Universal Basic Income

Universal Basic Income is in the news. Charles Murray wrote a thoughtful piece in the Wall Street Journal Saturday Review. The Swiss overwhelmingly rejected a referendum -- but on a proposal quite different from Murray's.

Murray proposes that "every American citizen age 21 and older would get" $10,000 per year "deposited electronically into a bank account in monthly installments." along with essentially a $3,000 per year health insurance voucher.

The most important part of Murray's proposal: UBI completely replaces

 Social Security, Medicare, Medicaid, food stamps, Supplemental Security Income, housing subsidies, welfare for single women and every other kind of welfare and social-services program, as well as agricultural subsidies and corporate welfare. 

There is a lot to commend this idea. First, it would reduce the dramatic waste in the current system:

Under my UBI plan, the entire bureaucratic apparatus of government social workers would disappear

Moreover, the bulk of government spending now does not go to people who are really poor. SSI and medicare go to old people, many of whom are quite well off. Housing subsidies such as the mortgage interest deduction go to people with big mortgages and big tax rates -- nor poor people. Murray doesn't really emphasize this point, but his proposal is far more progressive than the current transfer system.

Second, it would reduce the very high disincentives of the current system, which traps people.

 Under the current system, taking a job makes you ineligible for many welfare benefits or makes them subject to extremely high marginal tax rates. Under my version of the UBI, taking a job is pure profit with no downside until you reach $30,000—at which point you’re bringing home way too much ($40,000 net) to be deterred from work by the imposition of a surtax.

If I read Murray correctly, he takes away $3,500 of the benefit between $30,000 and $60,000, which is an 11.6% surtax. That applies on top of the Federal 25% marginal rate, 16% payroll tax, state income and payroll taxes and so forth. So not zero, but it is a lot less disincentive than many current programs.

Both considerations place the proposal not in the "perfect world" category, but "how can we do what we're trying to do now a lot more effectively." So, evaluate it as such.

The biggest problem in the argument is the biggest selling point: We trade a check -- even much more than $10,000 -- for complete elimination of everything else.

A UBI will do the good things I claim only if it replaces all other transfer payments and the bureaucracies that oversee them. If the guaranteed income is an add-on to the existing system, it will be as destructive as its critics fear.

There are a lot of these "big trades" on the table, and there should be more. A big carbon tax, in return for complete elimination of all the regulatory nudges and crony energy related subsidies. A VAT in return for complete elimination of income, corporate, estate, and other taxes.  Lots of infrastructure money in return for elimination of Davis-Bacon, endless legal challenges EPA reviews, and other regulations, strict cost-benefit analysis rather than subsidized anachronisms, and so on.

In all these much simpler cases, the deal doesn't get off the ground. Will the "right" allow a big enough carbon tax? Will the "left" really get rid of their subsidies? Will the "right" really allow a large enough VAT? Will the "left" really not just pile all the other taxes back on top? Making these deals is hard enough even when both sides admit the deal would be good.

That case is going to be even harder here. The "left" has not even thought about the deal, let alone agreed in principle with only trust issues remaining! The Swiss referendum [sad aside on media: it was really hard to find the actual text!] made no mention at all of a swap -- it was pure basic income on top of other social programs.

Programs will remain tempting, because a flat basic income is not close to the "perfect world" social insurance system, or even common sense. We want to give more help to people who need more help. That lets us be more generous to those who do need help, and contains moral hazard that people who don't really need help should be working and paying taxes to supply help. Social security goes to old people, because old people objectively are less able to work.  Disability goes to disabled people, because it's harder for them to work as well. Unemployment insurance goes to people who just lost jobs, we know they are more likely to have suffered a bad shock. Insurance payments go to people whose houses have burned down.

These social insurance programs are indeed ineffective, bureaucratically bloated, and do a terrible job of picking who really needs help from who doesn't. But UBI takes a pretty extreme view that the project is completely hopeless, and the Government should do no conditioning at all, other than reported income:

Government agencies are the worst of all mechanisms for dealing with human needs. They are necessarily bound by rules applied uniformly to people who have the same problems on paper but who will respond differently to different forms of help.

Well, ok, but the call of the better world will be hard to resist, and the "left" has far from accepted that bureaucracies are "the worst" mechanism for sorting the needy from the less needy.

There will still be unfortunate people,  they will still need help, and our electorate will still demand programs to help them. Disability: Ok, it's grown  out of control, but some people really are disabled. You're only going to give them $10,000 and turn your back? What about the guy who takes his check, blows it all on a weekend of meth and beer, and now is lying in the gutter, his children homeless?

Some people will still behave irresponsibly and be in need before that deposit arrives, but the UBI will radically change the social framework within which they seek help: Everybody will know that everybody else has an income stream. It will be possible to say to the irresponsible what can’t be said now: “We won’t let you starve before you get your next deposit, but it’s time for you to get your act together. Don’t try to tell us you’re helpless, because we know you aren’t.”

He goes on to extol the virtues of private charities. I don't think our electorate is ready to completely forswear all bureaucratic help. And the vine grows back.

Eliminating housing subsidies? Agricultural subsidies? "Corporate welfare?" These are all great ideas on their own. If we could do that, our economy would be in a lot better shape than it is.

A bit of paternalism is pretty ingrained in social policies, and it isn't necessarily a bad thing. I'm happier paying taxes to support food, clothes and school for the kids, and basic housing than I am to subsidize a beer and meth weekend. Murray already gives in, by restricting the first $3,000 to a health insurance voucher. If he's going to get rid of social security, he should restrict the next $1,000 to a forced savings plan. If we're going to get rid of all housing programs (a great idea) the next $2,000 is a rent/mortgage voucher.

Some paternalism is justified as a pre-commitment. We know if they blow the money, we'll enact social programs to help them after the fact.

There is a deeper problem -- and I have a constructive solution.

In fact, Americans use far fewer benefits than they are eligible for. Many programs have 2% take up rates. Lots of people eligible for medicare, Obamacare subsidies, disability food stamps, welfare, home heating subsidies, and so on and so on all the way down to Palo Alto's income-based parking permit system don't take advantage of the benefits. If each American took advantage of every subsidy and social program to which he or she is entitled, the country would be bankrupt in about 10 minutes.

Why not? Well filling out the forms is a pain. And, more importantly, most people really do use social programs for a limited time. Call it a stubborn independence ethic or some remaining shame to taking assistance, it's there. For now. I fear that welfare states fall apart when the social stigma of taking the money fades.  

