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Home Publications Blogs Beat the Press Casey Mulligan Unloads the Kitchen Sink

Casey Mulligan Unloads the Kitchen Sink

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Wednesday, 17 August 2011 05:20

Casey Mulligan has been putting on a one-economist show in his NYT blog, arguing week and after week that the downturn is really a supply story and has little or nothing to do with the plunge in demand created by the collapse of the housing bubble. This week he sums up his evidence.

Most of it has to do with the fact that even in the downturn employers will hire better qualified workers over less qualified workers and lower paid workers over higher paid workers. He infers from this fact that if all workers were better qualified and/or lower paid that we would not have an unemployment problem.

This is more than a bit of a bizarre argument since it is producing evidence that does not in any way contradict anything argued by Keynes or his followers. Does anyone believe that employers stop caring about workers' qualifications in a downturn? Or, alternatively, that they stop caring about wages?

Keynes' point is that changes that could increase any individual's chance of employment (e.g. improved education or accepting lower wages) would not necessarily lead to lower unemployment in general. In other words, if all workers could instantly get a college education then the main result would be that we would have more unemployed college grads.

This story would seem to be supported by two basic facts about the downturn. First, huge numbers of people who had the skills and desire to work before the collapse of the housing bubble, now do not have jobs. It seems difficult to explain the sudden loss of millions of jobs as a supply side phenomenon. The other basic fact is that unemployment has risen across the board in every major skills grouping and geographical location. This is very hard to explain as a supply side story.

I can't imagine that any Keynesian would have thought that skills don't matter for an individual's employability nor that the wages they expect affects their likelihood of finding a job. So the evidence that Mulligan finds along these lines hardly seems much of refutation of Keynes.

Comments (20)Add Comment
Excess Supply of Unskilled Workers is Normal Under NRFU, Low-rated comment [Show]
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written by skeptonomist, August 17, 2011 11:00
If the current recession is a supply-side phenomenon, then supply side remedies - action by the Fed in providing money to banks, which theoretically loan it to businesses - could have been predicted to have little effect. Unless the supply side has suddenly become more important, further supply-side action by the Fed will be even more futile.
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written by skeptonomist, August 17, 2011 11:36
I should have said "if the current recession is a demand-side phenomenon"
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written by S. D. Jeffries, August 17, 2011 11:43
My business has gone from 22 employees in July of 2008 to 3 employees today. If there is any supply problem here, it is a problem with the supply of customers.

Such foolishness. Does anyone actually accept Mulligan's arguments who isn't either blinded by ideology or on the payroll of someone whose income depends on our leaders' believing them? If so, that's astonishing.
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written by diesel, August 17, 2011 12:15
I'm sorry Mr. Mulligan, I would like to believe you but I find that to do so I would have to disbelieve too many other things which I know to be true.

If America suffers from a shortage of qualified workers, then they are not being trained properly. Their not being properly trained means the education system is faulty. A faulty education system can be blamed on union teachers. Unions persist because of special central government pampering. Government pampering is a legacy of Roosevelt's misdirected meddling in the free and fair markets on behalf of unqualified workers.

From the above we must conclude that the nation's unemployed, unqualified workers run the show and not wall-street bankers, corporate officers, the wealthy inheritors, rich entrepreneurs et al. To be truly powerful, to be a really big cog pulling the strings behind the scenes, one should become an unemployed, destitute person who picks up their weekly food at the local food bank; one who has lost faith in their own ability to influence their future--which the evidence suggests is leading to higher than normal rates of suicide.

Likely, it will come as news to the wealthy themselves that they are, in reality, victims. Strange that those whom we conventionally regard as the truly powerful should be so deluded. Lucky they are that they have the likes of Mr. Mulligan to shine a light on their plight.
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written by jerry, August 17, 2011 12:15
In his article he says that jobs creation in Texas can be explained by higher supply of workers. Here is a comparison between Texas and the nation for the past year:
http://www.bls.gov/ro6/fax/ces_tx_us_current.htm

Texas added 26,000 construction jobs in the past year while the nation added 13,000. This means the nation shed 13,000 construction jobs while Texas added 26,000. Texas has 8% of the nation's population. That can't be explained by low wages and higher qualifications. It's because Texas did not have a real estate boom since the banks were more heavily regulated.

You can also see from that comparison that while the public sector lost 652,000 jobs, Texas lost only 20,000. With 8% of the population they lost 3% of the public sector jobs. The public sector shrank at a slower rate in Texas. The difference is that Texas accounts for 21% of the payroll jobs created in the past year but only 13% of the private sector jobs created in the past year.

Texas clearly proves Mulligan is wrong.
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written by jerry, August 17, 2011 12:17
I underlined that url rather than linked it:

http://www.bls.gov/ro6/fax/ces_tx_us_current.htm
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written by jerry, August 17, 2011 12:21
screwed up something else (sorry)

"This means the nation shed 13,000 construction jobs while Texas added 26,000."

I meant this means that the other 49 states shed 13,000 construction jobs while Texas added 26000.
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written by Nick, August 17, 2011 12:42
The mulligan argument is great for draining noodles.

