Home > Uncategorized > Bill Mitchell and Joan Muysken on underemployment, macro-modelling and policy

Bill Mitchell and Joan Muysken on underemployment, macro-modelling and policy

Yesterday, I posted some graphs about underemployment in the EU, mainly to draw people’s attention to this important subject. The main takeaway:

Underemployment is high as well as cyclically sensitive.

And I stated that we should start to incorporate it in macro models. Well, Bill Mitchell and Joan Muysken are already doing this, I discovered. And incorporating underemployment in models turns out to make a large difference. In a prelude to a working paper Mitchell states the next things:

A motivation is that underemployment has become an increasingly significant component of labour underutilisation in many nations over the last two decades. In some nations, such as Australia, the rise in underemployment outstripped the fall in official unemployment in the period leading up to the financial crisis. Underemployment is now higher than unemployment in Australia. There is now excellent data available for underemployment from national statistical agencies, which makes it easier to examine its macroeconomic impacts.

The standard Phillips curve approach predicts a statistically significant, negative coefficient on the official unemployment rate (a proxy for excess demand). That is, when the unemployment rate falls, the labour market is said to tighten and workers are more able to demand money wage increases, which are passed on by firms with price-setting power (via their mark-ups) in the form of accelerating prices.

The “quality” of the unemployment pool is also considered. It is argued that “quality” (in terms of the disciplining capacity of unemployment to restrain worker wage demands) is related to unemployment duration and at some point the long-term unemployed cease to exert any threat to those currently employed.

Consequently, they do not discipline the wage demands of those in work and do not influence inflation. The hidden unemployed are even more distant from the wage setting process. So we might expect that the short-term unemployment is a better excess demand proxy in the inflation adjustment function.

While the short-term unemployed may be proximate enough to the wage setting process to influence price movements, there is another significant and even more proximate source of surplus labour available to employees to condition wage bargaining – the underemployed.

The underemployed represent an untapped pool of potential working hours that can be clearly redistributed among a smaller pool of persons in a relatively costless fashion if employers wish.

It is thus reasonable to hypothesise that the underemployed pose a viable threat to those in full-time work who might be better placed to set the wage norms in the economy.

This argument is consistent with research in the institutionalist literature that shows that wage determination is dominated by insiders (the employed) who set up barriers to isolate themselves from the threat of unemployment. Phillips curve studies have found that within-firm excess demand for labour variables (like the rate of capacity utilisation or rate of overtime) to be more significant in disciplining the wage determination process than external excess demand proxies such as the unemployment rate.

It is plausible that while the short-term unemployed may still pose a more latent threat than the long-term unemployed, the underemployed are also likely to be considered an effective surplus labour pool. In that case we might expect downward pressure on price inflation to emerge from both sources of excess labour

The equations shown are the simple regressions depicted graphically by the solid lines. The graph suggests the negative relationship between inflation and underemployment is stronger than the relationship between inflation and unemployment. More detailed econometric analysis (see later) confirms this to be the case.

(Alas no graphs, I did not manage to copy/cut/past/save the Mitchell graphs. To see these go to the source).

  1. Herb Wiseman
    October 13, 2013 at 1:53 am

    NAIRU is still alive and well? Only now the “U” refers to underemployment not unemployment!

  2. October 13, 2013 at 4:47 am

    The problem with most academic researchers is that they analyze today’s problems using yesterday’s concepts and models, without noticing that there have been fundamental structural changes which make analyses of the past irrelevant. Academics continue to extend incrementally past paradigms which have ceased to be relevant.

    The original Phillips Curve was a bad piece of econometrics, which got progressively worse in quality of analysis over time without anyone abandoning it altogether. The total lack of discipline or genuine respect for data is astonishing. Any data however mined and manipulated to show minimal statistical significance (more than random correlations) is considered empirical discovery, providing basis for speculation on causes and effects.

    Most economic “science” consists of creating theoretical or empirical straw men and then spending an enormous amount of effort in publications knocking them over. Knocking over the Phillips Curve straw man was awarded no less than seven “Nobel” Prizes (viz. Hayek, Friedman, Lucas, Mundell, Prescott, Phelps, Sims and Sargent). The complex and unpredictable shape of the Phillips Curve in the real-world, is conveniently ignored, and theoretical simplicity is maintained.

    Only a misguided belief that there is a universal direct relationship between inflation and unemployment (however defined), can the dual mandate of the US Fed in controlling both inflation and unemployment be justified, (a mission creep from the original lender of last resort mandate). Academician Bernanke and Yellen cannot see that they have failed their mandates in every respect, but claim that they have succeeded “overall” with their “limited” knowledge and monetary tools.

    • Robert Locke
      October 24, 2013 at 3:39 am

      “without noticing that there have been fundamental structural changes which make analyses of the past irrelevant. Academics continue to extend incrementally past paradigms which have ceased to be relevant”

      Lets be careful about the use of language because there is enough ambiguity already. “analyses of he past” should be “analyses done in the past.” The problem is that the analyses were no more relevant in the past than the present. “past paradigm which have ceased to be relevant.” Again, never have been relevant. The problem with economic theory is that it is not reality oriented specific to place and time.