For now, both act to limit moral hazard. If it takes a few hours and trips down to an unpleasant bureaucracy to get help, then only people who really need it are likely to ask. If there is some remaining social stigma to getting help, then only people who really need it are likely to ask -- and likely to get out as fast as possible.

Before I get howls of comments on how heartless this view is, remember the objective -- money is limited, we want to use it to help people who really need it, and if we can do something to keep out people who don't, we can be a lot more generous to those who do. If we impose some cost on people to get help, we get them to reveal who really needs it, and we can help them a lot more.

So, my major suggestion -- please, don't automatically send the check to every American the minute they turn 21! Don't send it to my kids! At least, make people go down to a dull and dirty office, stand in line, fill out a long form, and repeat once a year.

Murray limits the benefit once you get to $30,000 per year, introducing a surtax above that level. I've been mulling over a different way to limit benefits and thereby make them more generous: Limit by time, not by income. You can have an additional (say) $10,000 per year, for 5 years, at any point in your life. Most people using social programs do in fact use them to get out of trouble and back on track. Let's make that the expectation. This is not permanent income support, this is help to get out of trouble.  That lets us be more generous, without blowing the budget, and without inducing as large a marginal tax rate to working.

Murray has a lot of speculation on how society will adapt to $10,000 per year check and NO other social programs.

the entire bureaucratic apparatus of government social workers would disappear, but Americans would still possess their historic sympathy and social concern. And the wealth in private hands would be greater than ever before. It is no pipe dream to imagine the restoration, on an unprecedented scale, of a great American tradition of voluntary efforts to meet human needs. 

Trust private charity, with an ever-larger share of income in plutocratic hands? I don't see Bernie Sanders supporters signing on to the deal on that basis.

The known presence of an income stream would transform a wide range of social and personal interactions. The unemployed guy living with his girlfriend will be told that he has to start paying part of the rent or move out, changing the dynamics of their relationship for the better. The guy who does have a low-income job can think about marriage differently if his new family’s income will be at least $35,000 a year instead of just his own earned $15,000.

Or consider the unemployed young man who fathers a child.

Maybe. Maybe not. We do have some experience with corners of societies that live off government checks. We have more experience with places where lots of people don't work. Welfare neighborhoods in the 70s to mid-90s. Europeans living on the dole. Molenbeek. Saudi Arabia. By and large, places where most people live on government checks or large numbers don't work are not happy places.

One can also speculate in contrary ways. Labor markets are more and more regulated and restricted. Well, if people can all get $10,000 from the government, why fight for lower minimum wages for entry level workers, looser occupational restrictions, and so forth?

Murray also confuses the issue, and substantially weakens the case, I think, by wandering off into a soliloquy on once robots do everything there won't be any more jobs.

We are approaching a labor market in which entire trades and professions will be mere shadows of what they once were... the jobs (now numbering 4 million) that taxi drivers and truck drivers will lose when driverless vehicles take over... Advances in 3-D printing and “contour craft” technology will put at risk the jobs of many of the 14 million people now employed in production and construction...The list goes on, and it also includes millions of white-collar jobs formerly thought to be safe..

... as many as 47% of American jobs are at risk...it will need to be possible, within a few decades, for a life well lived in the U.S. not to involve a job as traditionally defined.  

I think this is wrong. Murray acknowledges

I’m familiar with the retort: People have been worried about technology destroying jobs since the Luddites, and they have always been wrong.

Indeed they have. The invention of the tractor was way worse than the invention of the self-driving car for the jobs of about 70% of Americans and about 99% of everybody else at the turn of the 20th century -- farm labor. Murray writes

 It takes a better imagination than mine to come up with new blue-collar occupations that will replace more than a fraction of the jobs..

It's a good thing that every time in the past we did not rely on policy writers' imaginations to come up with occupations for people. I think the answer is pretty clear: services. When robots make everything for us, then people make money supplying services to each other.

But I don't have to be right either.  The deeper problem with this line of argument, common on the left, is how utterly hopeless it is, and how it contradicts Murray's case.

Hopeless: Really? Your vision for the future is that 47% of working-age Americans will be living on a $10,000 per year check from the government, doing nothing? $10,000 is not a lot of money, barely sustaining a life on the margins in pockets of poor rural america. It buys a used trailer and a six pack of beer in a place with little hope.

We can do better than that! And we can. We're talking about a several decade shift in the labor force here. If services are the answer, we need to fix schools and other barriers that keep people from getting the skills needed to earn money in the service economy. We need to fix labor markets to make it easier to hire people in flexible ways and help them to develop skills on the job.

Contradictory: Murray's numbers work out (I think, I haven't checked, but it seems plausible) in today's America. But if half our labor force, and all our retired or non-working people, are living off a government check, the cost would explode past what the country could possibly support with any level of taxation.

So set this apart, recognize that adapting to automation will require getting people skills not sending them checks. And that is going to mean keeping the price system alive. It has to be crystal clear that computer programming pays more than goof off majors.

Bottom line, most of the Murray's social changes and adaptation to robot workforce is, I think, a mistake and a distraction.

A Big Deal -- along with the others -- remains attractive: Substantial cash grants and vouchers in place of many current programs -- could offer substantially more help to people who need it, with far fewer distortions.  In place of middle class subsidies -- housing, college, etc. -- and corporate subsidies even better.  But let's not pretend it will cure social ills, or save us from confronting labor market distortions.

Overtime

Like most economists, I was a bit baffled by the Administration's announcement of stricter overtime rules. The WSJ, and Jonathan Hartley and many others cover the obvious consequences on jobs, business formation and destruction, and so forth. A bit less mentioned, it reduces employee flexibility. If you like working more hours one week and less the next -- perhaps you have child or parent care responsibilities -- you're going to be stuck working an 8 hour day.  It's part of the general regulated ossification of American employment. Or, it could be one more inducement to substitute machines for people or make people independent contractors.

Why are they doing it? The government says it wants more jobs, yet there is no area in American life with larger impediments between a willing employer and employee than labor.

I'm trying to bend over backwards to understand a worldview under which this is a sensible idea.

One possibility. Suppose this is your image of work: Take as given that a person has a job, and the employer will keep that job going, and won't change the terms of the job -- lower the base wage, allow people to take overtime, etc. Take as given that the terms of the job are a pure bilateral negotiation, and there is money somewhere to absorb extra costs without raising prices.  Take as given also that the worker is in a bad negotiating position, and you, the benevolent central department of labor, care about moving this negotiation in the worker's way. Then, a rule like this is a way of strengthening the worker's bargaining position and driving some resources the worker's way out of the employer's pocket.

