Learning About Long Term Unemployment (II)

Politics and Policy

Last Monday, I discussed some of the findings from the conference on causes and consequences of, and policy responses to, long term unemployment, which brought to UW Madison Prakash Loungani, an Advisor in IMF’s Research Department, Kenneth Scheve, Professor of Political Science at Yale, Phillip Swagel, Professor of Public Policy at the University of Maryland, and a former Assistant Secretary of Treasury for Economic Policy, Rob Valletta, Research Advisor at the Federal Reserve Bank of San Francisco, and Kenneth Troske, Professor of Economics from the University of Kentucky.

In today’s post, I will discuss the presentations and papers by Ken Scheve and Phillip Swagel and Ken Troske.

Figure 1: Median duration of unemployment, official BLS series (blue line, left scale), overall unemployment rate (decimal form, right scale), unemployed over 27 weeks as a ratio of civilian labor force (red, right scale). NBER defined recession dates shaded gray. Source: BLS via FREDII, NBER, and author’s calculations.
On Policy
From Swagel and Troske’s paper, “Training: A Targeted Policy Proposal”:

In an era of limited government resources, we look to focus training dollars in a way that will have a meaningful and cost-effective impact in improving the lifetime incomes of those receiving training. The targeted groups are people with low skills and incomes but substantial motivation and evidence that they will benefit from training such as consistent labor force attachment. Training support is meant to provide an opportunity for people to garner the basic skills needed to move up the occupational ladder. People with low skills already have substantial incentives to get training, since acquiring new skills is a pathway to higher incomes. Many low-skilled workers, however, face substantial obstacles to utilizing training, including the potential cost of training. For people of modest financial means and limited access to credit, even the cost of community college could be an insurmountable obstacle, as could the cost of paying for others to care for dependents while taking training. Moreover, many workers in low-skill occupations are not likely to receive on-the-job training—a garage attendant or janitor, for example, might have the motivation to consistently show up to work and the non-cognitive and social skills to perform at a high level but still never have the opportunity to advance. A lump sum of training funds could allow such a worker to take remedial courses and learn the skills needed to move up the occupational ladder. Training could help allow a garage attendant or janitor to become an MRI technician or home health care aide.

The empirical training literature suggests as well that motivation is a key determinant of the success of training programs. The second component of our proposal thus targets groups such as single mothers who have considerable motivation to move up.

Our proposal would extend training support to low-skilled people who are currently employed. Some $18 billion of federal money is now spent on a welter of programs related to training and job search, but workers are generally not eligible for federal training assistance while they remain employed. We turn this on its head and make evidence of reliable employment—of strong labor force attachment, in the jargon—a qualifier for assistance. This thus serves to increase skills for those taking it up and as an incentive for employment for those not currently eligible.

The paper takes as given that there is going to be an extended period of elevated unemployment, and that some of this unemployment is structural in nature. The specific proposal is described thusly:

We would provide an annual training benefit of $2,000 for two years delivered as an individual training account as in the current WIA model for a total of $4,000. This would be a one-time benefit for an individual (once per lifetime). The funds in the account could be used for approved local training providers (often community colleges). This amount compares to the $2,713 average annual tuition and fees at a community college in 2010-2011 (from the American Association of Community Colleges 2011 Fact Sheet); participants in this program would typically continue to work at least part-time while taking up training, meaning that $2,000 would likely cover the cost of an appropriate program of part-time courses. The focus would be on basic skills; this is not meant to replace Pell Grants in funding post-secondary education and the menu of approved providers and training opportunities would be explicitly linked to development of basic skills.

The training account would allow for part-time and intermittent enrollment for up to five years, in recognition of the reality that many workers will find their training interrupted for life events.

For me, perhaps the most interesting aspect of the paper was the point that we know remarkably little about what works and doesn’t work in terms of retraining. (Some literaure here and here.) While the authors conclude we should focus on the individuals the empirical literature says benefit from retraining, they also argue forcefully for the need for additional research — and this is not merely a throwaway line. In other words, those truly interested in helping the unemployed believe more research is necessary to see what constitutes a cost-effective use of resources in retraining (i.e., better to light a candle than curse the darkness … and cut funding).

