active labor market policy

What would a better job market look like?

pnrj personal, public policy , , , , , , , , ,

Sep 13 JDN 2459106

I probably don’t need to tell you this, but getting a job is really hard. Indeed, much harder than it seems like it ought to be.

Having all but completed my PhD, I am now entering the job market. The job market for economists is quite different from the job market most people deal with, and these differences highlight some potential opportunities for improving job matching in our whole economy—which, since employment is such a large part of our lives, could have wide-ranging benefits for our society.

The most obvious difference is that the job market for economists is centralized: Job postings are made through the American Economic Association listing of Job Openings for Economists (often abbrievated AEA JOE); in a typical year about 4,000 jobs are posted there. All of them have approximately the same application deadline, near the end of the year. Then, after applying to various positions, applicants get interviewed in rapid succession, all at the annual AEA conference. Then there is a matching system, where applicants get to send two “signals” indicating their top choices and then offers are made.

This year of course is different, because of COVID-19. The conference has been canceled, with all of its presentations moved online; interviews will also be conducted online. Perhaps more worrying, the number of postings has been greatly reduced, and based on past trends may be less than half of the usual number. (The number of applicants may also be reduced, but it seems unlikely to drop as much as the number of postings does.)

There are a number of flaws in even this system. First, it’s too focused on academia; very few private-sector positions use the AEA JOE system, and almost no government positions do. So those of us who are not so sure we want to stay in academia forever end up needing to deal with both this system and the conventional system in parallel. Second, I don’t understand why they use this signaling system and not a deferred-acceptance matching algorithm. I should be able to indicate more about my preferences than simply what my top two choices are—particularly when most applicants apply to over 100 positions. Third, it isn’t quite standardized enough—some positions do have earlier deadlines or different application materials, so you can’t simply put together one application packet and send it to everyone at once.

Still, it’s quite obvious that this system is superior to the decentralized job market that most people deal with. Indeed, this becomes particularly obvious when one is participating in both markets at once, as I am. The decentralized market has a wide range of deadlines, where upon seeing an application you may need to submit to it within that week, or you may have several months to respond. Nearly all applications require a resume, but different institutions will expect different content on it. Different applications may require different materials: Cover letters, references, writing samples, and transcripts are all things that some firms will want and others won’t.

Also, this is just my impression from a relatively small sample, but I feel like the AEA JOE listings are more realistic, in the following sense: They don’t all demand huge amounts of prior experience, and those that do ask for prior experience are either high-level positions where that’s totally reasonable, or are willing to substitute education for experience. For private-sector job openings you basically have to subtract three years from whatever amount of experience they say they require, because otherwise you’d never have anywhere you could apply to. (Federal government jobs are a weird case here; they all say they require a lot of experience at a specific government pay grade, but from talking with those who have dealt with the system before, they are apparently willing to make lots of substitutions—private-sector jobs, education, and even hobbies can sometimes substitute.)

I think this may be because the decentralized market has to some extent unraveled. The job market is the epitome of a matching market; unraveling in a matching market occurs when there is fierce competition for a small number of good candidates or, conversely, a small number of good openings. Each firm has the incentive to make a binding offer earlier than the others, with a short deadline so that candidates don’t have time to shop around. As firms compete with each other, they start making deadlines earlier and earlier until candidates feel like they are in a complete crapshoot: An offer made on Monday might be gone by Friday, and you have no way of knowing if you should accept it now or wait for a better one to come along. This is a Tragedy of the Commons: Given what other firms are doing, each firm benefits from making an earlier binding offer. But once they all make early offers, that benefit disappears and the result just makes the whole system less efficient.

The centralization of the AEA JOE market prevents this from happening: Everyone has common deadlines and does their interviews at the same time. Each institution may be tempted to try to break out of the constraints of the centralized market, but they know that if they do, they will be punished by receiving fewer applicants.

