U.S. earnings seem to be humming along fairly well. Why is unemployment staying so high? What are thoughts on the "why" of continued high unemployment. Also, what would change that inducing hiring?

Steve Ellison writes:

Eric Falkenstein posits a correlation between bank stock declines and the unemployment rate which I find very interesting.

Gary Rogan writes:

"Confidence" (or lack thereof) is the stock answer from the right, and "corporate greed" on the left: those two are quite common these days in many documented discussions.

There is not specific reason why corporate profits have to lead to decreasing unemployment, although under normal circumstances they are positively correlated. They haven't been for a few years as the graph in this NY Times article demonstrates [link may require registration].

The key determinant of making the decision to employ someone is the answer to this question: do I need someone right now, in the geographical locale, to address current or future demand? And given that getting rid of people is expensive and unpleasant, there is a hurdle attached to the "need", and of course being able to afford the employee in the first place is another hurdle.

Corporate profits do help with macro demand and being able to afford new employees, but profits only translate into demand if employers have enough confidence to invest in new equipment/building, etc. or hire someone based on the future estimate of "need". So the lack of confidence does freeze the whole process in its tracks. High unemployment itself leads to lower macro demand on the part of the consumers due to the lack of incomes, so the only real way to break the deadlock is for the businesses to have enough confidence in the future to invest or hire. Of course the Keynesians believe in a totally different way to break the deadlock, but as I have mentioned multiple times I consider that nonsense.

High levels of unemployment compensation only slow down employment recoveries instead of doing the opposite as those on the left believe. On the macro level, they lead to mild consumer demand destruction as opposed to the supposed increased demands as they spend their transfer payments.

The geographical question is of course very big and complicated. There are a lot of alternatives to hiring locally and due to the tax-related lack of of foreign income repatriation as well as foreign political pressures, it's hard to correlate global profits with local employment anyway.

I personally believe that until Obama is out of office and the fate of the health bill is undecided (which may or may not be resolved in a few days) the employment picture will not improve. What seems like a slow-motion collapse in global demand may matter even more depending on the magnitude, but is hard to forecast. The recently documented household wealth destruction in the last few years doesn't portent a good story for local demand either.

Rocky Humbert writes:


In lieu of a titillating academic paper to share, I will reprise my typical rant: There are only two things on which ALL economists can agree: (1) Resources are limited; (2) Incentives matter. So, let's pull out the old Supply and Demand curve which derives from both (1) and (2) and repeat out loud: Ceteris paribus, if the supply exceeds the demand, the price must fall to achieve equilibrium. (A) If there is excess labor (aka unemployment,) the price of labor must decline to clear the excess from the market. or (B) The demand (hiring) must increase dramatically from the status quo. All of the political squawking focuses on the demand side. I don't hear anyone on the left OR the right talking about pay cuts as a way to clear the labor market. Maybe I should run for President on the platform that, EVERYONE should cut their wage rate by 30%. I promise you that unemployment will be below 4% before the end of my first year. Any volunteers to be my campaign manager? (It's an unpaid position — which is a first step towards reducing the unemployment rate.)

Andrei Kotlov writes: 

This is a reply specifically to Rocky's [witty and entertaining] latest post (as it has little to do with the original question); an economics post to follow in a couple of hours.

(1) There are no incentives in physics; only cause and effect. Incentives imply free will. An agent's behavior *tends* to be affected by incentives—but it does not have to be. (Do not get me wrong: I do fully agree with your original "incentives matter.")

(2) The second law of thermodynamics implies increase in entropy, but I am afraid only when no agents [of free will] are involved. The latter can [and do] decrease chaos.

(The main objection to your statement "resources are limited" should have been not an objection but a modification: "agents can use [albeit limited] resources with varying efficiency." Of course, you agree with such a restatement yourself.)

(3) Perhaps most importantly, "experiments" in economics are, in principle, not replicable because (as Mises has explained) agents are capable of modifying their behavior based on the outcomes of previous "experiments."

Andre Clapp writes:

As a former physicist, I'm not sure I agree with the statement that "There are no incentives in physics". As previously pointed out, objects and systems have a natural tendency to seek potential energy minimums (a ball is "incentivized" to roll down the hill, and requires intervention to prevent it from doing so). Similarly, there is a natural tendency towards greater disorder (castles turn into piles of stones naturally, but a great deal of "intervention" is required to turn a pile of stones into a castle.)

I find the analogy to be quite good. The natural tendencies of physics can be harnessed to create rocket fuel that makes a rocket fly. The natural tendency of humans to enrich themselves and make a better life for themselves and their families can be harnessed to make a better and more productive economic system. I agree that the ball rolling down the hill has no "free will", but incentive is just a word… I'm not sure if it implies free will or not. I'm not sure it matters.

As an aside, the question of whether humans have "free will" is actively debated in the relevant community. In thinking of how to design an experiment to demonstrate the concept of "free will", I find the concept to be poorly defined, if not undefined, and therefore meaningless (to a physicist!)

A pleasure to be part of the discussion group.

Respectfully yours,

Andre Clapp (The rocket scientist)

Andrei Kotlov writes: 

 To Andre Clapp: one indeed needs to start with the concept of free will—but, may I hide behind the statement that it is too big of a topic for me to cover here? I have spent long time thinking on the nature of free will, and still do not know how to summarize it in a few sentences. To me, it is a combination of randomly-fired processes (e.g., discharges in the neural net) with a deterministic ability to select. Ol' good dialectical "quantitative becoming qualitative."

If one accepts the notion of free will (not as an article of faith, but scientifically) then the word incentive is only meaningful in the presence of a choice. If you want to equate 'incentive' with 'cause,' well, you have just redefined the word meaning "a thing that motivates or encourages one to do something." Once again, in physics, one speaks of cause and effect. When agents [of free will] are involved, the relation between the causes and effect may not be traceable [because of the complexity and multitude of the randomly-fired prior events in the brain over the course of each agent' life]. Thus, it makes sense to separate 'incentives' (for agents) from 'causes' for 'inevitable' effects, in particular on inanimate objects.

Andre Clapp writes:

Hi Andrei,

First point: In the world of quantum mechanics the future is not completely predictable, even for inanimate objects (particles) in the absence of agents. The world is not deterministic, it is probabilistic, a point that N. T*leb seemed to understand well when he wrote "The Black Sw@n". It is not just humans that are to some extent unpredictable. The ball rolling down the hill is (to some extent) unpredictable. Does that mean the ball has free will?

I think it is better to simply think in terms of "causes" and "effects". "Free will" to me is an article of faith or religion, not science or reason. The fact that you cannot define it, yet ask one "to accept it", points very much in that direction.

Not that theology is a bad thing, but these are questions without right or wrong answers. "How many angels can fit on the head of a pin?" Tell me what (define) an angel is, and I'd be willing to discuss it, otherwise it belongs in the realm of religious leaders, artists, and traumatized children and families. In other words, in the realm of emotion. As I'm sure you know, centuries were spent (wasted?) discussing this very question. (And no, "people with wings that come from heaven" is not a definition of angel.)

(I think) I know how you feel. This concept is so deep in our culture, like "the soul", that it is difficult to reject. We feel like something fundamental is being ripped out of us. And yet, it doesn't bear up well under scrutiny, or the light of reason. Even something as fundamental as a definition is missing! Surely that tells us something…. In the end, is it really so (emotionally) different to say that human actions are a result of cause and effect, than to say that everything happens because it is a deity's will (an idea that many people find comforting, not threatening.)

All the best,

Andre - The rocket scientist


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