I had two observations regarding the proposal. The first was that the focus on the trainable represented essentially an abdication of responsibility for those who evidenced low payoffs to retraining. While this decision might make sense from a benefit-cost perspective, the weakness of the empirical evidence suggested caution. Moreover, even if new empirical evidence were to buttress the earlier findings, trade adjustment assistance might still be worthwhile because it is part of an implicit bargain that a free trade regime that induces costs on some workers is associated with compensation for those bearing those costs.

The Political Implications

Ken Scheve’s paper, “Envy and Altruism in Hard Times”, did not directly address unemployment, but was very relevant to how the public views policy interventions that help various groups. From the conclusion:

Mass political behavior in the midst of an economic crisis provides a unique lens for studying distributive political conflict and the determinants of political opinion and behavior. This paper points to any one of the millions of citizens who have voted, marched, or rioted to advocate or protest one policy position or another in their national political debate on how best to respond to the crisis and asks why did those citizens take the positions that they did and why did they often seem so invested in the debate. It seems likely that self-interest plays an important role in answering these questions. Having often already lost much in the crisis itself, individual citizens are acutely aware of the consequences of policy change on their individual welfare. Moreover, economic crises are often periods of significant policy change with long-lasting distributional consequences. In short, with so much at stake, it would be surprising if self-interest did not inform policy opinions and behavior in the national debate. However, the theatre of these political debates suggests the possibility that other considerations may also be central to determining the positions that citizens take and their behavior in the political process. The German or American taxpayer or Greek or Spanish civil servant is not outraged simply because they will lose from some new policy under consideration though that may be part of the story. Rather, their policy position and outrage is in part because the policy alternative under consideration either resonates or is in conflict with their sense of fairness.

In this paper, I investigate how one specific understanding of fairness- inequality aversion influences individual policy opinions about economic policymaking in the context of an economic crisis. I argue that attitudes about inequality — both envy and altruism — lead to systematic differences in support for trade protection across different sectors of the economy, in support for taxing banking incomes, and in support for higher income taxes. In each pol- icy domain, individuals not only consider how policy alternatives affect their own interests but also how they affect the incomes of others relative to their own.

The paper provides empirical evidence from a set of original survey experiments on a national sample of respondents in the United States (and I will shortly complement this with analogous experiments in France). First, I show experimentally how variation in the in- comes of the beneficiaries of various policies influence support for those policies. I show that opinions about trade, financial market regulation, and tax policy vary systematically with information provided about the incomes of those affected by policy alternatives. Respondents are generally more supportive of policies that benefit lower income recipients or create costs for higher income recipients. Second, I adopt a specific formalization of inequality aversion, incorporate this utility function into standard models of policymaking, and esti- mate structurally an equation of policy preferences. I find that individuals have the social preferences of altruism and envy assumed in these models though the relative importance of these motivations vary across issue areas. Econometrically identifying these preferences lends considerable support to the main claim of this paper that envy and altruism play a central role in distributive political conflict over economic policies during times of economic crises. That said, the evidence presented here should be viewed as pointing in the direction of an important role for inequality aversion but it must be recognized that it is possible for alternative mechanisms to generate the pattern of preferences observed across the experiments. It must also be said that many such alternatives seem more plausible for one policy area than another and so fail to simply explain the pattern across all experiments in the way that inequality aversion does. Nonetheless, exploring new experiments and analyses to evaluate alternative mechanisms seems a productive task for future research.

The way in which envy and altruism are operationalized is as follows:


As the author notes, perhaps a better way of characterizing the concept is inequality aversion. The extent to which this inequality aversion shows up, in the case of trade policy, is highlighted in this excerpt:

Table 1 reports the mean estimates for each treatment category and difference-in-means estimates for each combination of treatments. These results provide substantial evidence that support for sector-specific trade barriers are influenced by the average wage of workers in the industry.

Support for new trade barriers is 11 percentage points higher (a 33% increase) for respondents who considered protection for an industry with a low wage versus respondents who considered protection for an industry with an average wage. This difference was 20 percentage points (an over 80% increase) for respondents who considered protection for an industry with a low wage versus respondents who considered protection for an industry with a high wage. The differences between the middle and high wage treatments are also substantively and statistically significant.

