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Betting with Bryan Caplan

May 26th, 2009

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

Cry of the Owl psp .

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?

Update Quite a bit of quibbling in comments as to whether prisoners should count as unemployed. To short-circuit this dispute, can we all agree that breaking rocks (or similar) under armed guard is a bad labor market outcome, as is being unemployed. As the desire to debate this point shows, the excess prevalence of the first of these outcomes in the US, relative to the EU, is similar in magnitude to the excess prevalence of the second in the EU. Combined, they pretty much cancel out.

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  1. SeanG
    May 26th, 2009 at 07:14 | #1

    Use the stats and offer him a spread bet instead… increase the risk and increase the fun!

  2. Jim Birch
    May 26th, 2009 at 09:29 | #2

    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.

    Especially if you got the US incarceration rate in the deal.

  3. Alice
    May 26th, 2009 at 09:50 | #3

    3. JQ says
    “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?”

    JQ – I recall reading something a few years ago that suggested even though parents may have exhausted their access to cash benefits….theur children didnt. So cash benefits continue to be paid to parents….?? in the childrens names? It also then skewed figures downwards for numbers of adults (lots of eg single parents) on cash benefits. Ill try to find a link again (but not sure if I will – it was a paper floating out there somewhere).

  4. May 26th, 2009 at 09:51 | #4

    I believe you are correct about childless adults having essentially no public safety net. You become eligible for Medicaid if you have a qualifying disability and meet the income tests. Food stamps are available but only for a very short period of time if you are able-bodied and not working or in a work program.

    If you are an able-bodied childless adult in the US and have run out of assets and are unemployed, you have to rely on the private safety net of food pantries, shelters, church charities, etc. For health care, there are free clinics in some areas and emergency rooms will provide care in an emergency without regards to ability to pay. Alternatively, one can run drugs, rob convenience stores, or otherwise find a way to get oneself incarcerated, which will, at least, take care of bodily needs (snark).

    A pretty fragile existence, though the private charity network in the US is far more robust and active than in Australia, I believe (though I have little experience with Australian charities other than that they are not very visible).

  5. May 26th, 2009 at 09:54 | #5

    Alice, that is correct that children are still eligible for medicaid even if their parents are not, but that is not a cash benefit–benefits are paid directly to health care providers. Food stamps are, I believe, always a family benefit. And the presence of children in the family makes one eligible for welfare, which is a cash benefit, but if the parent does not fulfill the work requirements or runs out the clock, there is no further cash assistance to the child.

    All of this is explained in the wikipedia page for the programs, btw.

  6. Alice
    May 26th, 2009 at 10:31 | #6

    Here is another article suggesting the US jobless rate will soon pass Europes.

    http://www.nytimes.com/2009/05/23/business/economy/23charts.html?scp=2&sq=unemployment&st=cse

    It would also seem that a number of US states are running out of funds needed to pay jobless benefits (with one State describing policies of reducing taxes before the crisis …as creating “the perfect storm”)

  7. Alice
    May 26th, 2009 at 10:33 | #7

    Abby – welfare benefits are complicated to work out in the US because there are state programs as well …and they can differ greatly state to state.

  8. Joseph Clark
    May 26th, 2009 at 11:08 | #8

    “I will take the bet provided that people in prison are counted as unemployed.”

    Why is it reasonable to assume that people in prison would be unemployed if they were not in prison?

  9. May 26th, 2009 at 12:19 | #9

    I’ll have to agree with Joseph Clark #8.

  10. FDB
    May 26th, 2009 at 12:31 | #10

    Why indeed is it reasonable to assume they’re ‘unemployed’ while still in prison? Some are, some arguably are not.

  11. Alice
    May 26th, 2009 at 13:13 | #11

    Abby at #5
    I was almost sure this was a cash benefit that continued to be paid to parents whose own benefits had ceased (on behalf of children and in the childrens names but deposited to the parents – as their guardians…).It may have been a state benefit. The effect was to statistically reduce the number of sole parents who “appeared” to be receiving benefits (in reality they were still, but no longer in their own names).Anyway I cant find anything on it now.

  12. May 26th, 2009 at 14:11 | #12

    Being in prison is not a “labor market outcome” — it is (in the US) a war on drugs outcome, and one might think that the excess US prisoners are probably pretty employable compared to the EU prisoners.