The counterargument is really just that all this "take as given" is false.

Here is an effort to put that debate in econ 101 supply and demand diagrams. Let's think of the rule as a mandated higher wage, like a minimum wage. The classic analysis says you get fewer jobs.

Now, how might you not lose jobs? The implicit assumption in my paragraph above is that the labor demand curve is vertical. Employers will hire the same number of people for the same hours no matter how much they have to pay. And they'll all stay in business too.

If that were the case, as you see, we wouldn't lose any jobs. There would be some unemployment, as more people want to work or employees want more hours than they can get. But I think advocates of these policies don't mind. Getting people to go out and look for jobs might not be so terrible.

Another way to apply econ 101 is to think of the new rules as new costs imposed on the employer. If employers have to bear more costs, their demand for workers drops down by the amount of the extra costs. Again, adding costs reduces employment. Once again, what are they thinking?

Well, again, suppose that the demand curve is vertical. Now employers simply bear the cost, grumble, but there is no reduction in the number of employees and hours.

Of course, with the assumptions made bare, we can think of lots of reasons that demand curves do slope, employers cut down on workers if they have to pay more direct or indirect costs, and companies don't have infinite funds coming from nowhere. But perhaps by showing implicit assumptions, there is some room for discussion that gets somewhere. I would be interested in hearing serious defenses of the vertical demand curve assumption.

Update: Good grief, Noah,  of course "to understand the true impact of overtime rules, we probably have to include more complicated stuff!" Who ever said otherwise? Isn't "econ 101" clear enough that this is a an extremely simple starting place? And aren't you the guy complaining about excess mathiness,  big black boxes in economics, and people who don't even try to understand the opposing arguments?

Lost Jobs in Recessions

The WSJ has a nice article showing just how hard it has been for many people who lost jobs in the recession to get back to work. Their profile is typical of what I have read and not the typical picture of unemployment: Middle age middle managers. The paper by Steve Davis and Till von Wachter is here. They present the fact largely as a puzzle, which it is:  "losses in the model vary little with aggregate conditions at the time of displacement, unlike the pattern in the data."

As the story makes clear, the problem is really not unemployment. There are lots of jobs available. The jobs just don't pay much, and don't use the specialized skills that the workers have to offer. The problem is wages at the jobs they can get.

This is a very interesting fact, with many less than obvious interpretations. It strikes me as a good teaching moment for economics classes.

The natural interpretation of all correlations is causal: There are  two identical workers in two identical jobs at two identical companies. One worker happened to lose his or her job in a recession, and so faces a harder climb back. We learn about the difference in job markets over time.

Maybe, but the job of being an economist is to recognize lots of other possibilities for a correlation. So the proposed discussion question: what else might this mean? How does taking averages reflect selection rather than cause?

Perhaps not all workers are the same. The conventional view of recessions is that companies fire people from lack of "aggregate demand," or shocks external to the firm.  In good times, companies fire people when those people aren't very good. Then, you would think, being laid off in a recession is better than being laid off in good times. If you're laid off in good times that is a signal you're not a great worker. In a recession, everybody got laid off, so there is not any particular stigma in it.  Well, so much for that story.

A contrary story is that it's easier to get rid of people in a recession. The head of a large business once told me how useful the last recession was, as he could plead financial problems and finally get rid of the army of unionized workers that were playing solitaire all day. Guido Menzio  and Mikhail Golosov have a model that (I think!) formalizes this story. (Menzio was recently in the news, as an idiot fellow passenger thought he was a terrorist because he was doing algebra on a plane, a different sad commentary on contemporary America.)

Perhaps not all businesses are the same. Businesses and occupations that get hit in recessions are different from those that get hit in booms...

Perhaps times are not the same. Recessions are pretty much by definition a time when different sorts of shocks hit the economy. If recession shocks require bigger changes in specialized human capital than normal-times (more idosyncratic shocks), or people to move industries and cities more, then you'll see this pattern.

And so on. Interesting facts, not so obvious interpretations, averages that don't always mean what you think they mean, that's why economics is so fun.

Update:  Steve Davis writes to explain that job losses in recessions are concentrated in specific industries:

You write: "...If recession shocks require bigger changes in specialized human capital than normal-times (more idiosyncratic shocks), or people to move industries and cities more, then you'll see this pattern.” 

Here’s a modified version of this story that has more promise in my view.  First, an under appreciated empirical observation: The cross-industry (cross-firm, cross-establishment) distribution of employment growth rates becomes more negatively skewed in recessionary periods.  Job loss is also concentrated in industries (firms, establishments) that experience relatively large net and gross job destruction rates.  Taken together, these two observations tell us that, in recessions, a larger share of job losers hail from industries (firms, establishments) that get hit by especially large negative shocks (even compared to the average), reducing the value of skills utilized by workers in those industries (firms, establishments).  I conjecture that negative skewness in the cross-occupation distribution of employment growth rates is also counter cyclical, but I don’t recall any direct and convincing evidence on that score. 

Restating, the setting in which job loss occurs worsens for the average job loser in recessions, because (1) overall economic conditions worsen in recessions, AND (2) conditions worsen especially for industries (occupations, etc.) with a disproportionate share of job loss. Many models consider the effects of (1), but there is little work on (2).  Testing hypotheses and building theories related to (2) requires good measures of the individual-specific “setting” in which individual job losses occur.  One of my PhD students, Claudia Macaluso, is making good progress on that front in her dissertation.

William Carrington and Bruce Fallick have a review paper on why earnings fall with job displacement.

Historical Fiction

Steve Williamson has a very nice post "Historical Fiction", rebutting the claim, largely by Paul Krugman, that the late 1970s Keynesian macroeconomics with adaptive expectations was vindicated in describing the Reagan-Volker era disinflation.

The claims were startling, to say the least, as they sharply contradict received wisdom in just about every macro textbook: The Keynesian IS-LM model, whatever its other virtues or faults, failed to predict how quickly inflation would take off in the 1970, as the expectations-adjusted Phillips curve shifted up. It then failed to predict just how quickly inflation would be beaten in the 1980s. It predicted agonizing decades of unemployment. Instead, expectations adjusted down again, the inflation battle ended quickly. The intellectual battle ended with rational expectations and forward-looking models at the center of macroeconomics for 30 years.

Just who said what in memos or opeds 40 years ago is somewhat of a fodder for a big blog debate, which I won't cover here.

