How About Some Fun and Thoughtful Econ?

I have been spending too much time in the ultimate of frustrating activities: hoping to convince (or more likely see someone with a wide audience convince) Republicans that cuts to programs or increases in taxes in the short term will hurt the economy at a fragile time. Unfortunately, Republicans aren't reasonable and will not bother trying to understand economics; government is bad and cuts must be made now. So as our country careens towards a lost decade, let's spend some time on a less urgent issue and in a more reasonable fashion.

Casey Mulligan - who seems to be a pretty conservative economist - has been writing a lot lately on labor supply and labor demand. His main point seems to be that labor supply can be just as important (or not meaningless?) as labor demand during a recession. In this post, he uses a comparison between summer employment and Christmas / holiday employment to show the difference between the demand and supply side. During the holidays, demand for labor increases. During the summer, supply for labor increases.

Casey Mulligan says that summer employment shows that an increase in the supply of labor can increase total labor. Now, there are a few things I don't fully understand about his charts. He says total labor increases, which I can't see for sure. But it also looks like wages decrease, which isn't a good thing. Though I guess more jobs with lower wages is better than less jobs and stagnant wages. If this is part of his point, he leaves it unsaid.

His policy prescription that follows from this data is that unemployment benefits decrease labor supply and therefore total labor. To the extent that this is true, it matters how big this affect is. By decreasing benefits, we are hurting unemployed families, especially the ones that still can't get jobs. So if the effect is marginal, than we would probably want to keep the benefits. If the effect is significant, then... well then I don't know. I don't love the idea of letting families go into poverty just to induce them to work more.

While I am probably willing to concede that labor supply is not meaningless, I still think that labor demand is the much bigger factor at this point. Business surveys suggest that lack of sales are driving the lack of hiring. So while decreasing benefits, as cold-hearted as it seems, might increase employment, I can't imagine it having a major impact. I think we need to work on the demand side to really drive down unemployment.