A Conservative MP is looking for support in his role on the Public Accounts Select Committee.

The position is paid £7.85 p/h and will be for approx 15 hours per week.

The successful candidate must have excellent financial understanding in order to examine and analyse accounts.

The candidate should be inquisitive and have an interest in challenging public accounts.

The candidate should also be able to draft their findings into concise briefings and press releases.

To apply please send your CV and covering letter (1 page max) to XXXX by email XXXX@lse.ac.uk ASAP

£7.85 per hour?  Are they kidding?  They’re sending this to every economics Ph.D. candidate at the London School of Economics?  What the f*** are they thinking?  (the first person to say “non-monetary incentives” gets a clip ’round the ear)

Update 23 September 2010: Professor Frank Cowell, over on facebook, points us towards:

Gneezy, U. and Rustichini, A. (2000) “Pay Enough or Don’t Pay at All“, Quarterly Journal of Economics, 115, pp. 791-810.

Here’s the abstract:

Economists usually assume that monetary incentives improve performance, and psychologists claim that the opposite may happen. We present and discuss a set of experiments designed to test these contrasting claims. We found that the effect of monetary compensation on performance was not monotonic. In the treatments in which money was offered, a larger amount yielded a higher performance. However, offering money did not always produce an improvement: subjects who were offered monetary incentives performed more poorly than those who were offered no compensation. Several possible interpretations of the results are discussed.

The Tube, like most public services, is a monopoly.  As such, Transport for London (TfL) has pricing power and the ability to extract economic rents from consumers.  To whom would those rents flow?  There are three possible groups:  Capital owners (bonds), Capital owners (equity) and Labour (the suppliers of the stuff, not the political party).

The owners of capital in the form of bonds have no ability to insist on being paid economic rents because they cannot credibly threaten to walk away.  There are plenty of other (institutional) investors that are perfectly happy to step in and receive the low interest rates paid by TfL because TfL has the backing (implicit or otherwise) of the UK government and investors value that security.

The sole owner of capital in the form of equity is the UK government.  They have no desire to extract economic rents.  Indeed, they have an incentive to keep economic rents to a minimum because their existence is, on net, welfare-destroying for Britain as a whole.

That leaves the suppliers of labour.  If no TfL worker was unionised, then individual employees would be unlikely to be able to insist on receiving economic rent (i.e. a wage in excess of the value of their marginal product).  By being unionised, however, the employees have collective bargaining power and are therefore able to insist on economic rents.  They can do this because they can credibly threaten to stop the tube from working.  The current strikes are a demonstration of the credibility of any future threat.

There are two further issues to consider, however.  First:  what if without the union, workers would be unfairly exploited — paid less than the value of their marginal product?  If this were the case, the increased bargaining power of unionisation would be justified as it would offset the exploitation.  This is not a problem, however, because the owner of the Tube — the UK government — is not a a profit maximiser.  It is a (zero-profit seeking) service maximiser.  They have literally no incentive to pay less than the employees are genuinely worth.

Second:  what if, when paid the value of their marginal product, TfL employees end up with incomes that are less than the cost of living?  Once again, this fails as an argument for unionisation of TfL workers.  It is the job of the government to guarantee a living wage to all workers across the country, regardless of their job.  If TfL employees are concerned about this, they should be canvassing for an increase in the national minimum wage, not insisting on a higher wage just for themselves.

Therefore, to a first approximation, there is no justification for the unionisation of (and hence, no justification for the strike action by) London Underground employees.

While Professor Krugman’s characterisations of recent recessions are broadly correct, I am still inclined to disagree with him in predicting what will occur in the current recovery.  This is despite Brad DeLong’s excellent advice:

1. Remember that Paul Krugman is right.
2. If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule #1.

This will be quite a long post, so settle in.  It’s quite graph-heavy, though, so it shouldn’t be too hard to read.

Professor Krugman used his 24 August post on his blog to illustrate his point.  I’m going to quote most of it in full, if for no other reason than because his diagrams are awesome:

First, here’s the standard business cycle picture:

Real GDP wobbles up and down, but has an overall upward trend. “Potential output” is what the economy would produce at “full employment”, which is the maximum level consistent with stable inflation. Potential output trends steadily up. The “output gap” — the difference between actual GDP and potential — is what mainly determines the unemployment rate.

Basically, a recession is a period of falling GDP, an expansion a period of rising GDP (yes, there’s some flex in the rules, but that’s more or less what it amounts to.) But what does that say about jobs?