  13. jquiggin
    May 26th, 2009 at 14:42 | #13

    Tom, you might want to read Freakonomics. Drug dealing is a labour market choice, and one that is not very appealing to anyone with prospects better than US minimum wage.

    “one might think that the excess US prisoners are probably pretty employable.”

    only if you hadn’t paid much attention to their demographic characteristics and the associated E/P ratios (note that the comparison to EU prisoners is off-point, since I’m assuming, for the sake of argument that they are also likely to be unemployed).

    Here’s a good source

    http://books.google.com.au/books?id=xDhMqOGnD5cC&pg=PA57&lpg=PA57&dq=employment/population+ratio+black+males+high+school+education&source=bl&ots=LFU1s17Llq&sig=ArEuxpKbq4sVrD6Q10tQKZ-KyTo&hl=en&ei=0nIbSuWlO8WGkAX8093aDA&sa=X&oi=book_result&ct=result&resnum=1

    In any case, quibbling on this point is a concession of defeat on the main argument. If the flexible US labour market was really producing such superior outcomes, you wouldn’t need to fight about definitional issues.

  14. Monkey’s Uncle
    May 26th, 2009 at 15:29 | #14

    “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.”

    I have come across people who have argued that sacrificing a few jobs is a small price to pay for higher wages for a larger number of workers. And from a utilitarian perspective, this might make some sense. And in all fairness, this is a more intellectually honest argument than pretending that higher labour costs never reduce employment.

    But any measure that involves pricing some people out of the labour market in order to increase the earnings of others must, almost by definition, involve some increase in inequality in market incomes. In which case, the people who support such a position have less room to then complain about income inequality.

    It is also questionable as to whether it is moral to sacrifice the prospects of a minority for the betterment of the majority.

  15. Monkey’s Uncle
    May 26th, 2009 at 15:42 | #15

    While it would no doubt be the case that people in prison are more likely to be unemployed if they were not in prison than the population as a whole, it is not fair to count every single prisoner as unemployed.

    Every single white collar criminal or child molester would not be unemployed if they were not in prison.

    I would accept the bet, on a couple of conditions:
    - people in prison would be assumed to be four times as likely to be unemployed as the general population
    - every mature age university student, person classified as disabled or ill who is not sufficiently incapacitated to work (up to two-thirds in some countries by OECD estimates), every single parent without a disability living primarily on government support, and every person aged 50-64 who is ‘retired’ would also be added to the unemployed.

    By these measures, I am confident that the EU average unemployment would be higher than the US.

  16. Monkey’s Uncle
    May 26th, 2009 at 15:53 | #16

    Also, regarding the relationship between the number of people in jail and the unemployment rate, there would surely be a diminishing ratio between the incarceration rate and the risk of unemployment the greater the number of people who are jailed.

    That is, if you put more people in jail and have tougher penalties for lesser offences, there is a greater likelihood that more people will end up in jail who would not be unemployable if they were not in jail.

    Also, putting more people in jail surely creates more work for police officers, lawyers, court officials, parole officers, prison guards etc. Isn’t this public sector job creation? In which case, does it help employment levels overall?

  17. Bruce Bradbury
    May 26th, 2009 at 18:19 | #17

    MU at #15. Your second condition is really raising a different issue. You are arguing that generous welfare support in Europe reduces labour _supply_. This is an important question, but is different to JQ’s argument about the effect of labour markets on labour _demand_.

  18. charles
    May 26th, 2009 at 18:55 | #18

    For your next trick you should take the economic activity generated by US jails out of their GDP figures. It’s a sick joke if ever there was one.

  19. May 26th, 2009 at 21:17 | #19

    “In any case, quibbling on this point is a concession of defeat on the main argument. If the flexible US labour market was really producing such superior outcomes, you wouldn’t need to fight about definitional issues.”

    Not true. The superior outcomes (or not) are a matter of a few percentage points. Therefore many minor factors have an influence, and are worth considering.

    Furthermore, framing the debate as you see fit, imposing your own assumptions, and then calling people’s objections to those assumptions ‘quibbling’ is intellectually dishonest.

  20. May 27th, 2009 at 00:16 | #20

    Using the E/P ratios from Figure 4.1 in the link you gave, and using the figures here http://www.libraryindex.com/pages/2528/Characteristics-Inmates-EDUCATION-PRISON-JAIL-INMATES.html for inmates education attainment by race, and proportion of prison inmates of each race, I get a projected average E/P for inmates of 55%.