The fact that the centralized market is more efficient is likely a large part of why economics PhDs have the lowest unemployment rate of any PhD graduates and nearly the lowest unemployment rate of any job sector whatsoever. In some sense we should expect this: If anyone understands how to make employment work, it should be economists. Noah Smith wrote in 2013 (and I suppose I took it to heart): “If you get a PhD, get an economics PhD.” I think PhD graduates are the right comparison group here: If we looked at the population as a whole, employment rates and salaries for economists look amazing, but that isn’t really fair since it’s so much harder to become an economist than it is to get most other jobs. But I don’t think it’s particularly easier to get a PhD in physics or biochemistry than to get one in economics, and yet economists still have a lower unemployment rate than physicists or biochemists. (Though it’s worth noting that any PhD—yes, even in the humanities—will give you a far lower risk of unemployment than the general population.) The fact that we have AEA JOE and they don’t may be a major factor here.


So, here’s my question: Why don’t we do this in more job markets? It would be straightforward enough to do this for all PhD graduates, at least—actually my understanding is that some other disciplines do have centralized markets similar to the one in economics, but I’m not sure how common this is.

The federal government could relatively easily centralize its own job market as well; maybe not for positions that need to be urgently filled, but anything that can wait several months would be worth putting into a centralized system that has deadlines once or twice a year.

But what about the private sector, which after all is where most people work? Could we centralize that system as well?

It’s worth noting the additional challenges that immediately arise: Many positions need to be filled immediately, and centralization would make that impossible. There are thousands of firms that would need to be coordinated (there are at least 100,000 firms in the US with 100 or more employees). There are millions of different jobs to be filled, requiring a variety of different skills. In an average month over 5 million jobs are filled in the United States.

Most people want a job near where they live, so part of the solution might be to centralize only jobs within a certain region, such as a particular metro area. But if we are limited to open positions of a particular type within a particular city, there might not be enough openings at any given time to be worth centralizing. And what about applicants who don’t care so much about geography? Should they be applying separately to each regional market?

Yet even with all this in mind, I think some degree of centralization would be feasible and worthwhile. If nothing else, I think standardizing deadlines and application materials could make a significant difference—it’s far easier to apply to many places if they all use the same application and accept them at the same time.

Another option would be to institute widespread active labor market policies, which are a big part of why #ScandinaviaIsBetter. Denmark especially invests heavily in such programs, which provide training and job matching for unemployed citizens. It is no coincidence that Denmark has kept their unemployment rate under 7% even through the worst of the Great Recession. The US unemployment rate fluctuates wildly with the business cycle, while most of Europe has steadier but higher unemployment. Indeed, the lowest unemployment rates in France over the last 30 years have exceeded the highest rates in Denmark over the same period. Denmark spends a lot on their active labor market programs, but I think they’re getting their money’s worth.

Such a change would make our labor markets more efficient, matching people to jobs that fit them better, increasing productivity and likely decreasing turnover. Wages probably wouldn’t change much, but working in a better job for the same wage is still a major improvement in your life. Indeed, job satisfaction is one of the strongest predictors of life satisfaction, which isn’t too surprising given how much of our lives we spend at work.

Sometimes people have to lose their jobs. This isn’t a bad thing.

pnrj ethics, inequality, macroeconomics, public policy , , , , , , , , , , , , , , , , , , , , ,

Oct 8, JDN 2457670

Eleizer Yudkowsky (founder of the excellent blog forum Less Wrong) has a term he likes to use to distinguish his economic policy views from either liberal, conservative, or even libertarian: “econoliterate”, meaning the sort of economic policy ideas one comes up with when one actually knows a good deal about economics.

In general I think Yudkowsky overestimates this effect; I’ve known some very knowledgeable economists who disagree quite strongly over economic policy, and often following the conventional political lines of liberal versus conservative: Liberal economists want more progressive taxation and more Keynesian monetary and fiscal policy, while conservative economists want to reduce taxes on capital and remove regulations. Theoretically you can want all these things—as Miles Kimball does—but it’s rare. Conservative economists hate minimum wage, and lean on the theory that says it should be harmful to employment; liberal economists are ambivalent about minimum wage, and lean on the empirical data that shows it has almost no effect on employment. Which is more reliable? The empirical data, obviously—and until more economists start thinking that way, economics is never truly going to be a science as it should be.

But there are a few issues where Yudkowsky’s “econoliterate” concept really does seem to make sense, where there is one view held by most people, and another held by economists, regardless of who is liberal or conservative. One such example is free trade, which almost all economists believe in. A recent poll of prominent economists by the University of Chicago found literally zero who agreed with protectionist tariffs.

