Michael Meeropol: Zombie Economics Explains Slow Job Growth Incorrectly
Do you know what ZOMBIE ECONOMICS is? It’s an economic theory that has been proven wrong time and time again but keeps coming back --- as if from the dead. This occurs because economics --- unlike the hard sciences --- does not have sufficiently precise standards by which to discard a theory. In most of the “hard sciences” it is possible to do controlled experiments or make systematic observations. Thus, when Magellan circumnavigated the earth without “falling off” the flat edge, that was conclusive evidence that the earth was round. Now, only kooks think the earth is flat. Similarly, the science of biology has learned over time which substances are poisonous to human beings. Today, only idiots think that ingesting cyanide will not kill you.
Not so with economics. There are assertions made by well credentialed economists that are absolute nonsense but despite numerous cases where the evidence does not bear out those assertions they keep getting resurrected. [Economist Paul Krugman has highlighted some of this in his recent book, Arguing with Zombies: Economics, Politics, and the Fight for a Better Future (NY: W.W. Norton and Co., 2020). In 1996, when William Vickrey won the Nobel Prize in Economics he put together the following arguments: “Fifteen Fatal Fallacies of Financial Fundamentalism: A Disquisition on Demand Side Economics.” This wonderfully succinct summary is available on the Columbia University website at http://www.columbia.edu/dlc/wp/econ/vickrey.html.]
Among the assertions of “zombie economics” is the argument that unemployment compensation payments cause unemployment. In my town of Cold Spring, NY, a local restauranteur recently complained to my daughter that she couldn’t find anyone to hire because the current unemployment payments are too generous. As soon as the April jobs report was issued, showing slower than expected job growth, Republicans were all over television are blaming the recent $300 a week increase in those payments provided for in the American Rescue Act just passed by Congress for that disappointing April jobs report.
Now, on the face of it, there is some plausibility to the argument. If I get paid to stay home and not work, and the amount I get from staying home is as high, almost as high or (God forbid!) even HIGHER than what I can get paid for working --- well, as one member of Congress said, “Human nature ….” would lead people to prefer to get paid to do nothing.
[sorry I don’t have the reference – but I bet plenty of readers have seen similar comments made…]
However, that plausibility should be regularly tested against reality if economics had real scientific standards of evidence. Interestingly, economics columnist David Leonhardt of the New York Times published an online column on May 20 entitled “Good morning. Is the U.S. suffering from a labor shortage? If so, capitalism has the answer.” In this article he quotes a number of different individuals who are complaining bitterly about a labor shortage.
“The chief executive of Domino’s Pizza has complained that the company can’t hire enough drivers. Lyft and Uber claim to have a similar problem. A McDonald’s franchise in Florida offered $50 to anybody willing to show up for an interview. And some fast-food outlets have hung signs in their windows saying, ‘No one wants to work anymore’.”
Anecdotes are often useful for illustrative purposes. However, to figure out how much a particular anecdote represents the broader reality, we need evidence with lots of information, not just one person’s gut feeling or personal experience. Leonhardt points out that in a market economy (a capitalist economy) when there is a shortage of anything, the evidence for that shortage should be an increase in the price.
Here’s Leonhardt again:
“One of the few ways to have a true labor shortage in a capitalist economy is for workers to be demanding wages so high that businesses cannot stay afloat while paying those wages. But there is a lot of evidence to suggest that the U.S. economy does not suffer from that problem.” Workers’ wages pretty much rose along with productivity between 1948 and 1979. But after that, there was a dramatic divergence. While workers’ productivity rose over 300% between 1979 and 2018, the hourly real wage (that means purchasing power, not just the number of dollars) of the median worker rose only 11.6 percent. Over 39 years that’s a miniscule less than one percent increase per year.
[This information is available from the Economic Policy Institute. See “The Productivity–Pay Gap,” ]
“If anything, wages today are historically low. They have been growing slowly for decades for every income group other than the affluent. As a share of gross domestic product, worker compensation [which, by the way, includes the cost of fringe benefits like health insurance, not just wages] is lower than at any point in the second half of the 20th century. Two main causes are corporate consolidation and shrinking labor unions, which together have given employers more workplace power and employees less of it.”
My takeaway from this analysis is that, to the extent that more generous unemployment compensation makes business owners actually RAISE the wages they are offering, that is a GOOD THING not a bad thing.