    So perhaps adding half the excess prisoners to the unemployed would be fair?

    (caveats: I couldn’t see the white and hispanic dropout E/Ps on that chart, so I used 53% for whites and 33% for hispanics, I also ignored prisoners who were graduates, lumping them in with ‘some college’)

  21. Bingo Bango Boingo
    May 27th, 2009 at 09:02 | #21

    “In any case, quibbling on this point is a concession of defeat on the main argument. If the flexible US labour market was really producing such superior outcomes, you wouldn’t need to fight about definitional issues.”

    Let’s work this through…

    Caplan: “I bet that European unemployment will be worse than US employment.”
    Quiggin: “Yes, but I have a quibble. You need to include the prison population, otherwise you’re not comparing apples with apples. We need to define unemployment properly. You know, deal with the definitional issues. If you accept my quibble, then I will take your bet.”
    Quiggin Readers: “Wait, if you really want to compare apples with apples, don’t you also need to take into account x, y and z?”
    Quiggin: “Aha! You are quibbling! If you quibble, then you concede that I am right. Only a Quiggin Quibble is valid.”

    Pathetic. High-school level debating tricks.

    BBB

  22. jquiggin
    May 27th, 2009 at 10:01 | #22

    “For your next trick you should take the economic activity generated by US jails out of their GDP figures. It’s a sick joke if ever there was one.”

    I’m not sure if this is intended as irony, or if the writer seriously suggests that, in comparing welfare over time or between countries, expenditures on prisons, crimefighting and so on are appropriately counted as positive additions to welfare. The fact that they should not is one of the most generally accepted reasons for downplaying GDP as a welfare measure.

    Certainly, the sensitivity of libertarian-inclined commenters on this point is impressive. At least eight commenters have come in on this one point, while ignoring everything else in the post.

    Do you really want to defend the US system by treating high imprisonment rates as an economic and social positive?

  23. timothy watson
    May 27th, 2009 at 11:50 | #23

    Breaking rocks in the hot sun
    I fought the the law and the law won!

  24. Monkey’s Uncle
    May 27th, 2009 at 11:56 | #24

    Bruce @17 says “MU at #15. Your second condition is really raising a different issue. You are arguing that generous welfare support in Europe reduces labour _supply_. This is an important question, but is different to JQ’s argument about the effect of labour markets on labour _demand_.”

    Bruce, that is one issue. But it wasn’t the point I was getting at.

    The point that I was making is simply that if more people who are effectively unemployed are redefined, it can reduce the official unemployment rate without actually putting more people in work.

  25. May 27th, 2009 at 12:24 | #25

    PrQ,
    Perhaps a different measure would be a fair one – the proportion of the adult (defined as those between 18 and 65) that are employed. I have not looked at the numbers, but this seems fair. If we assume that having poeple employed is A Good Thing, then this measure is one that should be reasonably comparable between any two (or more) economies.
    I have not looked at the numbers, so I do not know how close they actually are.

  26. jquiggin
    May 27th, 2009 at 12:39 | #26

    AR, this is a pretty good measure for prime-aged males (25-54) since it can generally be taken for granted that being employed is a Good Thing for this group, under current social conditions.

    But, outside this group, alternatives like study, childraising, and retirement may be Better Things.

    And, there’s still the problem that the standard data on E/P ratios refer to the civilian non-institutional population, thereby excluding prisoners.

  27. Monkey’s Uncle
    May 27th, 2009 at 16:36 | #27

    JQ @22, I don’t really wish to defend the US criminal justice system, as I believe it is generally too harsh and punitive. Although Australia’s system is perhaps too lenient. So there is a happy medium somewhere.

    But I do agree that providing a good, efficient, and fair system of law and order is a more positive contribution to general societal wellbeing than anything else governments can do. Not that the US does a particularly good job at that.

  28. Ikonoclast
    May 27th, 2009 at 16:49 | #28

    JQ set the conditions of the bet re the prison populations. If people don’t like the conditions then don’t take the bet. The proposer of the bet proposes the odds and the conditions.

    Mind you, I agree that prison populations should be added to the unemployed count. In addition, I would the extra prison guards the US needs over the EU model (on a per capita basis), as these guards are not productive. The EU justice system model shows that these extra prisons and guards are not necessary in a more socially enlightened system.