Steve posted a graph from an interesting 1980 James Tobin paper simulating what would happen. This is a nicer source than old memos or opeds from the early 1980s warning of impeding doom. Memos and opeds are opinions. Simulations capture models.

The graph:

Source: James Tobin, BPEA. 

I thought it would be more effective to contrast this graph with the actual data, rather than rely on your memories of what happened.

The black lines are the Tobin simulation. The blue lines are what actually happened. (I'm not good enough with photoshop to superimpose the graphs, so I read Tobin's data off his chart.)

The two curves parallel in 81 to 83, with reality moving much faster. But In 1984 it all falls apart. You can see the "Phillips curve shift" in the classic rational expectations story; the booming recovery that followed the 82 recession.

And you can see the crucial Keynesian prediction error: After the monetary tightening is over in 1986, no, we do not need years and years of grinding 10% unemployment.

So, conventional history is, it turns out, right after all. Adaptive-expectations ISLM models and their interpreters were predicting years and years of unemployment to quash inflation, and it didn't happen.


One can debate 1981 to 1983. Here reality followed the general pattern, moving down a Phillips curve. Perhaps that is the success.  But the move was much quicker than Tobin's simulation. One might crow that inflation was conquered much more quickly than Keynesians predicted. But perhaps the actual monetary contraction may have been larger than what Tobin assumed, and assuming a harsher contraction would have sent the economy down the same curve faster?

Tobin describes his simulation thus:

The story is as follows: beginning in 1980:1 the government takes monetary and fiscal measures that gradually reduce the quarterly rate of increase of nominal income, MV. It is reduced in ten years from 12 percent a year to the noninflationary rate of 2 percent a year, the assumed sustainable rate of growth of real GNP. The inertia of inflation is modeled by the average of inflation rates over the preceding eight quarters. The actual inflation rate each quarter is this average plus or minus a term that depends on the unemployment rate, U, relative to the NAIRU, assumed to be 6 percent. This term is (6/U(-1) - 1). It implies a Phillips curve slope of one-sixth a quarter, two-thirds a year at U = 6 and has the usual curvature.

So, I think the answer is no. A faster monetary contraction leaves the 8 quarter lag of inflation in place, so you'll get even bigger unemployment and not much contraction in inflation. If someone else wants to redo Tobin's simulation with the actual 81-83 inflation, that would be interesting. But it is a bit tangential to the central story, 1984. You can also see here in the highlighted passage (my emphasis) how adaptive expectations are crucial to the story.

Now, let's be fair to Tobin. Yes, as quoted by Steve, he came out in favor of "Incomes policies," which used to be a nice euphemism for wage and price controls, but have an even more Orwellian ring these days. But Tobin also wrote, just following this graph,

This is not a prediction! It is a cautionary tale. The simulation is a reference path, against which policymakers must weigh their hunches that the assumed policy, applied resolutely and irrevocably, would bring speedier and less costly results. There are several reasons that disinflation might occur more rapidly. When unemployment remains so high so long, bankruptcies and plant closings, prospective as well as actual, might lead to more precipitous collapse of wage and price patterns than have been experienced in the United States since 1932. Moreover, the very threat of a scenario like figure 6 may induce wage-price behavior that yields a happier outcome. A simulated scenario with rational rather than adaptive expectations of inflation would show speedier disinflation and smaller unemployment cost, to a degree that depends on the duration of contractual inertia, explicit or implicit.

My emphasis. Now, having seen only one big Phillips curve failure in the 1970s, it might be reasonable for policy-oriented people not to jettison their entire theoretical framework in one blow. And this Tobin piece, using adaptive expectations, does incorporate some of the lessons of the 1970s. In the 1960s, Keynesians used a fixed Phillips curve. Friedman famously pointed out that it would not stay fixed -- but even Friedman (1968) had adaptive expectations in mind. For policy purposes it might make sense to integrate over models and adapt slowly, an attitude I just recommended in present circumstances.

You can see Tobin clearly seeing the possibilities, and clearly seeing the conclusions that we would come to after seeing the "happier outcome." That he had not come to these conclusions before the fact is understandable.

That contemporary commentators should forget or obfuscate this history, in an effort to resuscitate a comfortable, politically convenient, but failed economics of their youth, is less forgivable.

I don't want to fully endorse the classic resolution of 1984. Lots of other things changed, in particular deregulation and a big tax reform in the air. There was a lot of new technology. Financial deregulation was kicking in. We may find someday that such "supply side" changes were behind the 1980s boom. And we may jettison or radically reunderstand the Phillips curve, even with the free expectations parameter to play around with. It certainly has fallen apart lately (here, here and many more). But ISLM / adaptive expectations as an eternal truth just doesn't hold up. It really did fail in the 70s, and again in the 80s.

PS: The chart using actual inflation FYI

Phillips art

The Wall Street Journal gets a prize for Art in Economics for their Phillips curve article. Abstract expressionist division, not contemporary realism, alas.

Source: Wall Street Journal

(For the uninitiated: There is supposed to be a stable negatively sloped curve here by which higher inflation comes with lower unemployment. Beyond that correlation, most policy economists read it as cause and effect, higher unemployment begets lower inflation and vice versa. The point of the article is how little reality conforms to that bedrock belief.)

Summers and the nature of policy advice

Larry Summers has a fascinating editorial in the Financial Times titled "Corporate long-termism is no panacea — but it is a start" You really should read the whole thing and come back for commentary.

The three paragraphs in the heart of the editorial are a tour de force:

Businesses will raise wages to a point where the cost is just balanced by the reduced bill for recruiting and motivating workers. At that point, a further increase in wages does not appreciably change their total costs but higher wages certainly makes their workers better off. So there is a strong case for robust minimum wages.

Never mind centuries of supply and demand, centuries of experience with minimum wages and other price controls, or even the current controversies. Never mind that who works for what business and how many do so is a little bit endogenous. Larry has a new and very clever theory about monopsonistic wage setting in the presence of recruitment and motivation costs.  (One that apparently only holds at the lower end of the wage scale where minimum wages bite?)

There is also a strong reason for regulating aspects of pay. Usually competition drives desirable economic arrangements. But not always — especially when there is a risk of a race to the bottom. A company that tries to stand out by offering especially attractive family leave benefits, or job security, or egalitarian wage structures faces the prospect of attracting a disproportionately risk-averse work force. So there is an argument for using mandates to level the playing field.

