There is generally consensus among macroeconomists that monetary policy works best when it is systematic. Following the financial crisis, the US Federal Reserve shifted from long-term, systematic policy to short-term goals targeting unemployment. This column argues that, while these were appropriate in the aftermath of the downturn, such policy accommodations have been pursued for too long since. The need for a somewhat accommodative policy cannot be used to defend the current non-systematic policy and excessive emphasis on short-term employment gains.
Athanasios Orphanides, 11 November 2015
Thomas Philippon, 31 August 2015
The Eurozone crisis continues to take centre stage. This column discusses how deep the EZ crisis is, how long it will last, and what should be the policy priorities. A number of findings emerge. First, the difference in labour market performance between the US and the Eurozone is one of degree but not of kind. Second, the economic consequences of the sovereign debt crisis will be mostly gone by 2018, but the political crisis will continue. Third, enforcing fiscal rules via political arm twisting is a recipe for disaster. Market discipline must instead be brought back, but without financial fragmentation. Limited and conditional Eurobonds are the best way to do so.
Steffen Altmann, Armin Falk , Simon Jäger, Florian Zimmermann, 03 August 2015
A key question for policymakers is how long-term unemployment can be effectively reduced. This column presents new evidence from a large-scale field experiment in which job seekers were provided with information and encouragement. The results indicate that targeted information provision can be an effective policy tool, in particular in the combat against long-term unemployment.
Stefan Gerlach, Reamonn Lydon, Rebecca Stuart, 21 July 2015
Despite being a mainstay of macroeconomic theory for the past half century, the Phillips curve often receives the death knell from various commentators. These critiques often rely on results from data samples spanning relatively short periods. Using the case of Ireland, this column argues that short-term idiosyncrasies can explain the failure of the model in these contexts. Taking a longer historical view, the Phillips curve remains a useful macroeconomic model, at least in the Irish context.
Arash Nekoei, Andrea Weber, 10 July 2015
The generosity of unemployment insurance is often cited as a reason for long spells of joblessness. But this view neglects other important, and potentially positive, economic aspects of such programmes. Using Austrian data, this column presents evidence that unemployment insurance has a positive effect on the quality of jobs that recipients find. This can in turn have a positive effect on future tax revenues, and has implications for the debate on optimal insurance generosity.
Jeffrey Brown, Chichun Fang, Francisco Gomes, 23 March 2015
College-educated workers are less likely to experience unemployment, but their lifetime earnings are also much more uncertain. This column estimates the risk-adjusted value of college education to be between $225,000 and almost $600,000, corresponding to risk-adjusted increases in total present-value lifetime wealth of 35% to 48%. Increased earnings volatility actually decreased the risk-adjusted value of college between 1968–1980 and 1991–2011 by almost $50,000, even though expected lifetime income increased by about $150,000. Nevertheless, even the most conservative estimates of the value of college education are still positive.
Jan van Ours, 27 February 2015
The Great Recession has been characterised by an unprecedented decline in GDP, and unemployment rates remain above pre-Great Recession levels in many countries. This column argues that economic growth is a ‘one size fits all’ solution for the problem of unemployment, because the unemployment rates of different kinds of workers are strongly correlated within countries. That said, economic growth affects above all the position of young workers, and so benefits mostly those who need it the most.
Juan Dolado, 09 February 2015
Youth unemployment has been a problem in Europe for several decades, but some European countries have fared much better than others in recent years. This column summarises the policy lessons to be drawn from a new VoxEU.org eBook that compares the labour market experiences of different European countries and provides an early evaluation of the European Commission’s Youth Guarantee scheme.
Philip Jung, Moritz Kuhn, 04 February 2015
Given the pressing need for labour market reforms in Europe, policymakers are looking to the Hartz I-IV reforms conducted in Germany in the mid-2000s for inspiration. To successfully apply their lessons one must understand why they worked. This column argues that the success of the Hartz reforms lay in improving matching efficiency between unemployed workers and vacancies – particularly effective in Germany where employment inflows are the main driver of labour market adjustment, in contrast to the US, where outflows play the primary role.
Claudio Michelacci, Hernán Ruffo, 18 November 2014
Like any insurance mechanism, unemployment benefits involve a trade-off between risk sharing and moral hazard. Whereas previous studies have concluded that unemployment insurance is close to optimal in the US, this column argues that replacement rates should vary over the life cycle. Young people typically have little means to smooth consumption during a spell of unemployment, while the moral hazard problems are minor – regardless of replacement rates, the young want jobs to improve their lifetime career prospects and to build up human capital.