  29. billie
    May 27th, 2009 at 17:11 | #29

    My understanding is that in the US companies close their production lines then re open them in prisons because the prisoners are paid $1 a day. So I suppose the former workers steal, get sent to gaol then continue in the former job for $1 per day plus food and accommodation. I saw a program on private gaols in the US operated by Wackenhut who operate the Australian Detention Centres.

    So I disagree with Ikonoclast’s ascertain that the prison population always be added to the unemployed numbers. Prisoners have laboured in prison farms and stamp out our number plates

  30. May 27th, 2009 at 17:31 | #30

    “The proposer of the bet proposes the odds and the conditions.”

    The proposer was Caplan. It was Quiggin who wanted to Quibble.

    “I agree that prison populations should be added to the unemployed count.”

    Fine, but it’s a weird thing to do. If the War on Drugs was scaled down and prisoner numbers declined, would every single one of them be unemployable? I think not. Obviously a proportion of the prison population could be included, but not all.

  31. Ikonoclast
    May 27th, 2009 at 17:33 | #31

    Prison work is not productive. Most of what is called “work” in prisons is merely a punishment detail.

  32. Freelander
    May 27th, 2009 at 17:39 | #32

    As well as those in prison there must be a lot more “self employed” in the US – those who are not eligible for support and therefore need to turn to crime. Also, there are probably a larger percentage who are not counted in surveys – the homeless, those living in ‘no go’ areas and so on. The existence of an army of illegals must also have some sort of impact on the numbers. It could be worthwhile to find out how the numbers are estimated in the US and what difficulties they have when estimating unemployment.

  33. Alice
    May 27th, 2009 at 20:33 | #33

    I think only a proportion of prison populations (and likely very small – so it seems a red herring anyway) should be added. What if unemployment drove them to crime or drug dealing or other criminal activities which caused their imprisonment them in the first place….I do9nt see $1 a day production from prisons as productive…just the use of almost slave labour

    and then as someone suggested why dont we count the unemployed illegals living with relatives..

  34. Stephen L
    May 28th, 2009 at 13:41 | #34

    I wouldn’t have thought you have to believe every prisoner would be unemployed if let out to endorse JQ’s point. If someone who is employed gets sent to prison most of the time someone will get their job, and probably be doing it pretty much as well, but reducing the official unemployment figures.

    If you add together all the prisoners who would be unemployed if on the outside, and all who are easily replaced in the workforce it would come close to the prison total. Maybe Professor Q should knock 0.1% off for the proportion of prisoners who are genuinely hard to replace.

  35. Monkey’s Uncle
    May 28th, 2009 at 15:56 | #35

    “If someone who is employed gets sent to prison most of the time someone will get their job, and probably be doing it pretty much as well, but reducing the official unemployment figures.”

    This kind of thinking underpins much discussion of the labour market, but is fairly spurious. That is, the notion that there is somehow a fixed amount of work available and therefore if one section of the population works less or stops working it will automatically make more work available elsewhere. This is a kind of flat-earth economics.

    If one section of the population stops working it has a negative impact on the economy and therefore the demand for labour elsewhere. Also, if people stop working their income usually goes down which means they have less to spend on goods and services and thereby generate jobs elsewhere.

    It doesn’t necessarily follow that every time someone stops working a job is freed up for someone else. Sometimes it is. But sometimes a company that loses many good workers goes out of business, thereby creating further job losses. Or sometimes a lost worker is not replaced if there aren’t applicants with similar skills available.

  36. May 29th, 2009 at 23:12 | #36

    Pr Q says:

    Update Quite a bit of quibbling in comments as to whether prisoners should count as unemployed. To short-circuit this dispute, can we all agree that breaking rocks (or similar) under armed guard is a bad labor market outcome, as is being unemployed. As the desire to debate this point shows, the excess prevalence of the first of these outcomes in the US, relative to the EU, is similar in magnitude to the excess prevalence of the second in the EU. Combined, they pretty much cancel out.

    Commenters are quite right to quibble. Pr Q’s formulation of the incarceration problem is fatally flawed. Any analysis of US labour market exceptionalism which focuses on economic, and ignores ethnic, factors is not up to scientific par.

