Betting with Bryan Caplan

by John Quiggin on May 25, 2009

Bryan Caplan responds to the data on US and EU-15 unemployment by offering a bet.

The average European unemployment rate for 2009-2018 (i.e., the next decade) will be at least 1 percentage point higher than U.S. unemployment rate. The bet will be resolved when Eurostat releases its final numbers for 2018.
Betting is usually unwise, but nonetheless I’m willing to take Bryan on, with one amendment. I will take the bet provided that people in prison are counted as unemployed. By my estimate, that raises the US rate by about 1.5 percentage points and the the EU-15 rate by about 0.2 percentage points. That is, assuming current imprisonment rates remain unchanged, the bet is that the Eurostat measure of unemployment (which excludes prisoners) should be no more than 2.3 percentage points higher in the EU-15 than in the US.

A few points about the odds. I haven’t been able to download the time series data, but eyeballing this graph suggests Bryan would have won the bet narrowly if it had been run over the last 15 years.
US and EU-15 unemployment rates since 1993

I think the bet is fair, since unlike 1993, the EU-15 is starting ahead. Also, although EU geographical mobility is still much less than in the US, it has increased dramatically over the past fifteen years, and that is likely to continue, particularly if some countries recover from the current crisis faster than others.

Looking to the short term future, the big question is whether, as I argued recently, the EU system is characterized by lower variance than the US, which would suggest EU rates should be lower during the global recession. The alternative view is that the EU is just not as far into the cycle as the US and that the US will recover earlier and faster.

Thinking about the bet more generally, if you regard it as supporting the view that the proposition “in the long-term average US unemployment rates are about 1 percentage point lower than average EU-15 rates” is an even money bet, that has a number of implications.

First, since the EU-15 countries are quite disparate, this suggests that the US is likely to be, on average, around the middle of the pack of developed countries as regards unemployment rates (adding in non-EU countries like Japan and Australia wouldn’t change this much).

Second, although the US is middling on unemployment outcomes, it’s an outlier on a range of measures that have been presented as important in promoting high employment. In addition to higher geographical mobility, it has very low minimum wages (lower now in real terms than it was in the mid-1950s), very weak trade unions, almost no restrictions on hiring and firing, and very limited welfare benefits for unemployed workers*. It’s quite surprising, even to me, that all of these things should add up to a difference of only one percentage point in unemployment. In part, I suspect that these institutions create their own kind of dual labor force structure.

In political terms, it’s hard to see how the pressure to adopt “more flexible” * labour market institutions can be justified by reference to the US example. While lower unemployment is better, it’s hard to see why a country with a decent minimum wage, strong union movement and good social welfare systems would want to scrap those things to achieve a one percentage point reduction in unemployment.

  • As far as I can determine, in most US states, childless adults who have exhausted their unemployment benefits (or were ineligible) don’t have any access to cash benefits, and aren’t, in general, eligible for Medicaid or even, in some cases, food stamps. Can someone confirm or correct my understanding?

{ 28 comments }

1

stostosto 05.25.09 at 9:18 am

It’s a safe bet to take up, John, with or without counting prison population. After all, since Democrats are dedicated to restructuring American society along socialist ideals, and given that Americans support Democrats over Republicans by a wide majority, how would America stand any hope of avoiding the labour market quagmire of socialist Old Europe?

2

hidflect 05.25.09 at 9:50 am

@sto
needs more irony or people will think your serious…

3

John Quiggin 05.25.09 at 9:55 am

I must say I’m disappointed that, even now, the Republicans have missed the subtlety of our plans (cue evil laugh). Surely they must realise that when Marx and Engels picked the name “Social Democratic” for the parties they promoted in Europe, it was because they foresaw the rise of Obama, and the fact that the US Democratic party would ultimately become the ideal vehicle for the realisation of their dreams. Yet there’s not a hint of this in the communications of the RNC.

4

Henri Vieuxtemps 05.25.09 at 10:20 am

Not so fast, mister. When the American people finally realize what is going on, they will rise up and demand their god-given right to be fired on a whim to be restored.

5

Tim Worstall 05.25.09 at 10:30 am

“since the EU-15 countries are quite disparate”

And so are US States in such things as eligibility for unemployment pay, tax rates, etc etc and unemployment rates.

A tad odd to mention the variance in the EU 15 without mentioning it in the US 50……

6

John Quiggin 05.25.09 at 10:43 am

Good point, Tim. Looking at the fact that quite a few US states have unemployment rates higher than nearly all EU-15 countries, even though nearly all US states have more “flexibility” on standard measures than nearly any EU country, the case for labor market flexibility looks even weaker.

7

Willem van Oranje 05.25.09 at 12:22 pm

Aside from the prison population, plus of course employment generated by prisons (essentially “make-work jobs”). I’ve got the impression there is another gigantic “make-work job project” in the US that is hardly mentioned and is entirely paid for by government: the military.

