The Shadow Labour Supply And Zero Marginal Product Workers

The Shadow Labour Supply consists of people who are not in the labour force i.e. not actively searching for a job, but still want a job.

This paper by Davig and Mustre-del-Rio explores the flows between the shadow labour supply and the labour market. It is very interesting because a significant rise in discouraged workers is not a good thing by any measure.

From 2008 to 2013, the estimated size of the shadow labour supply has risen from 4.5 million to almost 6.8 million people in the United States.

The shadow labor supply, consisting of individuals who are not actively searching for a job but would like to work, has grown considerably in recent years. Although this group has characteristics similar to those who are officially counted as unemployed, individuals in this group flow into employment at a lower rate. Still, they become employed at a much higher rate than those who indicate they do not want a job. Compared with that group, individuals in the shadow labor force are also more likely to start looking for a job.

Nevertheless, despite the swelling size of the shadow labor supply, a return of these individuals to the labor force in numbers that would considerably affect the unemployment rate appears unlikely. Variation in their job search behavior may influence the future path of the unemployment rate modestly, but not greatly. Although individuals in the shadow labor force do flow back into unemployment, the peak in their return to the labor force typically occurs in the first few post-recession years. The recent, post-recession peak of their flow back into unemployment has already occurred, in mid-2010. While another surge back into the labor force by individuals in the shadow labor supply is possible, historical evidence suggests it is unlikely. Broader variation in flows between the different non-employment categories, however, can have a more substantial impact on the unemployment rate over the next few years.

Arnold Kling speculates that these people realise that they are currently zero marginal product workers, so they might as well stop actively searching for work to preserve their sanity. He adds that people who are still looking for work unsuccessfully “didn’t get the memo”.

It isn’t a particularly nice conclusion, but this is economics not sociology. When you add in the reality that when nominal wages can’t be cut payrolls will, perhaps a lot of people are completely unwilling to re-enter the labour force at a lower wage and would rather go fishing than take a job at a lower wage rate.

I’m looking forward to whatever he writes about the topic when he gets back to it. His upcoming macroeconomics book should be really interesting.

The Value Of Outreach For Group Thinkers

The other day Eric Crampton wrote about how the reaction to a pretty tame economics series on CBC was knee-jerk along the lines of “all economics is right-wing propaganda!”.

He writes about how mainstream economics just tells it like it is – when you do X, you get Y because people respond to incentives and that’s just the way the cookie crumbles.

For non-conformists, we forget how important groupthink is to those who would dismiss economics. For most people all that matters is fitting in. There are also a whole host of environmental factors at play here. New Zealand’s economics education from high school through to university level barely reinforces the basics before moving on.

I have noticed, anecdotally, that those most hostile to economic thinking are:

  • those who have had no interaction with the commercial sector in their entire lives or
  • those who grew up wealthy and feel guilt they feel the need to atone for through being “against the man” or
  • those who are scared of mathematics and would argue 1+1=3 if you believe or feel that’s the answer

For those of us who grew up in a household where your parents run a business and you see the ups and downs of the business cycle at the coalface, there is an acute appreciation for how micro behaviour makes sense.

When you are aware of how things like resource consents delay or cancel investment projects, how the administration costs of employing people create friction in the labour market, why decisions are made at the margin (potential project by potential project) and how credit risk needs to be constantly managed in the face of incentives faced by creditors it isn’t that hard to see how economics explains and helps you understand how the real world works.

This is where I’d like to bring in Arnold Kling’s theory that he wrote about in The Three Languages Of Politics.

His model of political discourse is called the Three-Axes Model. He argues that libertarians, progressives and conservatives “talk past each other” because they are speaking different languages that view the world through completely different lens.

Conservatives emphasise the civilisation-barbarism axis. Libertarians emphasise the freedom-coercion axis. Progressives emphasise the oppressed-oppressor axis.

People who care about different things will demonise different categories of people differently.

Because everyone “picks their sources” depending on which columnists or bloggers reflect their particular worldview, you end up with an ironic situation where economists of different persuasions either ignore or misrepresent mainstream economics to suit their particular narrative. Paul Krugman < Thomas Sowell, for example.

Bringing the dismissal of economics back into the frame, accepting empirically provable concepts that are in conflict with your dominant axis not only threatens your belief system that you have invested in emotionally and socially, if you come around to a different view your view is no longer that of the dominant group.

Many people are weak. They simply do not have the stomach to hold contrarian views that are out of tune with what the dominant group thinks. They are the enablers of populist despots and “mainstream politicians” alike.

This is one of the reasons why words matter as much as the group think about that issue. Try convincing a progressive that the minimum wage oppresses people wanting to negotiate their own wages.

The value of outreach for group thinkers is therefore low because we are asking people to re-examine their worldview. Some people still think the earth is flat.

This is reflected in the median voter theorem, where policies in society will tend towards the preferences of the median voter.

Increasing the level of economic thinking in New Zealand is a pipe dream, sadly.

The dominant political narrative restricts the sources of information many New Zealanders consume when it comes to news and opinion, that’s if they consume anything other than Super 15 and My Kitchen Rules!

The cost of being an informed voter / citizen might be substantially higher than we have thought in the past.

Most people care deeply about what other people think of them. They are obsessed with their in-group status – and political opinions matters a lot in many circles.

Their weaker amygdalas physically panic when they are exposed to differing views.

Think about reading reactions like “I listened to [right wing economist] and my pulse started racing and I had to leave the room!” and wondering “whaaat?”.

As time progresses, I am leaning more and more towards Bryan Caplan’s suggestion to “build a bubble” that insulates you from the world.