As an under employed person due to company bankruptcy, I find Mulligan's argument insulting. Unemployment benefits are miniscule and pale in comparison to my previous pay. I feel to see how Mr. Mulligan could assume that this was the the choice I made for my family.
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written by wallyfurthermore, August 17, 2011 1:51
How do guys like Mulligan ever get college degrees?
The guy is, apparently, a complete fool.
Where are the rising salaries
written by Lord, August 17, 2011 3:02
if it were supply side?
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written by howard, August 17, 2011 3:39
you know, the late '90s, when we hit an all-time high in employment to working-age population ratio, weren't that long ago: somehow i'm supposed to believe that the economy has changed so much in the past 10 years that people who had the skills to get jobs then don't have them now?

as s.d. jeffries implies above, jobs aren't a favor given out to the well-qualified or the low paid. employers add jobs when the marginal value of the worker's product exceeds the marginal cost, and when demand is low, that marginal value is non-existent, so why add?

and as lord correctly notes, if we have a shortage of appropriate skills, then wages should be going up somewhere, anywhere!

in short, mulligan is a moron.
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written by JAY, August 17, 2011 9:19
Off topic: on one hand some people claim that low US interest rates encourage corporations to take capital out of US to emerging economies. On the other hand, the same people claim that corporations already have huge piles of uninvested cash sitting outside US (which they would bring to US if taxes were lowered). Can you please tell us which one is true and to what degree? Thanks!
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written by Arin Dube, August 18, 2011 8:12
Good points. I made a similar observation last month in a blog post here http://economistsview.typepad....-jobs.html
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written by liberal, August 18, 2011 10:33
S. D. Jeffries wrote,
Does anyone actually accept Mulligan's arguments who isn't either blinded by ideology or on the payroll of someone whose income depends on our leaders' believing them?


It's not "or", it's "and". Economists like Mulligan have the ideology they do because it pays very well, even if the payments are not direct all the time.

As economists rightly point out (except when applying theory to themselves), incentives matter.
Unqualified workers?
written by RM, August 18, 2011 1:11
The mess we are in may have the housing bubble and financial shenanigans as its immediate cause, but the root cause is debt. Consumers were living on borrowed money and home 're-fi's. Why? Because over the last 10 years more wealth has accumulated in fewer hands.

Bailing out the banks did nothing because it simply made money available to borrow at low rates. Useless, and we are seeing a second round of bank insolvency.

The current situation however is perfect if you are rich. Poor people are competing for work. Not competing hard enough? Get rid of unions - soon those 'front-line workers' will be nothing more than slaves. Taxes too high? Start a PAC and hire some politicians. Dollar being deflated? Buy gold, oil and farmland.

This situation will not change worldwide until income is forcibly re-distributed.
To Jay
written by RM, August 18, 2011 1:27
written by JAY, August 17, 2011 8:19 PM
Off topic: on one hand some people claim that low US interest rates encourage corporations to take capital out of US to emerging economies. On the other hand, the same people claim that corporations already have huge piles of uninvested cash sitting outside US (which they would bring to US if taxes were lowered). Can you please tell us which one is true and to what degree? Thanks!



Well, both are part of the same thing. Corporations kept non-US profits outside of the US in places like Ireland because of favourable tax policy. (Now Ireland is crying that there will be financial services taxes in the EU) Note that these are PROFITS, cash that the corporation owns. Problem is, it is risky (currency, political) to keep all your money outside of the US when the owners/managers are inside the US. But to repatriate would mean paying the taxes they owed in the first place.

The other part of your question involves borrowing money. As rates are effectively 0% in the US and Japan, speculators borrow money in these countries, and speculate with it (usually in currencies and commodities) in countries that are heavy producers like Australia and to a lesser extent Canada. This raises the value to local currencies so while commodities markets and exchange rates are rising, you can make profits from 'free' borrowed money. (at least the rich can)

Note that the original government policy of low interest rates was intended to increase production and consumption at home, not fuel the carry trade, but is based on the misguided premise that people need to borrow more. People cannot borrow more because they are tapped out.

Since capitalism is based on competition to acquire as much as possible (greed), there must be sufficient countermanding actions to ensure that one person does not end up owning everything, thus ending the game. Hopefully we smart, rich people will restore the balance before the starving, angry hordes restore it for us.
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written by Jerry Jones, August 18, 2011 7:12
Another University of Chicago economist demonstrates an intellect one might associate with "General Ursus" of Beneath The Planet Of The Apes."
RM
written by JAY, August 18, 2011 9:13
Thanks for the explanation.
Mulligan's research not refuted by anecdote
written by Brian Dell, August 21, 2011 11:24
First, huge numbers of people who had the skills and desire to work before the collapse of the housing bubble, now do not have jobs. It seems difficult to explain the sudden loss of millions of jobs as a supply side phenomenon.


Is it really so difficult and implausible to suggest that America's workforce was becoming increasingly uncompetitive relative to education level as globalization has increased such that many were overpaid meaning even with a recovery in aggregate demand they could not get their old jobs back?

If the economy was perfectly efficient such that these people weren't overcompensated then why did so many people want to restrict their employers' ability to lay them off or fire them? They'd just be kicked back out into the market where they could find a similar job, no?

Perhaps they had a good thing going and when the crisis shook them off the wagon, employers were not inclined to pick them back up again. In other words, the labour allocation today is more efficient than it was then.

The other basic fact is that unemployment has risen across the board in every major skills grouping and geographical location. This is very hard to explain as a supply side story.


If the United States is an open economy and unemployment has not "risen across the board in every major skills grouping and geographical location" AROUND THE WORLD then your argument doesn't follow. Unemployment could have risen in the USA because the USA's workforce is uncompetitive.

But I think the larger point to make here is that it is not an either/or "supply side story" vs demand side. The point is that Mulligan has provided research EVIDENCE (as opposed to anecdote) that suggests that the Keynesians only have PART of the story. According to the Keynesian thesis, there is no point in moving to Texas or becoming a college grad because employers already have too many of these people to choose from. But the evidence shows that many people who moved to Texas DID get jobs instead of adding to Texas' unemployment rolls, and while unemployment amongst those who are very educated by international standards may be up, it does not represent anything like the crisis facing America's uneducated work force whom employers won't hire if they can hire Asians.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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