Another example is my topic for today: People losing their jobs.

Not unemployment, which both economists and almost everyone else agree is bad; but people losing their jobs. The general consensus among the public seems to be that people losing jobs is always bad, while economists generally consider it a sign of an economy that is run smoothly and efficiently.

To be clear, of course losing your job is bad for you; I don’t mean to imply that if you lose your job you shouldn’t be sad or frustrated or anxious about that, particularly not in our current system. Rather, I mean to say that policy which tries to keep people in their jobs is almost always a bad idea.

I think the problem is that most people don’t quite grasp that losing your job and not having a job are not the same thing. People not having jobs who want to have jobs—unemployment—is a bad thing. But losing your job doesn’t mean you have to stay unemployed; it could simply mean you get a new job. And indeed, that is what it should mean, if the economy is running properly.

Check out this graph, from FRED:

hires_separations

The red line shows hires—people getting jobs. The blue line shows separations—people losing jobs or leaving jobs. During a recession (the most recent two are shown on this graph), people don’t actually leave their jobs faster than usual; if anything, slightly less. Instead what happens is that hiring rates drop dramatically. When the economy is doing well (as it is right now, more or less), both hires and separations are at very high rates.

Why is this? Well, think about what a job is, really: It’s something that needs done, that no one wants to do for free, so someone pays someone else to do it. Once that thing gets done, what should happen? The job should end. It’s done. The purpose of the job was not to provide for your standard of living; it was to achieve the task at hand. Once it doesn’t need done, why keep doing it?

We tend to lose sight of this, for a couple of reasons. First, we don’t have a basic income, and our social welfare system is very minimal; so a job usually is the only way people have to provide for their standard of living, and they come to think of this as the purpose of the job. Second, many jobs don’t really “get done” in any clear sense; individual tasks are completed, but new ones always arise. After every email sent is another received; after every patient treated is another who falls ill.

But even that is really only true in the short run. In the long run, almost all jobs do actually get done, in the sense that no one has to do them anymore. The job of cleaning up after horses is done (with rare exceptions). The job of manufacturing vacuum tubes for computers is done. Indeed, the job of being a computer—that used to be a profession, young women toiling away with slide rules—is very much done. There are no court jesters anymore, no town criers, and very few artisans (and even then, they’re really more like hobbyists). There are more writers now than ever, and occasional stenographers, but there are no scribes—no one powerful but illiterate pays others just to write things down, because no one powerful is illiterate (and even few who are not powerful, and fewer all the time).

When a job “gets done” in this long-run sense, we usually say that it is obsolete, and again think of this as somehow a bad thing, like we are somehow losing the ability to do something. No, we are gaining the ability to do something better. Jobs don’t become obsolete because we can’t do them anymore; they become obsolete because we don’t need to do them anymore. Instead of computers being a profession that toils with slide rules, they are thinking machines that fit in our pockets; and there are plenty of jobs now for software engineers, web developers, network administrators, hardware designers, and so on as a result.

Soon, there will be no coal miners, and very few oil drillers—or at least I hope so, for the sake of our planet’s climate. There will be far fewer auto workers (robots have already done most of that already), but far more construction workers who install rail lines. There will be more nuclear engineers, more photovoltaic researchers, even more miners and roofers, because we need to mine uranium and install solar panels on rooftops.

Yet even by saying that I am falling into the trap: I am making it sound like the benefit of new technology is that it opens up more new jobs. Typically it does do that, but that isn’t what it’s for. The purpose of technology is to get things done.

Remember my parable of the dishwasher. The goal of our economy is not to make people work; it is to provide people with goods and services. If we could invent a machine today that would do the job of everyone in the world and thereby put us all out of work, most people think that would be terrible—but in fact it would be wonderful.

Or at least it could be, if we did it right. See, the problem right now is that while poor people think that the purpose of a job is to provide for their needs, rich people think that the purpose of poor people is to do jobs. If there are no jobs to be done, why bother with them? At that point, they’re just in the way! (Think I’m exaggerating? Why else would anyone put a work requirement on TANF and SNAP? To do that, you must literally think that poor people do not deserve to eat or have homes if they aren’t, right now, working for an employer. You can couch that in cold economic jargon as “maximizing work incentives”, but that’s what you’re doing—you’re threatening people with starvation if they can’t or won’t find jobs.)

