Wednesday, June 19, 2013

Is "voluntary unemployment" a myth?

I don't know, and this is not my area, but John Aziz is pretty sure that it's a myth under current circumstances. Hopefully I understand his argument. He uses as evidence this chart:

I'm not sure what data we're looking at here, but I assume its definition of Available Labor Supply is something like the CPS workforce definition. Aziz's argument makes a lot of sense in a representative agent or homogenous agent world. If there are 100 job applicants, and there are 50 job openings, then obviously none of the unemployment is voluntary because the job market wouldn't absorb any new job applicants even if they tried. This depends a bit on semantics, but it's good enough for me, to a first approximation.

But consider a model with two types of skillsets, carpentry and blogging. Suppose there are 50 people who count as unemployed (they are "seeking work"): 25 carpenters and 25 bloggers. Now suppose there are 45 job openings. By Aziz's logic, there is no voluntary unemployment. Now I tell you that 25 of the job openings are for carpenters, but only 20 of the carpenters are applying for those jobs while the other 5 carpenters are just "talking to friends about job opportunities" so they count as unemployed people. So it's possible that 5 carpenters are voluntarily unemployed (in anything but a semantic debate). And this argument can extend to geographic heterogeneity or anything else; it's pretty hard to pin down how much it matters.

Is this kind of mismatch happening now? I don't know, but if there is evidence that reservation wages are high or job-search intensity is low, I don't think we can rule it out. If you acknowledge heterogeneity and admit that transfers affect incentives to search for jobs (or start businesses), then I don't think you can be as confident as Aziz. We at least need more evidence about mismatch and other things.

The broader point is that too much aggregation can get you into trouble with some questions. Simply knowing aggregate numbers for job seeking and openings doesn't tell us all we need, since we don't know how many potential openings exist for every kind of worker. Further, we should keep in mind possible general equilibrium effects; what would happen to wages or entrpereneurship if people had a smaller safety net, and how would that affect labor demand? Again, this chart doesn't tell us.

I'm certainly not suggesting that transfers are the dominant driver of the current employment situation, but I think Aziz goes too far in suggesting that there's no involuntary unemployment out there.


  1. Obviously there are some people who have chosen to drop out of the labour force and claim unemployment, even if the financial incentives don't line up. Some people, for example, might be claiming unemployment to spend more time with family, or to work on starting a business. The point is that ceteris paribus, if they decided to return to the labour force they would just be joining the soaring numbers of people out of work who are looking for a job. So for all intents and purposes whether there are an unspecified people on unemployment who have (for whatever reason) chosen not to work is basically irrelevant. Without available jobs, desire for employment cannot be fulfilled.

  2. You're still missing a crucial point about heterogeneity. There could be job openings for people with the skills of the non-searchers, so that if the non-searchers returned to the market they'd find a job. This is true even if aggregate numbers are what we see. And geography can really make the model move.

    Also, you're taking the number of jobs as exogenous. Maybe that's a plausible assumption, but it's far from obvious--particularly given the relationship between unemployment and entrepreneurial decisions.

  3. One reason I'm assuming the supply to basically be homogeneous is that jobs are getting filled, so if more-qualified people who have dropped out of the labour force choose to return, they will just displace someone less qualified. There are a few exceptions here (e.g. entrepreneurs who might create lots of jobs) but these aren't generally people who are actively choosing welfare over working.

    Also I'm taking the labour demand as exogenous because empirically that has been the case. Job creation didn't rise in 2008 and 2009 when this phase of mass unemployment began. Even with government stimulus programs job creation fell.

  4. I'm not sure what you mean by "jobs are getting filled." The Beveridge Curve seems to have shifted out; lots of jobs AREN'T getting filled. See See also I'm not claiming that transfers are the reason for this, but we can't rule it out yet (as Steven Davis notes in that first link).

    Robert Fairlie and others have documented the relationship between unemployment and entrepreneurship--historically, many entrepreneurs have started businesses as a result of unemployment. When jobs are scarce and bills have to be paid, entrepreneurship is sometimes the only option. Higher unemployment benefits makes that less urgent. As I've said before, there are incentives working on margins here. Given the role of new firm formation in net job creation (ie, all net job creation is from new firms), I don't think you can assume labor demand exogeneity. If the cost of doing nothing falls, some people will find it in their interest to do nothing.

    Far from having your certainty, my reading of the job flows literature has made me think there are a lot of weird things going on that we don't really understand.