Both Phill Swagel and Ken Scheve had remarks in the morning panel. Professor Scheve’s remarks were quite relevant to the issue of what to expect in terms of policy changes. He observes that while the Great Depression induced a big change in views about intervention in the economy, it might be the case that that experience is the exception, rather than the rule. Even before the end of the Great Depression, views toward helping the unemployed had hardened considerably, despite high unemployment. Using more recent data, he observed that there is little correlation between unemployment and the view that “Government should see to it that people have jobs and a good income and unemployment.” (from the National Election Studies).


Figure from Scheve presentation.

Statistical analysis does confirm that the unemployed do have different views of policies aimed at helping the unemployed. However, even if the differential is statistically and numerically significant, even now when the unemployed represent a large share of the labor force, the overall impact on preferences is not sufficiently large to have a large impact on the policy process. This is in addition to the following two points:

  • Bartels (2008) and others have argued that political representatives are more responsive to high-income constituent opinion than low-income constituent opinion.
  • Dominant role played by interest groups in policy process.

Some commentary. As I have thought about this presentation over the past week and a half, it seems to me that is where economic analysts have an important role in the policy process. If the unemployed and otherwise disenfranchised cannot speak up (or act) for themselves, then it is incumbent upon economists to ensure that critically important resources not be wasted (that is the clinical perspective; there is of course the moral imperative, but that differs from person to person, so I will not presume), as in Christina Romer’s recent commentary.

And More on Current Politics

Professor Phill Swagel’s morning presentation [not available online] made several points. The first was that the fault for the Great Recession does not lie entirely with the Bush-Cheney Administration. The depth and extent of the recession is attributable to the collapse in confidence in policymakers, which was exacerbated by the failures of the Obama Administration to forge a bipartisan stimulus package. This collapse in confidence in turn induced a process of massive deleveraging.

Agreeing with Drs. Valletta and Loungani, Professor Swagel stated that the bulk of unemployment is primarily cyclical in nature; however, the longer the unemployment persists, the more of it will be structural in nature.

More on Professor Swagel’s views on policy here.

Not an Ivory Tower Conference

There are some Econbrowser readers who love to take me to task for my devotion to models and analytical frameworks, allegedly without reference to the real world. The conference’s morning panel brought in an audience of policymakers and others — including those who had first-hand experience with the phenomenon of long term unemployment. From the Capital Times:

Nobody needs to remind Jeanne Hime what hard times look like.

After 30 years as a union electrician, Hime watched her hometown manufacturing plant close down, disrupting the lives of hundreds of working families in Darke County, Ohio.

“These weren’t people who could just pick up and find a job somewhere else,” says Hime. “They had lifetime roots in the community and didn’t want to leave.”

Now retired and living in Mount Horeb, Hime isn’t confident the good factory jobs will ever return. And she takes exception to those who dismiss the current unemployment situation as simply a cyclical turn of the economy.

“People like me have been burned too many times,” she says. “Why should they believe anything is going to change?”

While some would say the models and the real-world experiences have little in common, the responses of the panelists demonstrated that the development and interpretation of the models cannot exist in a vacuum.

La Follette School of Public Affairs Professor Tim Smeeding, who heads the Institute for Poverty on the UW-Madison, expressed more concerns about the long-term disenfranchised. He says no one has an answer for the 30-year olds with no job skills or the 12 million Americans on probation or parole.

“These are the folks at very the bottom of the hiring pool,” he says.

Dealing with those issues will require analytical thinking, and empirical work, to determine what works — and does not work — in helping people — just as the paper of Swagel and Troske highlighted. The faster we dispense with such false dichotomies, the faster we can get to work.

This post originally appeared at Econbrowser and is reproduced here with permission.
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3 Responses to "Learning About Long Term Unemployment (II)"

  1. Joseph Patrick Bulko   May 17, 2011 at 5:00 am

    Models and analytical frameworks are all well and good … BUT here’s a simple concrete practical solution to the nation’s high unemployment mess: I’ve written a proposal that describes a mechanism through which we can fund a massive number of new business ventures by tapping the financial power of Wall Street to create jobs on Main Street. The purpose of this mechanism is to take a private sector proactive approach to address the expected long-term high unemployment problem. You can read the proposal at Newsvine.com: A Modest Proposal to Save the American Economy: Entrepreneurial Blitzkrieg as Job Creation VehicleJoseph Patrick Bulko, MBA