Traditionally, recessions were V-shaped, like this:

So the end of the recession was also the point at which the output gap started falling rapidly, and therefore the point at which the unemployment rate began declining. Here’s the 1981-2 recession and aftermath:

Since 1990, however, growth coming out of a slump has tended to be slow at first, insufficient to prevent a widening output gap and rising unemployment. Here’s a schematic picture:

And here’s the aftermath of the 2001 recession:

Notice that this is NOT just saying that unemployment is a lagging indicator. In 2001-2003 the job market continued to get worse for a year and a half after GDP turned up. The bad times could easily last longer this time.

Before I begin, I have a minor quibble about Prof. Krugman’s definition of “potential output.”  I think of potential output as what would occur with full employment and no structural frictions, while I would call full employment with structural frictions the “natural level of output.”  To me, potential output is a theoretical concept that will never be realised while natural output is the central bank’s target for actual GDP.  See this excellent post by Menzie Chinn.  This doesn’t really matter for my purposes, though.

In everything that follows, I use total hours worked per capita as my variable since that most closely represents the employment situation witnessed by the average household.  I only have data for the last seven US recessions (going back to 1964).  You can get the spreadsheet with all of my data here: US_Employment [Excel].  For all images below, you can click on them to get a bigger version.

The first real point I want to make is that it is entirely normal for employment to start falling before the official start and to continue falling after the official end of recessions.  Although Prof. Krugman is correct to point out that it continued for longer following the 1990/91 and 2001 recessions, in five of the last six recessions (not counting the current one) employment continued to fall after the NBER-determined trough.  As you can see in the following, it is also the case that six times out of seven, employment started falling before the NBER-determined peak, too.

Prof. Krugman is also correct to point out that the recovery in employment following the 1990/91 and 2001 recessions was quite slow, but it is important to appreciate that this followed a remarkably slow decline during the downturn.  The following graph centres each recession around it’s actual trough in hours worked per capita and shows changes relative to those troughs:

The recoveries following the 1990/91 and 2001 recessions were indeed the slowest of the last six, but they were also the slowest coming down in the first place.  Notice that in comparison, the current downturn has been particularly rapid.

We can go further:  the speed with which hours per capita fell during the downturn is an excellent predictor of how rapidly they rise during the recovery.  Here is a scatter plot that takes points in time chosen symmetrically about each trough (e.g. 3 months before and 3 months after) to compare how far hours per capita fell over that time coming down and how far it had climbed on the way back up:

Notice that for five of the last six recoveries, there is quite a tight line describing the speed of recovery as a direct linear function of the speed of the initial decline.  The recovery following the 1981/82 recession was unusually rapid relative to the speed of it’s initial decline.  Remember (go back up and look) that Prof. Krugman used the 1981/82 recession and subsequent recovery to illustrate the classic “V-shaped” recession.  It turns out to have been an unfortunate choice since that recovery was abnormally rapid even for pre-1990 downturns.

Excluding the 1981/82 recession on the basis that it’s recovery seems to have been driven by a separate process, we get quite a good fit for a simple linear regression:

Now, I’m the first to admit that this is a very rough-and-ready analysis.  In particular, I’ve not allowed for any autoregressive component to employment growth during the recovery.  Nevertheless, it is quite strongly suggestive.

Given the speed of the decline that we have seen in the current recession, this points us towards quite a rapid recovery in hours worked per capita (although note that the above suggests that all recoveries are slower than the preceding declines – if they were equal, the fitted line would be at 45% (the coefficient would be one)).

I thought it might be worthwhile to look at this idea further.  Here is the equivalent graph where movements in hours worked per capita are made relative to their actual troughs rather than their actual peaks:

At a first glance, recoveries do appear to be somewhat symmetric to their corresponding contractions, although they do also appear to be a bit slower coming back up to falling down in the first place.

I then identified data pairs that are symmetric in time around each trough (e.g. 3 months before and after the trough) and put them in a scatter-plot:

Points along the 45-degree line here would represent recoveries that were perfectly symmetric with their preceding contraction.  Notice that for five of the six recessions shown, recoveries are in a fairly tight line below the 45-degree line.  By comparison, the recovery following the ’81-’82 recession was especially rapid – it came back up faster than it fell down.

Excluding the ’81-’82 recession on the basis that it’s recovery seems to have been driven by a separate process, a simple linear regression gives a remarkably good fit:

This is a very rough-and-ready analysis.  In particular, I’ve not allowed for any autoregressive component to employment growth during the recovery.  Nevertheless, it is suggestive.