Once again, bravo. Larry has a new and very clever theory about companies attracting a too-risk-averse pool of workers when they offer benefits instead of pay. (Why are they offering benefits instead of pay? How does this paragraph, in which workers move from job to job, fit with the last one, about bilateral bargaining between fixed workers and firms? ) And an optimal pay mandate can just offset this distortion and give firms the proper pool of risk aversion in its workforce. (Why are excessively risk averse employees a problem? Where do the risk neutral go to work? Why does this not just lead to a different profile of pay vs. benefits to clear the market by risk aversion? )

Profit sharing, too, is an area where there are demonstrable benefits in terms of increased productivity — but an individual company that stands out by offering it may encounter difficulties in recruitment because workers are too risk averse. So there is a strong case for tax incentives to spur profit sharing.

Ditto. "may encounter" is a "strong case" for "tax incentives?"

Ignore my whining, though, and admire the prose. One, two, three, policies enshrined as economic fallacies in Econ 101 classes, are stunningly overturned by clever new theories in three short paragraphs.

My thought: is this really a good way for economists to help to advance public policy?

Larry is the Smartest Guy In The Room.  I mean that, and I mean it as a compliment. I've seen him in action at conferences and other meetings, and his performances are breathtaking. You can see that bravura here. If you have a policy in mind, Larry can come up with three theories to justify it in half an hour, all novel, all clever, all plausible.

But is this at all a service? We all know the elephant (or perhaps I should say donkey) in the room: these are all proposals Mrs. Clinton is making on the campaign trail. For totally different reasons, of course.

Does it really do lots of good to reverse-engineer clever new theories to justify old policies that happen to be politically hot at the moment? And to ignore all the old arguments over those old policies?

Larry's column is great advice for Harvard graduate students. Here are three great thesis topics. Work them out, see if the theory actually holds together (my questions need answering), see if there is a hope of support in the data. You'll have a great thesis.

But is this reverse-engineering great advice for the country?  Shouldn't economics act a little more like science, and keep our clever new ideas as clever new ideas until they have at least some certified theoretical coherence and empirical support?

***

I was also a bit annoyed by the classic missing subject and passive voice that pervades economic policy writing. Just who is going to do all these great things and how?

In this case it's more striking because the prose denies the obvious implicit subject -- the Federal Government. No, it's all going to happen

...not through government actions but through mandates or incentives to change business decision-making." 

And later,

So the idea of achieving reform through altered business behaviour, rather than government programmes, is appealing....

That's important, because of the obvious objection: If these clever new market failures exist, do government bureaucrats have any hope of measuring the distortions well enough to craft a policy? If pay mandates are not about giving one group with political access more pay than others, but to carefully offset an incentive to attract too many high-risk-aversion employees, does the current Department of Labor have a hope of getting it just right?

No, obviously. So it would help a lot if this were not a plea for a hopeless dirigisme. And by using the passive voice with no subject, and explicitly denying this is about government, Larry is trying to overcome that obvious hole in these ideas.

But just who other than the government is going to mandate  mandates, incentivize incentives, alter behaviors, impose "robust minimum wages," enact the "tax incentives to spur profit sharing" do the "regulating aspects of pay" and so on? Is Mrs. Clinton no longer running to be head of a government, but some sort of improve-business do-good website?

The last paragraph attempts an answer

The real need is for a cadre of trusted, tough-minded investors in any given company who can credibly commit to support strong management teams and to provide assurances to a broader investment community so that productive investments are made. Accomplishing that, while maintaining market discipline, is the crucial challenge.

Where is this cadre (!) of investors going to come from? How are they going to take over capital markets? How are these Wise People going to impose the long list of things Larry recommends that only governments can do, including minimum wages, tax incentives, and pay regulation? Just who if not the government is this "crucial challenge" for?

Surely this isn't a pean to the wonders of private equity (Bain capital), who can take companies off the short-termist stock market? Neither Harvard's nor Chicago's endowment managers did a great job of being "long-term" investors, both selling madly in 2008, to say nothing of taking little stance on minimum wages, tax incentives, pay regulation, and so forth. This is not a Summers criticism: university presidents do not direct endowment policy. But if university endowments are not the cadre of wise investors, who are? If (explicitly) not a plea for government intervention, is it a plea for alien invasion or divine intervention?

This part is just inconsistent in a very uncharacteristic way. There is a political discourse that wants to pretend there is a "government lite," that will just nudge us here and there. Unwittingly, perhaps, Larry has set forth quite clearly how empty that promise is.  But why he wants to make this obviously weak argument  I do not understand.

Similarly, the first paragraph is

There are not many wholly new areas to open up in economic policy. But in recent months there has been a wave of innovative proposals directed at improving economic performance in general, and middle-class incomes in particular...

Larry himself provides the counterexample to the idea that corporate short-termism is a "wholly new area"

A generation ago, the Japanese keiretsu system of cross ownership of corporate shares — which insulated corporate managements from share price pressure — was seen as a strength.

What's new, of course, is that the Clinton campaign has taken on these very old ideas.

Why go to such lengths to hide the subject of all these policy entreaties -- very much regulation by the Federal Government -- and pretend the final conclusion is to document a need for a new cadre of investors to parachute in from Mars and take over markets? Why ignore the elephant and donkey in the room when analyzing policy proposals by candidates?

Unemployment insurance and unemployment

"The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle" by Marcus Hagedorn, Iourii Manovskii and Kurt Mitman is making waves. NBER working paper here. Kurt Mitman's webpage has an ungated version of the paper, and a summary of some of the controversy. It's part of a pair, with "Unemployment Benefits and Unemployment in the Great
Recession: The Role of Macro Effects" also including Fatih Karahan.

A critical review by Mike Konczal at the Roosevelt Institute blog, and a more positive review by Patrick Brennan at National Review Online are both interesting. Both are thoughtful reviews that get at facts and methods. Maybe the tone of the economics blogoshpere is improving too. Bob Hall's comments and response on the earlier paper are also worth reading. This is a bit deja-vu from the observation that North Carolina experienced a large drop in unemployment when it cut benefits. My post here, WSJ coverage, and I think there are some papers which google isn't finding fast enough at the moment.

The basic issue: I think it's widely accepted, if sometimes grudgingly, that unemployment insurance increases unemployment. If you pay for anything, you get more of it. People with unemployment insurance can hold out for better jobs, put off moving or other painful adjustments, and so on. The earlier paper points out that there are important general equilibrium effects as well. We should talk about how UI affects labor markets, not just job search.

