Unemployed Need Not Apply -THE EXPLANATIONATION

[Jackson]

I was reading about Thomas Sargent who just received the Nobel Prize for Economics. I went to an interview he had last year where he discussed a topic we dealt with yesterday. Unemployment and why employers are not eager to hire the unemployed.

According to Sargent, every person holding a job earns human capital as he works. The longer on the job, the more valuable the emplyees becomes.

Once the employee finds himself out of work, he begins losing capital right away. Sargent discusses how this happened in Europe and now in the US. It is the unexpected result of unemployment benefits leads to higher unemployment.

A person receives more unemployment benefits on a scale of the salary he last had. So when looking for a job, he would not want to take a job that would pay less than what he was receiving from his former workplace. Without realizing it, this unemployed person is losing capital and the delay in getting a job quickly, makes him a less valuable worker.

When a worker has been unemployed 2 or more years, he has lost most of his capital and the unemployment benefits which were meant as a social net have basically acted as a trap. It is especially bad for those over 50.

Thomas Sargent - Nobel Prize Winner
An Interview with Thomas Sargent 2011
An interesting read.

 

[WatertheTree]

End the minimum wage and limit unemployment to 90 days. Make unemployment eligable for everyone that loses a job, by quitting or by being fired.

That would get everyone back to work at true market demands and off of the governments tit.

Its better for a man to work for less then to sit on the couch eating government cheese. As long as the 'free' market is manipulated from every corner then bubble induced prices will not fall, pay scales will not increase, and people will continue to not work.

 

[Sallow]

How about making it impossible to fire an employee after 10 years?

 

[Jackson]

I don't claim to know the answer. Here is part of the explanation. The actual explanation is much longer.

Interview with Thomas Sargent

New York University economist on the state of modern macro, polar models of bank regulation and the problem of persistently high unemployment

: Lars and I believe that when people now become unemployed, they’re taking a more or less permanent hit to their level of human capital, a larger one than they might have received before 1980. We have a theory that people build up human capital while they’re working on a job, but lose human capital when they’re displaced from a job. We think that after 1980, people in Western economies started suffering bigger drops in their human capital at the moment that they suffer a job displacement. Some of the forces leading to this outcome come from various technological changes going under the umbrella name of “globalization.”


Thomas Friedman’s 2005 book The World Is Flat has many stories testifying to such forces.19 By positing increased turbulence in this sense at the microeconomic level, Lars and I have been able both to come to grips with the observations on aggregate unemployment across Europe and the United States and also to explain some of the micro observations collected by Gottschalk and Moffitt and others. So the Great Moderation seems not to have been occurring at the individual level. Just the opposite.

Our theory goes beyond the aggregate unemployment rate and focuses on individuals. Our models have cohorts of aging heterogeneous workers. Our models imply that people in Europe, especially older workers, are suffering from long-term unemployment because of the adverse incentives brought about by a generous social safety net when it interacts with these human capital dynamics. Unfortunately, the data bear this out. In Europe, there has been a long-term unemployment problem especially affecting older workers.
Rolnick: In your model, what type of labor market frictions impede people who want to work from immediately finding a job?

Sargent: The models that we like best for our purposes view unemployment as an “activity” distinct from “work” and “leisure.” We’ve cast the heart of our theory in several contexts, including, for example, search models in the spirit of George Stigler and John McCall,20 where finding a job requires a time-consuming activity of sorting through offers for jobs with various levels of pay and compensating differences; and also Diamond-Mortensen-Pissarides21 matching models where an aggregate matching function imposes a congestion externality on workers’ activity of waiting for a match and firms’ activity of waiting for vacancies to be filled. The same forces come through across a variety of structures, so we think there’s a lot of robustness to our basic story.

Rolnick: OK, so part of your story for lower U.S. unemployment in the past has to be that in the United States, especially for the older workers, the safety net wasn’t as generous. They had to go back and get retrained or whatever; therefore, they chose to be more active in the labor market than their European cousins did.