There are more serious efforts in looking at this for the economy as a whole (rather than just hours worked).  James Hamilton is not convinced that it will occur this time.  The oddly rapid recovery in hours worked per capita following the ’81-’82 recession should give us reason to agree with Professor Hamilton, not disagree: it shows that the typical recovery is not guaranteed.  Look back at the scatter-plot of all the recessions.  Notice that the recovery following the ’69-’70 recession was actually quite slow.  It’s fitted line is y = 0.252 x.

For me, the big thing that makes me lean towards Professor Hamilton’s fears of a slower-than-typical recovery is the possibility of zombie banks, or as John Hempton argues, zombie borrowers.  Zombie borrowers should worry us because, if they exist, they are keeping hold of the capital that could (and should) be better placed elsewhere in the economy, which means that those more deserving would-be borrowers are not able to expand and employ more people.

As Hempton argues in the second of his posts, on this basis it is a Good Thing ™ that two of the three US car manufacturers have been forced into a bankruptcy-induced contraction.  Note that Ford only really managed to avoid the same fate by borrowing a huge amount just before the credit markets froze.  It probably needs (from the point of view of the economy as a whole) to follow the same process, whether inside or outside the courts.

But the car manufacturers are by no means the only candidates for the “zombie borrower” epithet.  The really big borrower behind all of the mess in the financial sector is the one at the bottom of all the “toxic” CDOs:  the underwater American households.

First the year-over-year % change in number of production workers, hours worked per member of the workforce and hours worked per capita:

A casual inspection of this graph suggests that the current recession is, for employment, about the same as or a little better than the 1973-75 recession, but that is an incorrect interpretation.  This graph effectively shows rates of change, so it’s not just the depth below zero that matters but the time beneath it as well.  As we will shortly see, the current recession is actually quite a bit worse than the ’73-75 recession and the 2001 recession was a lot worse than it looks.

First, though, it’s instructive to zoom-in to the last year or two on the graph:

The red line indicates the year-over-year change in employment.  It’s clearly badly negative.  The green line is the change in hours worked per member of the workforce.  This is worse than that for employment because not only are people losing their jobs, but those who keep their jobs are, on average, having their hours cut.  The blue line is the change in hours worked per capita.  This is the worst of the three because in addition to people losing their jobs and those with jobs having their hours cut, some of those without jobs have given up looking.  Notice that the blue and green lines were pretty close together at first.  This suggests that in the first half of the current recession, people who lost their jobs were staying in the workforce in the hope of finding work, while it was only in the second half that some of the unemployed started to lose hope and give up looking.

In comparing recessions, I prefer to use the hours-worked-per-capita metric because it captures much more of the employment picture than just employment figures or total hours worked.  Here is a comparison between recessions dating back to 1964, centred around their NBER-determined peak in economic activity:

Notice that hours worked per capita tend to have been falling for some time before the NBER-determined peak in economic activity.  This is because employment is not the be all and end all of the economy and the dating committee has to take those other elements into account as well.

Now we rebase that comparison so each recession is relative to it’s actual peak in hours worked per capita:

This gives us a true measure of the depth of each recession with respect to employment.  We can see that the ’71-75 and 2001 recessions reached about the same depth and that the current recession has now gone lower than either of them.  Since it is reasonable to assume that the USA will continue to lose jobs (or at least hours worked) in the next couple of months, we can safely call the current recession the worst of this group of seven.

Finally, I thought it worthwhile to compare the falls relative to actual peaks, but centred around each recession’s trough in hours worked per capita (for comparison purposes, I have assumed that the current recession’s trough was in May ’09):

This graph gives some hope to those imagining a quick recovery.  While the recoveries do tend to be a little slower than the recessions, there does appear to be some symmetry around the troughs.

Akerlof, George A. and Kranton, Rachel E. “Economics and Identity.” Quarterly Journal of Economics, 2000, 115(3), pp. 715-53.

The abstract:

This paper considers how identity, a person’s sense of self, affects economic outcomes.We incorporate the psychology and sociology of identity into an economic model of behavior. In the utility function we propose, identity is associated with different social categories and how people in these categories should behave. We then construct a simple game-theoretic model showing how identity can affect individual interactions.The paper adapts these models to gender discrimination in the workplace, the economics of poverty and social exclusion, and the household division of labor. In each case, the inclusion of identity substantively changes conclusions of previous economic analysis.