Quick disclaimer. Let's not jump to "good" and "bad."  Searching too hard and taking awful jobs in the middle of a depression might not be optimal. Pareto-optimal risk sharing with moral hazard looks a lot like unemployment insurance.  Perhaps that disclaimer can settle down the tone of the debate.

But the question remains. How much?  How much does unemployment insurance increase unemployment? And the related macro question, just why did unemployment in the US suddenly drop coincident with sequester and the end of 99 week unemployment benefits?

Method is important. Too much media coverage starts and stops with "study finds unemployment insurance raises unemployment." And then the next day "study finds unemployment insurance crucial to stopping people from dying in gutters." If we focused on the facts, we'd all get along better.

In macro, we always are faced with the problem that interpreting time series, we never know what else changed. Sure, congress lowered unemployment benefits and the economy took off. But lots of other stuff happened. Maybe it's "despite" not "because."

This paper is part of a new breed trying to get around this problem by looking at cross-sectional evidence. Roughly, the evidence in this paper builds on the fact that Congress' action had different effects in different states.

Bob Hall described the strategy compactly:

They compare labor markets with arguably similar conditions apart from the UI benefits regime. In their work, the markets are defined as counties and the similarity arises because they focus on pairs of adjacent counties. The difference in the UI regimes arises because the two counties are in different states and UI benefits are set at the state level and often differ across state boundaries. The research uses a regression-discontinuity design, where the discontinuity is the state boundary and the window is the area of the two adjacent counties....

Table 3 contains the basic number, which the authors digest as

We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points.  In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut.

(Small complaint: economists should not write that jobs "were created," especially economists writing in the search, match and labor-supply tradition, to say nothing of passive voice and strong causal inferences.) I tried to digest the fact a bit more, but stopped here:

Column (1) of Table 3 contains the results of the estimation of the effect of unemployment benefit duration on employment using the baseline specification in Equation (6).

If commenters can vocalize the actual fact in words, fixed effects, controls and all, I'd be grateful.

Bob Hall echoes standard but important complaints.

The issues that arise in evaluating the paper are those for any regression-discontinuity research design: (1) Are there any other sources of discontinuous changes at the designated discontinuity points that might be correlated with the one of interest? (2) Is the window small enough to avoid contamination from differences that do not occur at the discontinuity point but rather elsewhere in the window?

In words, is there something else about state policies that changed at the same time in the "generous" vs. "stingy" states? And are counties really small enough to capture only the border effects?

The deeper issue in evaluating this paper, I think, comes from blowing the county results up to the aggregate, as Bob but it

The authors conclude that, absent the increase in UI benefits, unemployment in 2010 would have been about 3 percentage points lower.

The jump back from micro to macro isn't so easy either.  For example, suppose the expansion came from selling more goods from expanding states to contracting states. Then you'd see a micro effect but no macro effect. I don't think that's the case, but I have been skeptical about other papers jumps from micro to macro. For example, if the Federal government spends a trillion dollars in the desert, and a bunch of businesses move to sell donuts to the construction workers, you get a nice stimulus. That doesn't mean stimulus works for the economy as a whole.

This is a small nitpick. The basic fact is interesting, and I think a lot harder to dismiss.

It's interesting that so much of the pushback, both from Bob and from Mike Konczal's critical review comes down to theory, not the fact.

Update: Wednesday's Wall Street Journal covers the paper. The WSJ spends more time on the macro question, the claim that unemployment insurance actually boosts the economy via stimulus. 

Lazear on Labor

Ed Lazear has a very nice short column, Job Turnover Data Show Lots Of Churning, Little Job Creation on Investor's Business Daily.

Modern labor economists see employment and unemployment as a search and matching process with a lot of churn. The popular impression, echoed in most media discussion, is that there is a fixed number of jobs, and people just wait around for more jobs to be "created." That's what it may feel like to an individual, but that's not how the economy works. Lazear's column puts in one very short space some of the better ways to think about unemployment.

The central fact of labor markets is huge churn, not a fixed number of lifelong jobs:

During the typical month when jobs increase by about 100,000, 5.1 million workers are hired and five million separate from their jobs, resulting in a net change of +100,000 jobs. 

During the worst month of the most recent recession (June 2009), when net jobs decreased by almost half a million, there were still 3.6 million hires. 

The labor market is dynamic; even through sluggish periods, there is tremendous churn.

Recessions are not what you think:

One might expect that hires would fall and separations would rise in recessions.
Not so. There are lots of hires in booms but also a large number of separations; and in recessions there are lower levels of both hiring and separations... 

Workers quit to move to better jobs when the labor market is strong. 

...as was typical in this and previous recessions, separations declined along with hiring. Because hires are so large and variable, net job creation depends in large part on what happens to hires.

Work and Jail

I have run in to some interesting recent readings on the nexus between work, or the lack thereof, jail and drugs.  In case you didn't know, the numbers are staggering.

The table below, from The Prison Boom and the Lack of Black Progress since Smith and Welch by Derek Neal and Armin Rick, gives the fraction of black male high school dropouts employed, and below that the fraction that are institutionalized -- mostly in jail.

So, bottom left, in the last census, 19.2% of 20-24 year olds were employed, and 26.4 (!) percent were in jail. Read up, and it was not always thus. Of the cohort born in the 1930s, at the same age, 68% were employed and 6.7% were in jail -- in a society and criminal justice system that was, whatever our current faults, much more overtly racist. The numbers for older men are just as shocking if you haven't see these before.

Source: Derek Neal and Armin Rick

And really, that's just the surface.  Neal and Rick's numbers don't count the numbers on parole or otherwise under the supervision of the criminal justice system. And their numbers miss one of the biggest effects: In America, once you have a criminal record -- often even just an arrest record -- getting a job becomes next to impossible. So the flow through the criminal justice system, as much as the numbers currently in jail, is an important measure of its effect.

Becky Petit's Invisible Men: Mass Incarceration and the Myth of Black Progress calculates the cumulative risk of imprisonment, which gives a sense of how many people are in this quandary.

Source: Becky Petit

The less than high school black number rose from 14.7% in 1979 to an astounding 68% in the latest numbers. Nearly 70 percent of black high school dropouts will spend time in jail. And pretty much end their hopes for conventional employment as a result. (Things aren't great for white high school dropouts either, and 21% for black high school graduates is pretty shocking too.)

The main point of Petit's book, and echoed by Neal and Rick, is that institutionalized people don't show up in standard statistics. Employment to all population is, for minority men, even worse than the standard ratio of employment to non-institutionalized population. Which was already amazingly low.

