Wednesday, January 28, 2009
Why unemployment lags
The reason for this was explained years ago by Victor Zarnowitz. If you simply plot a sine wave and think of the wave as happening over time, you will see that from the bottom of the cycle you get a slow increase at first that quickens only after a bit. Employment grows from the trough, but Zarnowitz notes that at first it grows slower than the growth in the labor force (perhaps enhanced by discouraged workers re-entering the labor market.) Since UR = 1-E/LF, employment (E) has to grow faster than labor force (LF) for the unemployment rate UR to fall.
I fail to see how that becomes an excuse to have later stimulus. That shape of the growth of employment is simply a result of time-to-build issues: Just as there are lags in implementation of stimulus bills, there are also lags in the process of adding workers to the production process (hiring and training are not instantaneous -- these, btw, are part of the new Keynesian paradigm that Krugman embraces.) They do not avoid the types of concerns about the lateness of fiscal policy implementation envisioned by Friedman almost half a century ago. All that is old...
Labels: economics