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Breaking the (Okun’s) Law

January 17, 2011

Should the U.S., Ireland, and Spain be thrown in Jail for breaking a "Law"? Views diverge

One of the very first posts I wrote was a post on Okun’s Law, on the Daily Kos site.  This post shows my lack of writing skills, but it is noteable today for a few reasons.

  1. I wrote this post 2 weeks before Paul Krugman wrote the same post.  His traction was a bit more than mine, but we came up with similar estimates. I was quite shocked when Paul ripped me off – I’ll forgive him this time for his slow thinking, but next time…
  2. Today, Okun’s law appears to be breaking down all over the G-7.

I really like the work over at Worthwhile Canadian Initiative.  They ask consistently good questions, have a moderate and friendly tone, and then have good and productive back and forth as well, even if they do it with one of the shrill.

Brad DeLong has an excellent response to this question.

It used to be that labor productivity was procyclical: businesses would hold onto workers in downturns even when there wasn’t enough for them to do–would put them to work painting the factory–because the match between businesses and their skilled, experienced workers was valuable, and businesses did not want to see their skilled, experienced workers drift away in a temporary downturn and then have to go through the expense and loss of training new ones. We know this because when the overall unemployment rate rose higher, and so there were fewer places for laid-off workers to drift off to, labor productivity became less procyclical.

That era is over. (Well, there is still a very small sign of it in manufacturing.)

These days U.S. labor productivity looks to be countercyclical: firms take advantage of downturns in demand to rationalize operations and increase labor productivity, pleading business necessity in the face of the downturn to their workers.

It seems fairly clear to me that calling this “structural change” is somewhat of a misnomer. Structural change is when workers find jobs in expanding industries. That happens overwhelmingly during booms. For workers to lose jobs in contracting industries and to not find them in expanding industries is not “structural change” but rather something else.

If we were to pump up demand we would pump it up in expanding industries, and so accelerate rather than obstruct labor reallocation.

Why is do I consider this response to be so excellent?  Because I know about 4 business owners that have run businesses for 20 years, and all of them have made this exact change.  They are very quick to lay people off in downturns today, where in the 1990’s, this wasn’t the case.  In the early 1990’s, they would hold onto people for months and months, bleeding themselves of cash.  Now, they laid off probably 50 people between them in just a few weeks in early 2008.

This was a very perceptive observation on Brad’s part – obvious once stated.

Then the second part of the observation could probably be said better, because I think that as stated, this is so close to structural unemployment it would confuse people from Chicago.  I think a better way to say it would be:

For workers to lose jobs in contracting industries and not find work in expanding industries that “should” be able to use these workers is not “structural change” but rather something else.

These is a small distinction but might make it a bit more clear. There is something quite strange going on, and the change makes a huge difference to our economy. It should make a difference to the policy response to cyclical upturns and downturns.

*I am starting to think that this relatively unknown collection of Science Fiction Stories from Michael Swanwick is more important than I ever knew.  In this volume:

  1. A guy makes a fortune on Lawsuit Futures before putting his brain into a TRex!
  2. Some people are fighting to bring about a Khmer Rouge quality future for many people so they can be slightly richer!
  3. A man is offered a new job at a company that animates dead people who work for free, and thinks:

“I thought of the millions who were never going to hold a job again. I thought of how they must hate me – me and my kind – and how helpless they were against us. And yet. There were so many of them, and so few of us. If they were to all rise up at once, they’d be like a human tsunami, irresistible. And if there was so much as a spark of life left in them, then that was exactly what they would do.
That was one possibility. There was one other, and that was that nothing would happen. Nothing at all.

God help me, but I didn’t know which one scared me more.”

If you haven’t see Watson in action, you should.  Expert knowledge just got significantly devalued. I’ll have more on Watson when I get a few minutes.

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