What would happen if we tried to stop people from losing their jobs? Typically, inefficiency. When you aren’t allowed to lay people off when they are no longer doing useful work, we end up in a situation where a large segment of the population is being paid but isn’t doing useful work—and unlike the situation with a basic income, those people would lose their income, at least temporarily, if they quit and tried to do something more useful. There is still considerable uncertainty within the empirical literature on just how much “employment protection” (laws that make it hard to lay people off) actually creates inefficiency and reduces productivity and employment, so it could be that this effect is small—but even so, likewise it does not seem to have the desired effect of reducing unemployment either. It may be like minimum wage, where the effect just isn’t all that large. But it’s probably not saving people from being unemployed; it may simply be shifting the distribution of unemployment so that people with protected jobs are almost never unemployed and people without it are unemployed much more frequently. (This doesn’t have to be based in law, either; while it is made by custom rather than law, it’s quite clear that tenure for university professors makes tenured professors vastly more secure, but at the cost of making employment tenuous and underpaid for adjuncts.)

There are other policies we could make that are better than employment protection, active labor market policies like those in Denmark that would make it easier to find a good job. Yet even then, we’re assuming that everyone needs jobs–and increasingly, that just isn’t true.

So, when we invent a new technology that replaces workers, workers are laid off from their jobs—and that is as it should be. What happens next is what we do wrong, and it’s not even anybody in particular; this is something our whole society does wrong: All those displaced workers get nothing. The extra profit from the more efficient production goes entirely to the shareholders of the corporation—and those shareholders are almost entirely members of the top 0.01%. So the poor get poorer and the rich get richer.

The real problem here is not that people lose their jobs; it’s that capital ownership is distributed so unequally. And boy, is it ever! Here are some graphs I made of the distribution of net wealth in the US, using from the US Census.

Here are the quintiles of the population as a whole:

net_wealth_us

And here are the medians by race:

net_wealth_race

Medians by age:

net_wealth_age

Medians by education:

net_wealth_education

And, perhaps most instructively, here are the quintiles of people who own their homes versus renting (The rent is too damn high!)

net_wealth_rent

All that is just within the US, and already they are ranging from the mean net wealth of the lowest quintile of people under 35 (-$45,000, yes negative—student loans) to the mean net wealth of the highest quintile of people with graduate degrees ($3.8 million). All but the top quintile of renters are poorer than all but the bottom quintile of homeowners. And the median Black or Hispanic person has less than one-tenth the wealth of the median White or Asian person.

If we look worldwide, wealth inequality is even starker. Based on UN University figures, 40% of world wealth is owned by the top 1%; 70% by the top 5%; and 80% by the top 10%. There is less total wealth in the bottom 80% than in the 80-90% decile alone. According to Oxfam, the richest 85 individuals own as much net wealth as the poorest 3.7 billion. They are the 0.000,001%.

If we had an equal distribution of capital ownership, people would be happy when their jobs became obsolete, because it would free them up to do other things (either new jobs, or simply leisure time), while not decreasing their income—because they would be the shareholders receiving those extra profits from higher efficiency. People would be excited to hear about new technologies that might displace their work, especially if those technologies would displace the tedious and difficult parts and leave the creative and fun parts. Losing your job could be the best thing that ever happened to you.

The business cycle would still be a problem; we have good reason not to let recessions happen. But stopping the churn of hiring and firing wouldn’t actually make our society better off; it would keep people in jobs where they don’t belong and prevent us from using our time and labor for its best use.

Perhaps the reason most people don’t even think of this solution is precisely because of the extreme inequality of capital distribution—and the fact that it has more or less always been this way since the dawn of civilization. It doesn’t seem to even occur to most people that capital income is a thing that exists, because they are so far removed from actually having any amount of capital sufficient to generate meaningful income. Perhaps when a robot takes their job, on some level they imagine that the robot is getting paid, when of course it’s the shareholders of the corporations that made the robot and the corporations that are using the robot in place of workers. Or perhaps they imagine that those shareholders actually did so much hard work they deserve to get paid that money for all the hours they spent.