From what I’ve heard, the US pays more for the military than the entire world combined. How does that influence the labor market and (un)employment, including the costs associated with that?

8

Barry 05.25.09 at 1:22 pm

IIRC, the USA accounts for 50% of the world military spending, and I don’t believe that that includes other features (VA, Dept of Energy’s nuclear programs, a $50 billion/year intelligence budget).

9

Barry 05.25.09 at 1:28 pm

The US also is one of the top exporters of military equipment (first? second?).

10

Willem van Oranje 05.25.09 at 1:40 pm

Barry, sure it generates work too. That’s one of the purposes of make-work projects. But wouldn’t it be fair to view a big part of the Defence-budget as an enormous “stimulus package”?

Likewise with a big prison population: in order to maintain a big prison population, you also need a big industry: police etc. to get the “criminals”; a judiciary to lock them up; prisons guards and support services to keep them locked and alive; etc.). All the excess costs as compared with the rest of the world could be considered stimulus money. N’est-ce pas?

11

gabe 05.25.09 at 2:16 pm

When you say ‘dual labour force structure’, do you mean working in the black economy? I have always thought working while claiming benefits is pretty prevalent in EU15 countries, thus the EU figure unemployment figure is always a bit overstated compared to the US. And also, there is a ‘hire and fire’ job market in the EU (the entire restaurant sector, construction, cleaners) but it doesn’t show up in the statistics as it is in the black economy.

12

stostosto 05.25.09 at 2:35 pm

gabe,

considering there are around, what, 11 million illegal immigrants in the U. S., I am not sure the official jobs records capture everything there either.

13

Willem van Oranje 05.25.09 at 2:50 pm

People committing fraud are everywhere (tax evaders; fraudulent claims; etc.).
A black/grey economy exists everywhere too. I don’t think you’ll find much of a difference in scope. Just the particulars may vary

14

lemuel pitkin 05.25.09 at 2:52 pm

Re including the prison population, it depends why we’re interested in uemployment, no?

If the question is whether there is sufficient growth to employ the whole labor force, then yes, you should correct for prison population — but you should also correct for lots of other differences in the size of the labor force. Seems simpler to just cut that Gordian knot and focus on the employment-population ratio instead. More importantly, that’s really a question about effective demand (ok, and innovation), it’s only incidentally about labor market institutions.

On the other hand, if the question is about what level of unemployment is needed to maintain work discipline, restrain wage demands/inflation, and so on, along Kaleckian or efficiency-wage lines, then you are very much talking about labor-market institutions. And then unemployment as such really is the relevant variable, but prisoners aren’t relevant — since they can’t work, they don’t affect the bargaining power of labor.

15

PGD 05.25.09 at 3:15 pm

When you say ‘dual labour force structure’, do you mean working in the black economy?

No, it’s a specific term in labor economics that refers to a theory of labot market partitioning. See e.g. this book . It’s often claimed that the cause of such partitioning is either inflexible labor market institutions like firing restrictions or unions, but on the left the claim can be that either prejudice or the mechanics of workplace hierarchy can cause this partitioning. Quiggin seems to be claiming that labor market flexibility can itself cause a form of partitioning, which is an interesting claim that could be pursued mathematically.

16

lemuel pitkin 05.25.09 at 3:40 pm

Also, on your final question, I think you’re basically right, except I’m pretty sure childless adults can qualify for food stamps (now called SNAP) everywhere in the US — unlike other welfare programs, eligibility rules vary only slightly between states. On the other hand, “Able-bodied, childless persons between the ages of 18 and 50 are limited to three months of food stamp receipt in a 36 month period unless they are working at least 20 hours a week or participating in an employment and training program.”

The other exception is EITC. But both the income threshold and dollar amounts are extremely low for non-elderly, non-disabled childless adults (annual benefits top out at about $500) and, obviously, you have to be employed.

17

Old-Timer 05.25.09 at 4:18 pm

Bad graph! Bad graph! We Edward Tufte fans know that the eye is bad at subtraction. Graph the difference, not the unemployment numbers.

18

gabe 05.25.09 at 7:05 pm

Thanks PGD, I see. A possible view which combines a dual labour market idea and the prison thing is the work of Loic Wacquant on what he calls the subproletariat: “On any given day, upwards of one third of African-American men in their twenties find themselves behind bars, on probation, or on parole. And, at the core of the formerly industrial cities of the North, this proportion often exceeds two thirds. ”

http://www.bostonreview.net/BR27.2/wacquant.html

19

David Wright 05.25.09 at 7:43 pm

This is a rather weasely way of not taking the bet.

Yes, there is a reasonable argument to be made that some adjustment for prison population is in order. There is also a reasonable argument to be made that no adjustment for prison population should be made. That the U.S. economy is productive enough to support all those extra people in prison (where their upkeep costs considerably more than they would likely earn in the labor force), thereby improving the quality of life of its non-criminal citizens, and still manages to afford its citizens a higher standard of living than any large European nation, should arguably count as a point in the U.S.’s favor, no?