Leonhardt’s conclusion is most interesting: “That so many are complaining about the situation is not a sign that something is wrong with the American economy. It is a sign that corporate executives have grown so accustomed to a low-wage economy that many believe anything else is unnatural.”
So, returning to the complaints quoted at the beginning of Leonhardt’s article and the complaint voiced to my daughter by the local restauranteur, what they are REALLY saying is, “I can’t hire anyone…” at the wages I want to pay!
The zombie economic analysis of the slow job growth reported for April starts with an unstated assumption that unemployment is VOLUNTARY --- that people refuse to look for jobs if the “compensation” for staying at home is high enough. This assertion was the basis of all economic analysis of depressions during the 19th and 20th centuries (until the great depression of the 1930s) whenever the economy experienced business cycle downturns (known in the 19th century as CRISES). The solution according to economists of that era was always to cut wages --- and the economic analysis of continued unemployment when the economy was depressed was that wages did not fall enough.
Despite the fact that John Maynard Keynes and his followers had demonstrated that this was a nonsensical argument, this point of view keeps rising from the dead over and over again. [For what I hope is a relatively concise presentation and refutation of that set of arguments see the book I co-authored with Howard and Paul Sherman, Principles of Macroeconomics: Activist vs. Austerity Policies, 2nd edition (NY: Routledge, 2019): Chs. 3 and 4.]
Well, here’s another test. After August 1 of 2020, the extra unemployment compensation of $600 a week disappeared. According to this analysis, there should have been a jump in employment because the extra money wasn’t there anymore. In fact, just the opposite happened. Between February of 2020 and April of that same year, the economy lost over 22 million jobs. With the efforts made to pump money into the economy (the CARES act), employment rebounded partially. Between April and August of last year, about 11 million jobs were created. After the extra compensation ceased at the end of July of last year, the rate of job growth virtually stagnated. Only about 1.6 million jobs were created during that period when the extra $600 was gone – from August through January. In other words, there is NO EVIDENCE (zilch, nothing) to support the argument that generous unemployment compensation slowed job growth after April 2020 nor that the removal of that extra compensation for “doing nothing” encouraged (forced?) more unemployed workers to take jobs. [This information is available from the Federal Reserve Bank of Saint Louis – the data is available on line as FRED – the specific table is at https://fred.stlouisfed.org/series/PAYEMS]
In fact, usually unemployment is caused by lack of demand for workers because businesses don’t see profit in more hiring.
Another argument presented by the Economic Policy Institute in the above referenced analysis is that if generous unemployment insurance payments had caused the slow job growth, one would have expected it to have the greatest impact in the low wage sector. Since January, unemployment payments have been supplemented by an extra $300 a week. Giving that to an unemployed accountant would hardly convince her or him to stay home. Supposedly, such generosity might have an impact on minimum wage workers --- say in the hospitality industry.
Once again the evidence goes against the zombie argument. The low wage sectors of the economy saw a higher job growth in April than other sectors. The lower than expected overall job growth was caused by people getting laid off. New entries into the labor force (the people that would have been discouraged by the extra unemployment benefits according to the zombies) actually increased. (By the way, polling data suggest another reason for the slow job growth --- millions of our fellow citizens are still worried about returning to work because of fears for their health.)
Finally, it just isn’t very useful to take one month’s worth of data and attempt to draw conclusions. Monthly data is revised at least twice before a “final” number is accepted, and trends need at least a quarter’s worth of information to reveal themselves.
But, hey – what does any of this matter, right? Republicans have another story with which they can run which fits their overall posture. And I am sure that Fox News will make sure all their brainwashed viewers get this story over and over again. Lurking beneath the alleged theoretical analysis is a stark (and in my opinion disgusting) truth. The people supporting the zombie economic arguments believe that giving money to people who are unemployed is a bad thing. Instead, those folks should be forced to work for starvation wages so businesses can achieve maximum profit. (I apologize to those who sincerely believe the garbage put out by zombie economists --- but most of the politicians and especially business leaders who spout these lines really believe workers are (almost always) overpaid!)
[For information on the April jobs report, see “Job Growth Slowed in April, Muddling Expectations” [May 7, 2021, Patricia Cohen]
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies
The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.