What happened? That's the main point of Neal and Rick's paper. Crime got a lot better. Arrests are down. Neal and Rick's  main answer is that the criminal justice system got a lot harsher: arrests turned in to jail more often, and jail sentences got a lot longer.

A move toward more punitive treatment of arrested offenders drove prison growth in recent decades, and this trend is evident among arrested offenders in every major crime category. Changes in the severity of corrections policies have had a much larger impact on black communities than white communities because arrest rates have historically been much greater for blacks than whites.

But while this explains a larger number in jail, it doesn't square with Petit's finding of the much larger numbers that flow through jail. If the same number get arrested and spend more time in jail, then we would not see larger numbers with lifetime experience of jail.

The other suspect is the war on drugs. Neal and Rick do find that the rise in Federal incarceration is mostly about drugs:

Between 1989 and 2010, the stock of federal prisoners increased by more than 250 percent....The Federal prison population increased by about 150,000 persons over this period, [that's at any one time, so the total number of people flowing through the system is much larger] and increases for only three offense categories account for almost 90 percent of this growth...  drug offenses...81,000, weapons and immigration offenses...29,000 and 21,000 respectively...The stock of prisoners serving time for traditional violent and property crimes remained roughly constant..

 And overall, it is the one category where arrests rose:

Source: Neal and Rick 

So, perhaps the war on drugs disproportionately affects less-educated minorities, reconciling Petit with Neal and Rick.

What is life like for people in this situation? How do they even get by with so few working?  I've been reading the reviews, both positive and negative, of Alice Goffman's On the Run. (The book itself is still on the in pile alas.) But it seems like it gives us a useful sense of the broader impact of the war on drugs and the intense association with the criminal justice system.

Interesting observations fro the New York Times Review:

The war on drugs mangled, if not destroyed, any trust between residents of distressed urban communities and the authorities. 

Young men like Mike often avoid girlfriends for fear that the women, for their own reasons, might turn their paramours in

Yes, if the cops are looking for you, the first thing they'll do is ask a girlfriend, or if there was one, a wife, and the cops can be pretty persuasive. Then we wonder why marriage is rare and men are absent in their children's lives.

As you can see, I'm attracted to the view that a lot of this disaster is one more awful consequence of the pointless war on drugs.

The New York Times has come out in an excellent series of editorials for Marijuana legalization. The column on this prohibition's effects on minorities "The injustice of Marijuana Arrests"

America’s four-decade war on drugs is responsible for many casualties, but the criminalization of marijuana has been perhaps the most destructive part of that war. The toll can be measured in dollars — billions of which are thrown away each year in the aggressive enforcement of pointless laws. It can be measured in years — whether wasted behind bars or stolen from a child who grows up fatherless. And it can be measured in lives — those damaged if not destroyed by the shockingly harsh consequences that can follow even the most minor offenses.

Sometimes, unintended consequences reach farther than one would imagine.

Update: 

Some of the comments speculated that the high school dropout rate decreased, so we're just seeing a smaller sample of really pathological people.  Here's Petit's graph of the dropout rate. It is smaller, but that doesn't strike me as enough to account for the rather dramatic changes in employment, incarceration, or flow through the criminal justice system.

Source: Becky Petit

Weekend Labor Markets

This weekend produced several interesting readings on the state of labor markets.

1. Glenn Hubbard,

In the Wall Street Journal on "The Unemployment Puzzle: Where Have All the Workers Gone?" Like economists of all stripes, the fact that the unemployment rate -- the fraction of people looking for jobs -- is down masks the deeper problem, that so many people are not working and not looking.

Glenn sets out well the basic question:

In one view, this decline is just a temporary, cyclical result of the Great Recession. If so, we should expect workers to come back as the economy continues to expand...But structural changes are plainly at work too, ...

This part of the drop is a function of various factors, including simple discouragement, poor work incentives created by public policies, inadequate schooling and training, and a greater propensity to seek disability insurance.

Glenn advocates a mix of serious fundamental get-out-of-the-way reforms, with some puzzlingly dirigiste tinkering.

A sustained infrastructure program, rather than a temporary one for "shovel-ready" projects, would have provided more reassurance of longer-term demand. 

Infrastructure is fine for building infrastructure. But the idea that unemployed middle-age mortgage brokers are going to get jobs running a backhoe on a road crew, or the idea that building roads creates "demand," are both a bit far fetched.

...far-reaching tax reform 

is a good idea, but not because it

could have provided both a near-term fillip from front-loaded business tax cuts and a credible prospect for future growth.

Again, Keynesian thinking at least in the former. Economists should focus on margins, which is what drives the growth.

What we need most urgently is to rethink the federal government's wider role in the labor market. 

Now we're getting somewhere, and it is a great point that

The fierce debate now going on in Washington about extending unemployment insurance and raising the minimum wage largely ignores these issues. Such policies may affect the incomes of some Americans, but they won't do much to expand opportunity and bring more people back into the labor force.

But then Glenn goes back to  tweaking the earned income tax credit, and trying to fix social security disability by providing

the employers of disabled employees with tax advantages for retraining them to remain on the job.

Really, long term growth and employment doesn't come from more clever little tax credits. That contradicts "far reaching tax reform."

Noting 80 - 100% marginal tax rates,

A broader tax reform that gives a more uniform subsidy for health insurance and health spending 

is a great idea. But then

complement traditional unemployment insurance with block grants to states to support training and workforce development through community colleges and vocational education...Advancing and updating skills are also important: Funds currently in other federal training programs could be repurposed to provide this pro-work support.

There's that regulatory passive and layers more tweaking.

Overall, I rate it a nice essay on the problem, but I'd rather see more detailed analysis of just what causes the problem and get-out-of-the-way solutions before we start passing around more tax credits here and there.

2. Tyler Cowen and driverless cars. 

Tyler Cowen chipped in with a Marginal Revolution blog post, and a New York Times Column. The Times column starts on the same track,

employment opportunities remain stubbornly low in the United States, 

But Tyler is after something other than social program disincentives. Rather

giving new prominence to the old notion that automation throws people out of work.

For example

Driverless vehicles and drone aircraft are no longer science fiction, and over time, they may eliminate millions of transportation jobs

Why is this more of a problem than, say, the steam engine?  Why has

history ... seen many waves of innovation and automation, and yet as recently as 2000, the rate of unemployment was a mere 4 percent.[?]

His worry,

Labor markets just aren’t as flexible these days for workers,...Many of the new jobs today are in health care and education, where specialized training and study are required.