    In particular, the explanation of the US’s “bad labour market outcomes” relative to the EU needs to take into account extraordinary rates of African-American incarceration and Mexican-American immigration. Otherwise it would not be an apples-to-apples comparison.

    About 70% of the US prison population are colored minorities, in a population where 30% fit that classification. Those disparities in prison demographics cannot be explained soley by socio-economic disadvantage.

    If a substantial fraction of the US population have trouble abiding by common sense laws (“say no to drugs”) then how are they going to hold down a regular job on the outside? The evidence so far is not looking good.

    From the late fifties through the early noughties black male labour force participation in the key prison demographic (16-24) has plummeted to rates 30% to 50% below comparable white rates. Andrew Sum crunched the numbers:

    Employment rates among black male teens and young adults ages 16 to 19 have dropped considerably over the past 50 years, the study found. In 1954, a slight majority – 52 percent – of black male teens worked, a rate slightly in excess of their white peers. By 2003, however, only one of five black male teens was employed in a typical month – just 20 percent – only half the employment rate of white male teens.

    Among 20 to 24 year old black males, employment rates also have declined considerably from their peak values of 77 to 83 percent in the mid to late 1960s to dramatic 50-year lows more recently. During 2003, for example, just 56 percent of such young black men ages 20 to 24 was employed.

    The prison demographics suggest that, in the post-segregation era, black male labour morale, at least for the bottom half of their Bell Curve, has more or less collapsed. That would imply that even if the prisons were emptied those liberated prisoners would not be willing or able to enter the regular workforce.

    They would not become unemployed as they are, apparently, unemployable under current conditions. They would most likely economically fall off the BLS radar, just like vast numbers of their un-incarcerated brothers. It is therefore a fallacy to treat, as Pr Q does, the US prison population as “hidden unemployed”.

    I dont have all the stats handy to do accurate algebra. BOTE calculation, blacks are 14% of the population therefore are, pro-rata, likely to be 7% of the eligible workforce. About one-quarter of them would have done jail time say 2% of the total workforce. More than half of that lot would likely fall into the non-participating half of the black male labour force. That pretty much eliminates Pr Q’s 1-2% of potentially employable incarcerated persons.

    Its implausible to count most incarcerated black males, given their typical employment participation rates, as “willing and able” for gainful employment. Therefore Bryan Caplan is quite right to be wary of Pr Q’s wagering stipulation.

    But there is one form of economic liberalism that is actually wrecking the labour market outcomes of the bottom tier of American workers. And that is mass illegal immigration, mainly from Hispanic countries.

    These workers take jobs that might be done by native born and drive down wages for those natives in jobs. Particularly native born black Americans. George Borjas surveyed African American employment trends in the post-desegregation era and found that mass immigration had been a direct cause for the disaster for black male job opportunities and had indirectly caused a massive spike in black male incarceration:

    The employment rate of black men, and particularly of low-skill black men, fell precipitously from 1960 to 2000. At the same time, the incarceration rate of black men rose markedly. …

    As immigrants disproportionately increased the supply of workers in a particular skill group, the wage of black workers in that group fell, the employment rate declined, and the incarceration rate rose.

    Our analysis suggests that a 10-percent immigrant-induced increase in the supply of a particular skill group reduced the black wage by 3.6 percent, lowered the employment rate of black men by 2.4 percentage points, and increased the incarceration rate of blacks by almost a full percentage point.

    A moments thought and this conclusion is exactly what anyone with any real knowledge of the US economic system would draw. (I have worked in the US for lengthy periods of time, less than a year all up.)

    In fact this conclusion has been drawn by an economist of impeccable Left-liberal persuasion: Heres Paul Krugman arguing for much tighter restrictions on mass immigration, to protect the worst-off native workers:

    many of the worst-off native-born Americans are hurt by immigration — especially immigration from Mexico. Because Mexican immigrants have much less education than the average U.S. worker, they increase the supply of less-skilled labor, driving down the wages of the worst-paid Americans. The most authoritative recent study of this effect, by George Borjas and Lawrence Katz of Harvard, estimates that U.S. high school dropouts would earn as much as 8 percent more if it weren’t for Mexican immigration.

    Hats off to Pr K for at least mentioning the unskilled immigration gorilla in the labour market institution living room. I wonder, idly to myself, whether Pr Q will follow suit.

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