Saturday, January 31, 2009

Summers on Unions

via Mankiw, who quotes approvingly...

"Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions."

But of course, correlation does not equal causality, my friends. The upper midwest -- the rust belt -- has higher rates of unionization and has been bleeding jobs for a generation. Is it b/c of the unionization? Let's look at the time series evidence. In the mid-1950s and 1960s, the unemployment rate in the old industrial midwest was much lower than today. In addition, the unionization rates were much, much higher than today. Hence, now we could just as easily conclude that high employment rates are correlated with high rates of unionization across time...
It's also worth mentioning that many of these old union jobs were in manufacturing. America doesn't manufacture all that much any more. It's done in China.

According to Summers,
"To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways."

OK, but then what caused long-term unemployment before welfare payments and unemployment insurance. Why, without these two causes of long-term unemployment, was 25% of the labor force unemployed when FDR took office in 1933, almost all of them having been unemployed long term? And, why, then was the unemployment rate in 1928, during a stock market bubble, but before the New Deal, 4.1%, while the unemployment rate in 2000, when we've got welfare and unemployment insurance, just 4.0%?

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