Because pay is for work, isn’t it? The reason you get money is because you’ve earned it by your hard work?

No. This is a lie, told to you by the rich and powerful in order to control you. They know full well that income doesn’t just come from wages—most of their income doesn’t come from wages! Yet this is even built into our language; we say “net worth” and “earnings” rather than “net wealth” and “income”. (Parade magazine has a regular segment called “What People Earn”; it should be called “What People Receive”.) Money is not your just reward for your hard work—at least, not always.

The reason you get money is that this is a useful means of allocating resources in our society. (Remember, money was created by governments for the purpose of facilitating economic transactions. It is not something that occurs in nature.) Wages are one way to do that, but they are far from the only way; they are not even the only way currently in use. As technology advances, we should expect a larger proportion of our income to go to capital—but what we’ve been doing wrong is setting it up so that only a handful of people actually own any capital.

Fix that, and maybe people will finally be able to see that losing your job isn’t such a bad thing; it could even be satisfying, the fulfillment of finally getting something done.

The high cost of frictional unemployment

pnrj critique of neoclassical economics, macroeconomics , , , , , , , , , , , , , , , , ,

Sep 3, JDN 2457635

I had wanted to open this post with an estimate of the number of people in the world, or at least in the US, who are currently between jobs. It turns out that such estimates are essentially nonexistent. The Bureau of Labor Statistics maintains a detailed database of US unemployment; they don’t estimate this number. We have this concept in macroeconomics of frictional unemployment, the unemployment that results from people switching jobs; but nobody seems to have any idea how common it is.

I often hear a ballpark figure of about 4-5%, which is related to a notion that “full employment” should really be about 4-5% unemployment because otherwise we’ll trigger horrible inflation or something. There is almost no evidence for this. In fact, the US unemployment rate has gotten as low as 2.5%, and before that was stable around 3%. This was during the 1950s, the era of the highest income tax rates ever imposed in the United States, a top marginal rate of 92%. Coincidence? Maybe. Obviously there were a lot of other things going on at the time. But it sure does hurt the argument that high income taxes “kill jobs”, don’t you think?

Indeed, it may well be that the rate of frictional unemployment varies all the time, depending on all sorts of different factors. But here’s what we do know: Frictional unemployment is a serious problem, and yet most macroeconomists basically ignore it.

Talk to most macroeconomists about “unemployment”, and they will assume you mean either cyclical unemployment (the unemployment that results from recessions and bad fiscal and monetary policy responses to them), or structural unemployment (the unemployment that results from systematic mismatches between worker skills and business needs). If you specifically mention frictional unemployment, the response is usually that it’s no big deal and there’s nothing we can do about it anyway.

Yet at least when we aren’t in a recession, frictional employment very likely accounts for the majority of unemployment, and thus probably the majority of misery created by unemployment. (Not necessarily, since it probably doesn’t account for much long-term unemployment, which is by far the worst.) And it is quite clear to me that there are things we can do about it—they just might be difficult and/or expensive.

Most of you have probably changed jobs at least once. Many of you have, like me, moved far away to a new place for school or work. Think about how difficult that was. There is the monetary cost, first of all; you need to pay for the travel of course, and then usually leases and paychecks don’t line up properly for a month or two (for some baffling and aggravating reason, UCI won’t actually pay me my paychecks until November, despite demanding rent starting the last week of July!). But even beyond that, you are torn from your social network and forced to build a new one. You have to adapt to living in a new place which may have differences in culture and climate. Bureaucracy often makes it difficult to change over documentation of such as your ID and your driver’s license.

And that’s assuming that you already found a job before you moved, which isn’t always an option. Many people move to new places and start searching for jobs when they arrive, which adds an extra layer of risk and difficulty above and beyond the transition itself.

With all this in mind, the wonder is that anyone is willing to move at all! And this is probably a large part of why people are so averse to losing their jobs even when it is clearly necessary; the frictional unemployment carries enormous real costs. (That and loss aversion, of course.)

What could we do, as a matter of policy, to make such transitions easier?