Sargent: Yes. In a 2003 paper in a volume to honor Edmund S. Phelps, Lars and I exhibited simulations of our model illustrating this.22 What would a typical, say, 50-year-old worker do if he or she loses his or her job and then immediately gets hit by a human capital loss? What differences in behavior would be exhibited by otherwise similar workers, one facing European benefits versus another facing U.S. benefits?

Our simulations exhibit a force that traps the European worker in unemployment. Unemployment compensation systems typically award you compensation that’s linked to your earnings on your last job; those past earnings reflect your past human capital, not your current opportunities or current human capital. That can make collecting unemployment compensation at rates reflecting your past (and now obsolete) human capital more desirable than accepting a job whose earnings reflect a return on your current depreciated level of human capital. This mechanism sets an incentive trap that induces the European worker to withdraw from active labor market participation.

Rolnick: Earlier, you said that the European experience with persistently high unemployment over the last three decades fills you with dread about the prospects for the United States.

Sargent: The prospect that concerns me might sound like I’m hardhearted, but that’s just the opposite of my feelings. What you’ve seen in the recent recession—and it’s quite natural because it’s been so severe—is a tendency of Congress to expand unemployment benefits, over and over again. What Lars and my theory tells us is that if, in the United States, we create a system where unemployment and disability benefits are permanently extended in their generosity and their duration, we will inadvertently put ourselves into the situation that much of Europe has suffered for three decades.

I don’t know enough about politics to predict whether that’s likely to happen. The unfortunate thing is you can see a multiple equilibrium trap here. Low unemployment rates enabled the United States politically to sustain a modest unemployment compensation system. But the politics of the current situation can imply that so long as unemployment is high, we’re going to extend the duration and generosity of benefits. And that extension, done out of the best of motives, is exactly what can lead to the trap of persistently high unemployment. An intriguing thing is that some European countries like Sweden and Denmark are now moving exactly in the opposite direction.

 

[Sallow]

Don't know what?

Companies regularily fire older workers. Or didn't you know that?

People with more years cost more. So to drive down those costs..these people are let go.

Or didn't you know that?

It's whats been happening over the last 13 years or so.

Or didn't you know that?

 

[Jackson]

Don't know what?

Companies regularily fire older workers. Or didn't you know that?

People with more years cost more. So to drive down those costs..these people are let go.

Or didn't you know that?

It's whats been happening over the last 13 years or so.

Or didn't you know that?

I would agree with you, Sallow, but it goes both ways, depending on the industry. An experienced older employee my be invaluable for his experience and contacts as well. He can act as a mentor for yopunger, unexperienced workers. I believe it really depends on the individual - how valuable they make themselves.

 

[ba1614]

Don't know what?

Companies regularily fire older workers. Or didn't you know that?

People with more years cost more. So to drive down those costs..these people are let go.

Or didn't you know that?

It's whats been happening over the last 13 years or so.

Or didn't you know that?

I would agree with you, Sallow, but it goes both ways, depending on the industry. An experienced older employee my be invaluable for his experience and contacts as well. He can act as a mentor for yopunger, unexperienced workers. I believe it really depends on the individual - how valuable they make themselves.

It requires effort to go above and beyond to make oneself more valuable than the next guy. That is why so many require a union to protect their useless ass and eliminate the need to better their value as an employee.

 

[zzzz]

The unemployed are looked at by companies as a flawed group, otherwise they would be employed. In their prior jobs were let go because they were not as valuable as other employees or they were lazy.

This is not true for all of them. Older workers who had been at companies for an extended time cost more because of the higher wages they accrued during their time on the job. Companies let them go because it cheaper to hire younger workers, although they were less experienced they were easily trained resulting in a net gain for the companies. Plus the rise of the temporary employee agencies has brought into the equation a group of workers that the companies do not have to pay unemployment insurance or health insurance and they are on call to work for a day or week or longer. They use them then let them go at will and it costs a lot less.