Meanwhile, in Europe… (16). Employment (and the ECB)

from Merijn Knibbe

Eurostat has published new data on employment (2011, first quarter):

• Employment: up, albeit at a dismal rate (+0,3% year on year; 0,0% quarter on quarter).
• Austerity countries do bad, except for the UK with its floating exchange rate. Latvia and Estonia do quite well when we look at last year, not when we look at a somewhat longer period.
• Large differences between countries  

Except otherwise indicated, the year on year changes mentioned below are consistent with the pattern of quarter on quarter changes; +2% or more can be understood as ‘doing really well’.

• Transition economies: differences.
  • Growth:  Estonia + 6,5%; Latvia +3,0%; Slovakia +2,2%; Poland + 2,1%, Lithuania +1,0.
  • Shrinking:  Romania -2,7%; Slovenia -2,3%. Hungary +0,3 but it experienced a very sharp -1,2% decline in the last quarter.
  • Note that Poland and Slovakia did not experience the extreme 2007-2010 declines of Latvia, Lithuania and Estonia.
• GIPSD austerity/overvalued exchange rate countries: drama.
  • Greece -5,0%; Ireland -3,4% (2010-IV); Spain -1,4%; Portugal -1,6%; Denmark -0,6%. Note that this is the continuation of a trend.
• Greater Germany:up.
  •  Germany +1,4%; Austria +1,6%; Belgium +1,1%;Finland +0,8%; Netherlands +0,4%
• Non-Euro non-overvalued exchange rates: up
  • Sweden +2,8% (!); UK +1,4%; Czech Republic (which I do not count as a transition economy): +0,7%.
• France, Italy
  • France: +0,8; Italy -0,7.

EU unemployment (U-5 concept) is still about 13%. If frictional unemployment is 3%, unemployment has to come down 10%-points.  This means that at the present 0,3% year-on-year employment growth rate, solving unemployment will take till, well, do the math yourself: debts are clearly not the EU’s largest problem.

Methodological notes:

The Eurostat data tell us quite a lot, as they are based upon (see the URL’s below):

• Clear definitions (for instance: the production boundary and the definition of households)
• A ‘real world’ definition of the economy (identifiable real world sectors and relations between sectors)
• And estimates based upon a scientifically rigorous, sound, non-trivial agent based micro economic sample (3.3 million households per quarter)

I’ve also read some recent European Central Bank reports based upon its neo-classical Dynamic Stochastic General Equilibrium ‘New Area Wide Model’. What does these analysises teach us about employment, unemployment and the crisis? Nothing, as these models are not based upon:

• Clear definitions (they use ‘utility’ but does not define this variable (nobody ever does), the production boundary is not clear, there is no clear definition of households, unemployment is defined away, …).
• A ‘real world’ definition of the economy: the ‘representative consumer’ , which represents all households (including jails? including hospitals? Including schools?) clearly is a metaphysical concept, not a scientific one.
• Scientifically rigorous, sound, non-trivial agent based micro economic concepts, like  ‘the unemployed’.

Models like those used by the ECB even explicitely rule out the very possibility of unemployment. It’s hard to believe, I know. But somebody who tries to introduce unemployment in these kind of models is even worth a footnote (note 14 of ECB June 2011): ‘More recently, Gali et al (2010) introduces the notion of unemployment into the model (not the ECB model but the ‘Representative DSGE model’, M.K.) and uses the unemployment data in model estimation’. How do these economists manage to define away unemployment? Easy. The entity caled the ‘representative consumer’ or ‘households’ of these models is never unemployed, it just works a little more or a little less….  According to these models the entity is a kind of what biologists call a ‘super bug’, an ant heap or bee hive or, going to the realms of science fiction, the quintessential  startrek ‘Borg’ society. This ‘entity’ actually likes to be unemployed (or at least to an extent prefers unemployment (called: ‘leisure’) above jobs and income). It chose to work a billion hours less, in 2008/2009. That’s the model the ECB (read: Frank Smets, head of the research department ) is so proud about. The next quote (from the ECB website) has to be read in a literally autistic way (emphasis added):  “Households (i.c. ‘the entity’, M.K.) decide how much to consume, how much to invest and how much to work and at what wage. Firms employ workers and capital and decide how much to produce and at what price to sell their products.” Being fired, not being able to provide for your family and having to sell your house is a choice which increases the ‘utility’ of the ‘entity’ – according to the ECB model. You’re not becoming unemployed, ‘the entity’ is choosing more leisure, in true 1984 newspeak. That’s the model that’s used to advise Trichet…. (in the latest version there is, however, a very fuzzy Phillips curve).

P.S: how do neo-classical economists call a wage cut? “A negative wage mark-up shock”…

http://circa.europa.eu/irc/dsis/employment/info/data/eu_lfs/LFS_MAIN/LFS/LFS_COMPARABILITY.htm

http://epp.eurostat.ec.europa.eu/cache/ITY_SDDS/EN/lmhu_m_esms.htm

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-16062011-AP/EN/2-16062011-AP-EN.PDF

Fahr, S., R. Motto, M. Rostagno, F. Smets and O. Tristani (May 2011), ‘A monetary strategy in good and bad times. Lessons from the recent past.’, European Central Bank working paper series No. 1336.

Vetlov, I., T. Hledik, M. Jonsson, H. Kucsera and M. Pisani (June 2011), ‘Poential output in DSGE models’, European Central Bank working paper series No. 1351.