Federal Reserve: Economist Papers Propose Broad Conclusions without Proper Foundation; No Direct Tie between EUC and Amount of Job Openings

Economics is an art not an exact science, extensive use of Calculus notwithstanding. But just like other social sciences, practitioners must remember that the theories of these fields have very real effects on living, breathing human beings. The United States has seemed to place too much emphasis on an inexact Economics field to impose policy that brings misery to human beings without relief.

The practitioners take relief in absolute maintenance of academic theory at the cost of being blind to human effects of the policy. Economists must realize the limitations of their profession and resist making tremendous conclusions without sufficient foundation–support not only from other economists, but also of observations from other social science practitioners. Economics does not exist within a bubble after all.

In addition, excessive focus on artificial limitations leads to unfair, inaccurate conclusions lending support to the comfortable prevailing opinion or policy choice. The paper described in this post has this unfortunate flaw. The authors propose an artificial limit–the end of the emergency unemployment compensation (EUC) program–and use that limit to state the EUC held back job openings. However, the authors failed to consider the growth of job openings that occurred during the operation of the EUC policy.

This result suggests that EUC had no effect on job openings. This data was in the same chart the authors used to draw their ultimate, and inaccurate conclusion–that EUC seemed to hold down job openings. (The end of the EUC program left millions of people without financial resources and no employment.)

In September 2014, Economist Fatih Karahan Senior Research Analyst Samuel Kapon, and Senior Analyst Kaivan K. Sattar, published a paper, “Do Unemployment Benefits Expirations Help Explain the Surge in Job Openings?” for the Federal Reserve Bank of New York’s Liberty Street Economics web publication. The authors conclude that the end of the EUC program led to a tremendous increase of job openings (the types of jobs that were opened were not discussed unfortunately–this lapse reduces the effectiveness of the paper).

The authors base their opinion on two documents. First, the Diamond-Mortensen-Pissaredes (DMP) model, which, the authors state, “predicts that increases in UI (unemployment insurance benefits) generosity put upward pressure on wages since it becomes more expensive to lure people back into work.” Second, a staff report by Marcus Hagedorn, Fatih Karahan, Iourii Manovski, and Kurt Mitman suggested that UI extensions do put upward pressure on wages, reduce job openings, and raise unemployment. Essentially, following the DMP model’s conclusions.

But the authors’ own chart (Job Openings Level and Rate) contradicts this conclusion–job openings (whether real or effective placeholders–no one knows if the employer was actually going to hire from the posting) did increase generally during the duration of the EUC program–mid-2009 through the end of December 2013. Indeed, there was a sharp increase in early 2014, but given the general increase during the EUC period, it cannot truly be said that the end of the EUC program was the reason for that increase. The authors aver a suggestion, but a lack of presenting other reasons, suggests that this “suggestion” is more than that.

Unemployment and its effects on human beings are real not theoretical. Academic economists participating in policy making have a duty to examine all parts of the problem to ensure that advice provided in such a crucial area as unemployment is complete and accurate. In general, I think the United States commits an error by basing judgments solely on economic models–good within their limits but dangerous once economists go beyond the limits of their profession to offer advice.