Brian Clark, Clement Joubert, Arnaud Maurel, 16 November 2014
There are large rewards of higher education in terms of earnings. However, a sizeable fraction of workers hold occupations that not require as much schooling as they have. This column considers the effects of being overeducated on future employment and wages for a representative cohort of Americans. Around 38% of the college graduates in the sample have higher education than the typical worker in their profession. Rather than transitory, the bulk of overeducation persists in the long run. Even if workers manage to transit to better jobs, they experience wage penalties similar to those after unemployment.
Hugh Rockoff, 04 October 2014
World War I profoundly altered the structure of the US economy and its role in the world economy. However, this column argues that the US learnt the wrong lessons from the war, partly because a halo of victory surrounded wartime policies and personalities. The methods used for dealing with shortages during the war were simply inappropriate for dealing with the Great Depression, and American isolationism in the 1930s had devastating consequences for world peace.
Nicholas Crafts, 27 August 2014
It is well-known that World War I was expensive for Britain. The indirect economic costs were also huge. This column argues that the adverse implications of the Great War for post-war unemployment and trade – together with the legacy of a greatly increased national debt – significantly reduced the level of real GDP throughout the 1920s. A ballpark calculation suggests the loss of GDP during this period roughly doubled the total costs of the war to Britain.
Pascal Michaillat, Emmanuel Saez, 12 August 2014
High US unemployment rates following the crisis are a primary policy concern, but are poorly explained by existing models. This column introduces a new model of frictional labour and product markets. Price rigidities yield testable predictions pointing to the source of unemployment and product market tightness. Evidence suggests that unemployment fluctuations are driven mostly by aggregate demand shocks.
Michele Battisti, Gabriel Felbermayr, Giovanni Peri, Panu Poutvaara, 08 August 2014
Immigration continues to be a hotly debated topic in most OECD countries. Economic models emphasising the benefits of immigration for natives have typically neglected unemployment and redistribution – precisely the things voters are most concerned about. This column analyses the effects of immigration in a world with labour market rigidities and income redistribution. In two-thirds of the 20 countries analysed, both high-skilled and low-skilled natives would benefit from a small increase in immigration from current levels. The average welfare gains from immigration are 1.25% and 1.00% for high- and low-skilled natives, respectively.
Liu Yang, 19 July 2014
In China, both unemployment and a labour shortage have emerged as problems in recent years. This column explains their co-existence by a decrease in the matching efficiency in the labour market. One way to improve the matching efficiency, though difficult to implement in the short-run, is through the creation of more employment agencies. Companies can benefit if they invest more in recruiting activities.
Kerem Cosar, Nezih Guner, James Tybout, 07 July 2014
Trade liberalisations are often accompanied by labour market reforms, making it difficult to isolate their effects. This column discusses the effects of trade liberalisation, globalisation, and labour-market reforms on the Colombian labour market. Reduced trade frictions increased cross-firm wage inequality and shifted the firm-size distribution rightward, with offsetting effects on overall wage inequality. Average income increased, but the gains were concentrated among employees of large, productive firms with access to export markets. Greater trade openness also increased job turnover.
Laurence Ball, 01 July 2014
Whereas textbook macroeconomic theory suggests that output should return to potential after a recession, there is mounting evidence that deep recessions have highly persistent effects on output. This column reports estimates of the long-term damage caused by the Great Recession. In most countries in the sample, the loss of potential output – 8.4% on average – has been almost as large as the loss of actual output. In the countries hit hardest by the recession, the growth rate of potential output is much lower today than it was before 2008.
João Pessoa, John Van Reenen, 28 June 2014
The fall in productivity in the UK following the Great Recession was particularly bad, whereas the hit to jobs was less severe. This column discusses recent research exploring this puzzle. Although the mystery has not been fully solved, an important part of the explanation lies in the flexibility of wages combined with very low investment.
David Blanchflower, Stephen Machin, 12 May 2014
The pain of the UK’s Great Recession has been spread more evenly than previous downturns, with falling real wages across the distribution. This column asks why this happened, how it compares with the US experience, and what the prospects are for recovering lost wage gains.