...young men...with especially restless temperaments.. aren’t always well-suited to the new class of service jobs, like greeting customers or taking care of the aged, which require much discipline or sometimes even a subordination of will. 

Many expanding economic sectors are not very labor-intensive, be they tech fields like online retailing or even new mining and extraction industries. That means it’s harder for the rate of job creation to keep up with the rate of job destruction, because a given amount of economic growth isn’t bringing as many jobs

Here, I think Tyler is making a classic mistake. Over the long run -- the kind of long run where technical change like driverless cars and a shift to high education service jobs matters -- changing demand for worker characteristics changes wages, it does not cause unemployment or joblessness.  "Jobs" are not created in fixed quantity independent of wages, skills are not acquired in fixed quantity independent of wages, and wages are not sticky forever.  This is econ 101 supply and demand.

Driverless cars and trucks will, after the 20 years they take to become introduced, lower wages of people who formerly drove cabs and trucks -- a serious worry -- but that does not mean millions of people sitting idle on the street corner.  Low wages alone do not cause people to stop working unless they have an alternative. Tyler knows that, I know that he knows that, and he's writing for a popular audience. But I don't think using popular fallacies to communicate is a good idea.

Like Glenn, when he gets back to the immediate problem, he spies what I think is a central part of the story. The recession led to long term joblessness because inefficiencies, private and government induced, that are papered over in a boom, make it harder for the economy to recover.  One of many little inflexibilities.

The law is yet another source of labor market inflexibility: The number of jobs covered by occupational licensing continues to rise and is almost one-third of the work force. We don’t need such laws for, say, barbers or interior designers, 

i.e. making it harder for an unemployed taxi driver to take up such professions. "Sticky" wages, "inflexible" labor markets are not mysterious, they are born of a thousand grains of sand in the gears.

3. Temporary workers

Damian Paletta at the  Wall Street Journal Monday notices the surge in temporary employees.

Why is there even a distinction between "temporary" and "permanent" employees? Aren't we all "temporary employees?"

Well, no. We have a system, largely because of labor laws, where there is a large fixed cost to hire "permanent" employees. Obamacare has added substantially to that. So you only hire a "permanent" employee if it overcomes the fixed costs to doing so.

The worry is that we are more and more bifurcating into a market with a small number of "permanent," high benefit, high hours worked, career jobs, and a larger group of "temporary" employees, limited in hours and incidentally limited in career and human capital development.

4. Claudia Goldin and women.

High fixed costs, and the need to work employees long hours to recoup them, is particularly a problem for women. Claudia Goldin's Presidential address is out at the American Economic Review and it's a must-read.  It deserves its own blog post (and will get one). One big point from the abstract

The gender gap in pay  would be considerably reduced and might vanish altogether if firms did not have an incentive to disproportionately reward individuals who labored long hours and worked particular hours. Such change has taken off in various sectors, such as technology, science, and health, but is less apparent in the corporate, financial, and legal worlds.

As our president will apparently be championing "wage equity" this week, the speech is particularly topical.

5.  Casey Mulligan

His latest, The ACA: Some Unpleasant Welfare Arithmetic adds up some more disincentives

Under the Affordable Care Act, between six and eleven million workers would increase their disposable income by cutting their weekly work hours. About half of them would primarily do so by making themselves eligible for the ACA's federal assistance with health insurance premiums and out-of-pocket health costs, despite the fact that subsidized workers are not able to pay health premiums with pre-tax dollars. The remainder would do so primarily by relieving their employers from penalties, or the threat of penalties, pursuant to the ACA's employer mandate. Women, especially those who are not married, are more likely than men to have their short-term financial reward to full-time work eliminated by the ACA. Additional workers, beyond the six to eleven million, could increase their disposable income by using reduced hours to climb one of the "cliffs" that are part of the ACA's mapping from household income to federal assistance.

Note that some of these also push people to the part-time world.

6. Long term unemployed and Phillips curve

Tyler brings up the very interesting Kruger, Cramer and Cho paper, Are the Long-Term Unemployed on the Margins of the Labor Market? which I've been meaning to blog about.

Their basic view is that long-term unemplyed are not on the margins, which means that monetary policy -- "demand" -- really can't help them much (my conclusion, they're a bit softer).  One piece of evidence, Phillips curves (Figure 1) fit better with short-term unemployment.

Their conclusion gives interesting meat to "margins"

Although the long-term unemployed have about a one in ten chance of moving into employment in any given month, when they do return to work their new jobs are often transitory.  After 15 months, the long-term unemployed are more than twice as likely to have withdrawn  from the labor force than to have settled into steady, full-time employment. And when they exit  the labor force, the long-term unemployed tend to say that they no longer want a job, suggesting  that many labor force exits could be enduring. The subset of the long-term unemployed who do  regain employment tend to return to jobs in the same occupations and industries from which they  were displaced, suggesting that significant challenges exist for helping the long-term unemployed to transition to growing sectors of the economy. A stronger macroeconomy helps the long-term unemployed in part because it raises demand in their previous sectors. But even in  good times, the long-term unemployed are often on the margins of the labor market, with  diminished employment prospects and relatively high labor force withdrawal rates

If you otherwise read the New York Times you think all macro is preordained by political persuasion. This interesting paper is a great counterexample.

7. Discrimination against the long-term unemployed

Cowen again, in the blog post, brings up the issue. Are employers "discriminating" against long-term unemployed? We know they are less likely to hire them. I asked an employer once, who said he didn't want to hire "people on the way down," an interesting comment.  Kruger, Cramer and Cho think of the long-term unemployed as "unlucky". Tyler:

I think attributing all of this labor market misfortune to luck is unlikely...

There were two classes of workers fired in the great liquidity shortage of 2008-2010.  The first were those revealed to be not very productive or bad for firm morale.  They skew male rather than female, and young rather than old.  The second affected class were workers who simply happened to be doing the wrong thing for shrinking firms: “sorry Joe, we’re not going to be starting a new advertising campaign this year.  We’re letting you go.”

The two groups have ended up lumped together and indeed a superficial glance at their resumes may suggest — for reemployment purposes — that they are observationally equivalent.  This discriminatory outcome is unfair, and it is also inefficient, because some perfectly good workers cannot find suitable jobs.  Still, this form of discrimination gets imposed on the second class of workers only because there really are a large number of workers who fall into the first category.

In short, is it discriminatory and "unfair" to use conditional probability and Bayes' theorem, in a world where information is expensive? A deep question.