Dean (Biden) Baker and Kevin (Dow 36000) Hassett have a very nice piece in today’s NY Times focused on new evidence documenting the long run costs of short run job loss due to recession. Unemployment raises suicide risk and divorce risk. The new empirical research pays careful attention to trying to establish whether the correlation between unemployment and bad later outcomes is a causal effect. It is possible that there is some omitted 3rd factor that causes both events.
The recent collapse of Dewey and LeBoeuf offers an example of how modern applied economists seek to establish causal effects. In the year 2015, a researcher will be able to study suicide and divorce outcomes for those who have recently been fired by the law firm Dewey and LeBoeuf . These workers didn’t expect to be fired and this was a top law firm so nobody can claim that the lawyers and staff were “losers”. The control group might be similar workers (same age, gender and ethnicity) who remain employed at other law firms. Since social scientists can’t randomly assign the treatment of “job loss” , this is the type of “natural experiment” that labor economists use to test the important hypothesis that “unemployment isn’t a vacation”.
This new research counters the old half joke that I was taught in graduate student at a Midwest university that “unemployment is a vacation”. This joke is true if you have savings in the bank, and labor markets are competitive. Under these assumptions you can easily transition to your next job without much pain. This new empirical research on the long run cost of recessions is important and provides an intellectual underpinning for Dr. Krugman’s demand side push. An alternative policy strategy is to lower migration costs so that unemployed households can move to local labor markets where there is job growth.
While many RBC readers appear to believe that neo-classical economics is a smoke screen for pushing a core ideology covered with a lot of math and ivy league degrees, I believe that this Baker/Hassett piece (written by a well known Liberal and Conservative) highlights the consensus and the scientific approach at the heart of modern economics. We are making slow progress but the target is moving and the questions are hard and game theory (i.e the strategic game between Bernanke, Congress, Obama, Europe, China and Wall Street) is hard!