In any case, there are reasonable arguments to be made for all sorts of other adjustments too. For example, several European nations suppress their unemployment rates considerably by classifying an inordinate fraction of their population as “disabled” — the Netherlands is a prime example. You have cherry-picked one adujustment that happens to help your case.

If you are so concerned about the validity of cross-country comparisons of unemployment rates (and there are good reasons for concern, dispite the fact that your reasons are entirely self-serving), I suggest that you avoid unemployment classifications entirely and simply compare the fraction of the working-age population that is employed.

20

stostosto 05.25.09 at 8:51 pm

hidflect #2:

@sto
needs more irony or people will think your serious…

I don’t have that in me. People who take terms like “socialist Old Europe” seriously (and I am painfully aware they exist, cf. the link in my post), will require so thickly applied irony as to bury the intended point in ick.

21

John Quiggin 05.25.09 at 9:19 pm

Thanks for the gratuitous abuse, David W. I take your slightly desperate tone as a concession that
(1) The difference between the US and EU rates on the Eurostat measure is unlikely to average much more than 2 percentage points over the cycle.
(2) This is within the range of measurement error, so that the bet turns on issues like the labor force classification of prisoners.

On your specific suggestion of looking at employment rates, Laurent Guerby in the thread on labour market flexibility was making this point from the opposite direction. A lot of EU-15 countries do better on this measure, relative to the US, than on unemployment. That’s partly because the US, while not matching the Netherlands, has a relatively high number of workers on disability.

As I said in response to Laurent, the equation Employed+Unemployed=Population, is pretty much valid for prime age males (since they don’t tend to engage in education, child-care or self-financed retirement), but not for other groups. I’d be happy to take the bet for prime-aged males, if that’s more acceptable. But of course, I would still want the base to be the entire population, with prisoners not counted as employed. I don’t find your counterclaims on this point at all convincing.

22

Henri Vieuxtemps 05.25.09 at 9:43 pm

Where do you think all those license plates come from?

23

stostosto 05.25.09 at 9:51 pm

By the way, I really like their Newsweek quote:

“Whether we like it or not – or even whether many people have thought much about it or not – the numbers clearly suggest that we are headed in a more
European direction…As entitlement spending rises over the next decade, we will become even more French;”

I mean: Even more French! Mon dieu! Soon they will be serving pommes de liberté in the Congress ‘ bistro.

24

minneapolitan 05.25.09 at 10:21 pm

Wouldn’t that be frites liberte? (Or something closer to idiomatic French grammar?)

Are there good statistics on relative ages in EU vs. US workforces? My impression has been that it can be more difficult to get your foot in the door as a young person in the EU, whereas, in the US, it only takes one layoff in your 50s to make you permanently unemployable. (With the result, of course, that a bigger chunk of US employees are young, low-waged and lacking benefits.)

25

will u. 05.26.09 at 3:21 am

“That the U.S. economy is productive enough to support all those extra people in prison (where their upkeep costs considerably more than they would likely earn in the labor force), thereby improving the quality of life of its non-criminal citizens, and still manages to afford its citizens a higher standard of living than any large European nation, should arguably count as a point in the U.S.’s favor, no?”

Yes, because a massive prison population is the marked of a civilised, compassionate society, like Belarus or Turkmenistan.

In other words: lolwut

26

Thomas Jørgensen 05.26.09 at 5:21 am

Honestly, measuring only male employment is absurd, because it renders any comparison between countries with differing degrees of gender equality and female labour market participation utterly meaningless. The labour of women does bloody well count. – Unemployment stats are not a very good measure to compare either, unless the countries involved measure this in the same way, which is rarely so. Employment as a share of total population is the only meaningful measure if you wish to compare the effect of diffrent ecomomic and social policies on labour market mobilisation, which is the entire point of this debate, no?

27

Sebastian 05.27.09 at 8:40 pm

“Employment as a share of total population is the only meaningful measure if you wish to compare the effect of diffrent ecomomic and social policies on labour market mobilisation, which is the entire point of this debate, no?”

Not unless you can figure out which effects are which. And John appears to be suggesting the prison population is having a particular effect (though I’m not sure exactly what effect). Is it that the US economy couldn’t have prisoners work if they were free?

28

Larry 05.28.09 at 5:31 am

“While lower unemployment is better, it’s hard to see why a country with a decent minimum wage, strong union movement and good social welfare systems would want to scrap those things to achieve a one percentage point reduction in unemployment.”

That’s a bit regressive, isn’t it? The unemployed are those at the bottom. Those who can find someone to pay them that higher minimum wage, or who can get a union job are likely to be higher skilled and better off than those who can’t, no? Not to mention that European youth unemployment rates are through the roof. I.e., the overall 1-2 point difference conceals a much greater disparity for those trying to get their working lives started.

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