      • October 24, 2013 at 7:33 pm

        Robert, “analyses of the past” is, in my meaning, “analyses done in the past ABOUT THE PAST”; it is not just “analyses done in the past”, valid forever. Economic analysis is contextual. Past economic analysis is always about its “present” (or its past) and not about its “future”, our NOW.

        Economists make the blunder of “ceteras paribus”, which is declared everywhere in their analyses. It is a blunder because everything else is never equal in an evolving human context.

        For example, the many posts on the blog about employment by economists are seriously flawed, because they pass judgement based on past frameworks valid for past circumstances. The interpretation of employment statistics today needs to take into account structural changes such as women entering the work force, evolving welfare to encourage part-time work, mechanization etc.

  3. davetaylor1
    October 23, 2013 at 9:19 am

    Surely, with nearly everything is produced by machines under-employment is inevitable. Isn’t the need to share it out and make incomes independent of it, so that we all have spare time and resources to be able to learn and join in doing the jobs that are not now being done adequately, like looking after, maintaining and improving each other, our homes, our neighbourhoods, our cities and our social infrastructure?

    • merijnknibbe
      October 23, 2013 at 9:45 am

      We did this, in fact, to an extent already (weekends, longer vacations)! My gransfather from fathers side worked in the Amsterdam harbour after the war – his work has been replaced by containers and robots who handle these containers (at least in the Rotterdam harbour). My other grandfather spent around 20 to 30 hours a week to milk the cows and, in the winter, something like that to clean the ‘grup’ in the ‘cow stable’. This work is by now also performed by robots. And there is, as far as I’m concerned, room for more. Government policies are at the moment however very consciously pushing the other way: lower pensions, higher pension ages,more private debts (recently Roel Beetsma, an official economists with a degree of influence in Dutch politics, stated that private debts had to increase to enable the government to wind down..). Think also of the very remarkable decline of productivity in the UK, an epic break which at least over 60 years of post war development and in fact with about 150 years of post industrial revolution development, which starts to be hailed as a solution to our problems (see this rather inconsistent post which more or less claims that lower productivity leads to more production – by definition it doesn’t http://marginalrevolution.com/marginalrevolution/2013/10/britains-curious-economic-recovery.html) Think also of study debts, which are also concsciously meant to force people to work more, after their study, to pay them down (in the phrase of economic models: to force people to smooth their livetime consumption, as the models assume that people do this).

      • davetaylor1
        October 23, 2013 at 10:28 pm

        Meryjn, the key words in what I said was “incomes independent of [employment], so we ALL have spare time and resources so we can learn and join in” etc.

        I say again, incomes in the form of a credit budget not generating monetary debt but requiring what we use to be repaid by working the system to replace what we use, would resolve our education and pension problems and eliminate any need for the parasitic FIRE system; if we didn’t buy what we didn’t need we wouldn’t reach our credit limit but such money as we spend would be accounted for as a negative value. But for sure, “Government policies are at the moment however very consciously pushing the other way: lower pensions, higher pension ages, more private debts …”.

  4. davetaylor1
    October 25, 2013 at 9:22 pm

    That’s an interesting way of putting it, Robert. So my argument is that current economic analyses are applications of an epistemological theory of analysis which is itself an application of a theory of logic based only in time: on the paradigm of causal relations in a family tree constructed on the basis of appearance, not knowing for sure “who the father is”. The new possibility of DNA testing should perhaps have been taken as food for thought.

    The modern theory of real logic is based on spatial circuit paths down which (over time) energy carrying information can flow, two such paths determining the outcome of a third (deduction) or three such paths the outcome of a fourth, such that any two can modify a third to determine the fourth (dynamic control, as in cybernetic navigation) or capture of the four degrees of freedom of motion in space-time (i.e. or localisation of energetic motion as matter to form or transform a [material] whole with its own degrees of freedom, causal family tree and possibility of control).

    Human physiology (with all its circulating breath, blood cells, neural impulses and “words”) forms such a dynamic whole. So does the macro economy; hence the theory that it may be interpreted as a PID control system. [The acronym stands for feedbacks Proportional to present error, Integrals of past error, and Differentials to avoid problems in the foreseeable future].

    In the Capitalist version its four potential outcomes lead not to control of economic equilibrium but to differentiation (change of the previous economic course) if what is seen ahead is failure of the monetary criterion of profitability, with the outcome being to increase profits by reducing costs at whatever cost to the economic goal of a human ecology, and safeguard paper profits by capture of previously circulating money in a chrematistic money-generating FIRE (Finance, Investment and Real Estate) control system. With the addition of fraudulent insurance derivatives to fraudulent money, this has closed itself off in a vicious spiral which, unless the institutions of the FIRE system are replaced very shortly by honest management, money, contract and ownership law, will narrow the 0.1% lording it over the 99.9% to few micro percent of the population (with four degrees of freedom to do what they like to the rest).

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