Wednesday, June 10, 2020

Should the May Decline in Unemployment Have Been a Surprise?

Tyler Cowen admits:
13.3% unemployment rate

That one surprised me, as indeed it did most other economists.  What should I learn from this episode?  After all, labor market adjustment was relatively slow coming out of the 2008 crisis.

My tentative hypothesis is that “matching” is more important than I had thought (and I already thought it was quite important, relative to other macro commentators).  One feature of the current layoffs and rehirings is that the ties between workers and firms apparently were not so severed in the first place.  For most sectors (cruise ships aside, etc.), no “rematches” were required, and so rehirings were accomplished very quickly.  As demand (partially) returned, employers wanted at least some of the old workers back, and workers wanted their old employers back, and then it happened.  “Figuring out where I belong” did not slow down the process very much.

That is good news for the remainder of the recovery, provided the recovery happens soon, and it is at least one factor (not necessarily decisive, of course) militating in favor of a speedier reopening.  “Reopen before the worker-employer ties are lost!”

It also implies that during regular, non-pandemic downturns a lot of the slowness of labor market recovery has to do with matching rather than demand per se, noting that the two interact.
I am surprised by Cowen's surprise more than anything else.

This situation looked obvious to me months ago, long before the actual numbers came out.

I wrote back on March 13 in the EPJ Daily Alert:
With a business cycle downturn, there is slowed or no money being pumped in to support the structure. That is not what is going on now, the Fed is opening the spigots in every way imaginable. There is plenty of money out there.

Thus the situation is fundamentally different from a business cycle downturn. The money is out there. Once the panic subsides and life returns to normal, the money is already there to spend on baseball games, travel and to buy stocks etc. People who have been laid off because of the crisis will for the most part be able to go back to work at their old jobs. A business cycle downturn is much different with prolonged loss of jobs for 6 months or more when people hunt for new jobs. When the panic is over here, the old jobs will, for the most part, be waiting.
This should have been obvious. It just highlights that Keynesians, and I count Cowen amongst them, are working with a very bad model of the economy.

That said, I am now reporting in the ALERT that there could be some speed bumps on the lower unemployment road, given that many unemployed are taking in more on the dole than if they would return to work (at least through the end of July) and some small businesses have gone out of business and workers associated with those firms will have to find new jobs.


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