Well, one thing we could do is expand unemployment insurance, which reduces the cost of losing your job (which, despite the best efforts of Republicans in Congress, we ultimately did do in the Second Depression). We could expand unemployment insurance to cover voluntary quits. Right now, quitting voluntarily makes you forgo all unemployment benefits, which employers pay for in the form of insurance premiums; so an employer is much better off making your life miserable until you quit than they are laying you off. They could also fire you for cause, if they can find a cause (and usually there’s something they could trump up enough to get rid of you, especially if you’re not prepared for the protracted legal battle of a wrongful termination lawsuit). The reasoning of our current system appears to be something like this: Only lazy people ever quit jobs, and why should we protect lazy people? This is utter nonsense and it needs to go. Many states already have no-fault divorce and no-fault auto collision insurance; it’s time for no-fault employment termination.

We could establish a basic income of course; then when you lose your job your income would go down, but to a higher floor where you know you can meet certain basic needs. We could provide subsidized personal loans, similar to the current student loan system, that allow people to bear income gaps without losing their homes or paying exorbitant interest rates on credit cards.

We could use active labor market programs to match people with jobs, or train them with the skills needed for emerging job markets. Denmark has extensive active labor market programs (they call it “flexicurity”), and Denmark’s unemployment rate was 2.4% before the Great Recession, hit a peak of 6.2%, and has now recovered to 4.2%. What Denmark calls a bad year, the US calls a good year—and Greece fantasizes about as something they hope one day to achieve. #ScandinaviaIsBetter once again, and Norway fits this pattern also, though to be fair Sweden’s unemployment rate is basically comparable to the US or even slightly worse (though it’s still nothing like Greece).

Maybe it’s actually all right that we don’t have estimates of the frictional unemployment rate, because the goal really isn’t to reduce the number of people who are unemployed; it’s to reduce the harm caused by unemployment. Most of these interventions would very likely increase the rate frictional unemployment, as people who always wanted to try to find better jobs but could never afford to would now be able to—but they would dramatically reduce the harm caused by that unemployment.

This is a more general principle, actually; it’s why we should basically stop taking seriously this argument that social welfare benefits destroy work incentives. That may well be true; so what? Maximizing work incentives was never supposed to be a goal of public policy, as far as I can tell. Maximizing human welfare is the goal, and the only way a welfare program could reduce work incentives is by making life better for people who aren’t currently working, and thereby reducing the utility gap between working and not working. If your claim is that the social welfare program (and its associated funding mechanism, i.e. taxes, debt, or inflation) would make life sufficiently worse for everyone else that it’s not worth it, then say that (and for some programs that might actually be true). But in and of itself, making life better for people who don’t work is a benefit to society. Your supposed downside is in fact an upside. If there’s a downside, it must be found elsewhere.

Indeed, I think it’s worth pointing out that slavery maximizes work incentives. If you beat or kill people who don’t work, sure enough, everyone works! But that is not even an efficient economy, much less a just society. To be clear, I don’t think most people who say they want to maximize work incentives would actually support slavery, but that is the logical extent of the assertion. (Also, many Libertarians, often the first to make such arguments, do have a really bizarre attitude toward slavery; taxation is slavery, regulation is slavery, conscription is slavery—the last not quite as ridiculous—but actual forced labor… well, that really isn’t so bad, especially if the contract is “voluntary”. Fortunately some Libertarians are not so foolish.) If your primary goal is to make people work as much as possible, slavery would be a highly effective way to achieve that goal. And that really is the direction you’re heading when you say we shouldn’t do anything to help starving children lest their mothers have insufficient incentive to work.

More people not working could have a downside, if it resulted in less overall production of goods. But even in the US, one of the most efficient labor markets in the world, the system of job matching is still so ludicrously inefficient that people have to send out dozens if not hundreds of applications to jobs they barely even want, and there are still 1.4 times as many job seekers as there are openings (at the trough of the Great Recession, the ratio was 6.6 to 1). There’s clearly a lot of space here to improve the matching efficiency, and simply giving people more time to search could make a big difference there. Total output might decrease for a little while during the first set of transitions, but afterward people would be doing jobs they want, jobs they care about, jobs they’re good at—and people are vastly more productive under those circumstances. It’s quite likely that total employment would decrease, but productivity would increase so much that total output increased.

Above all, people would be happier, and that should have been our goal all along.