Bill Mitchell on the empirical falseness of supply-side unmployment measures

The main underlying idea of supply-side unemployment measures is that the average (potential) employee looks at wages he can earn working, the unemployment support (welfare) that the government is paying, and then decides that the wage is too low to give up on the leisure he enjoys staying unemployed.

The “solution” is therefore to punish people that are unemployed: by reducing overall unemployment support, having unemployed participate in “trainings” and cut their support if they don’t do this often enough, to include stipulations that unemployed have to take on jobs, even only part time or very low-paying (in fact, the government might even subsidize part or all of the wage) or have their unemployment support cut.

The current incarnation of such a scheme in Germany means that as a single, longterm unemployed, without children, or additional income one would receive 374 euros per month (plus a certain amount of rent money) (Calculator – only in German). At this “support” level, 7.5% of Germany’s workforce prefers their leisure, about half of them long-term.

As Mitchell points out, simply by looking at changes in the unemployment rate one can see this assumption to be false:

The familiar territory – the macroeconomy fails to generate enough work because aggregate spending is insufficient to entice firms to employ all those who want to work at the current wage levels and transfer payment arrangements.

Thousands, millions lose their jobs. Remember they were working then not working. No changes have occurred in the system of transfer payments (welfare benefits).

and has a nice empirical graph to go with it:

The UK Office of National Statistics publishes a series VACSO1: Vacancies and unemployment – which allows us to compute the number of unemployed to each vacancy.

Here is the graph of the series from the first-quarter 2001. The series is currently at 5.4 – that is, there are at least five [more] people seeking work than there are unfilled vacancies.


If you think about it, five point four into one doesn’t equal 5.4. Notice also the sudden jump as private spending collapsed as the world entered the global financial crisis. The Tory argument would require a very sudden behavioural change among millions of workers to be a fair account of what has happened.

I am sure psychologists would refute the claim that there was an outbreak of mass laziness in the UK around 2008. The Tories would also have to argue that the laziness spread very quickly throughout the world around then as well.

Current macroeconomic orthodoxy and the policy prescriptions based on it don’t survive the reality test.

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This entry was posted in austerity, belief systems, deficit spending, economic policy, macroeconomics, neo-liberalism, science-based policy. Bookmark the permalink.

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