economy producing a quick turnaround after the first quarter.  Working through the various scenarios along the lines of my post from last week, it’s very hard to see an average-over-average growth rate better than -8% this year and very easy to imagine scenarios that are worse.

Unemployment Rate up to 10.4%

In a further indication of the rapidity of the decline in Irish economic activity, the CSO‘s Live Register release reports a standardised unemployment rate of 10.4% in February up from 5.0% one year earlier.  One reason the figure is so high is that unemployment rates from previous months were revised up (January’s rate was revised up from 9.2% to 9.6%) as they were benchmarked to the QNHS estimates for September-November.   (Brendan Walsh had predicted such a revision in his post on the QNHS release.) Even controlling for that, the pace at which the economy is contracting is remarkable.