I’m surprised that this paper was published in such a highly ranked economics journal.  Not because of a lack of quality in the paper, but because of it’s topic.  It reads like a sociology or psychology paper.  99% of the mathematics were banished to the unpublished appendices, while what made it in were the justifications by “real world” examples.  The summary is below the fold …

The authors propose a model whereby a) there are abstract social identities or categories (e.g. “man” and “woman”); b) there are also prescriptions on what actions each identity ought (or ought not) to take; c) individuals’ payoffs are identity-based; d) individuals’ payoffs derive from both their own actions and from others’ actions; and e) some people may be able to choose their identity.  In particular, $$j$$’s utility function is:

$$!U_{j}=U_{j}\left(a_{j},a_{-j},I_{j}\right)$$

Where $$a_{j}$$ are $$j$$’s actions (including consumption decisions), $$a_{-j}$$ are the actions of everyone other than $$j$$ and $$I_{j}$$ is $$j$$’s identity or self-image.  $$I_{j}$$, in turn, is represented as:

$$!I_{j}=I_{j}\left(a_{j},a_{-j};c_{j},\epsilon_{j},P\right)$$

Where $$c_{j}$$ describes how $$j$$ believes everyone is assigned to identities/categories, $$\epsilon_{j}$$ is a measure of the extent to which $$j$$’s own given characteristics match the social ideal of $$j$$’s assigned category and $$P$$ is the set of prescribed ideal actions for each identity.

A series of examples are then given for the four main assertions made about this utility framework:

The impact of a person’s actions ($$a_{j}$$) on their utility depends in part on their sense of identity ($$I_{j}$$)

• Self-Mutilation (tattooing, body-piercing, steroid abuse, plastic surgery, circumcision, etc.)
• Gender and Occupations (a woman in a “man’s job”)
• Alumni Giving
• Mountaineering

People have identity-related payoffs that are affected by others’ actions ($$a_{-j}$$ affects utility both directly and through $$I_{j}$$)

• Gender and Occupations (when confronted by a woman in their profession, men might tease her)
• Manhood and Insult
• Those who seek upward mobility are often teased by their peers

To some extent, people may choose their identity ($$c_{j}$$)

• Parents choosing schools for their children
• Entering particular fraternities or sororities at college
• Moving from permanent residency to citizenship

(Self-choice of an identity can still be constrained by appearance, voice or accent)

How social categories ($$C$$) and prescriptions ($$P$$) are created

• Advertising
• Professional and Graduate Schools, Military Training
• Political Identity (populist leaders fostering racial or cultural divisions)

They next present a simple model capturing some of these aspects, summarised in this extensive-form dynamic game:

There are two social identities or categories:  Green and Red.    Social prescriptions dictate that a “true” Green will choose Activity One.  Both players start out being thought of as Green, but Person Two has a private desire to perform Activity Two (this need not require that they think of themselves as Red).

Person One goes first and chooses Activity One (the possibility of their choosing Activity Two is suppressed because it would never be chosen in a Subgame-Perfect equilibrium).

If Person Two chooses to conform to the societal prescription and perform Activity One, Person One gets $$V$$ while Person Two gets nothing.

If Person Two instead chooses Activity Two (as indeed they would if their utility were solely determined by their own action), then this creates an identity conflict.  Person Two gets $$V$$ from the activity, but also suffers anxiety at the loss of self-identity ($$-I_{s}$$).  In addition, an externality is imposed on Person One, who has the value of their identity threatened ($$-I_{o}$$).

In this case, Person One has an opportunity to respond to Person Two’s deviation from the prescription.  If they do so, a further loss ($$-L$$) is imposed on Person Two and Person One no longer suffers a loss from questioning their identity but instead incurs a cost of the response.

Subject to the parameters, there are four possible subgame-perfect equilibria:

• $$c<I_{o}$$ and $$I_{s}<V<I_{s}+L$$:  The threat of response is credible so that Person One successfully deters Person Two from engaging in Activity Two.
• $$c<I_{o}$$ and $$I_{s}+L<V$$: Person One responds (as it minimises their own loss) so the threat is credible, but it has insufficient effect to deter Person Two from choosing Activity Two.
• $$c>I_{o}$$ and $$I_{s}<V$$: Person One will not respond so the threat is not credible, and Person Two chooses Activity Two.
• $$c>I_{o}$$ and $$I_{s}>V$$: Person One will not respond so the threat is not credible, but Person Two still doesn’t choose Activity Two because the loss of self-identity exceeds the benefit.

Clearly, government intervention to impose a “tax” or certain actions can serve to change the equilibrium.

The authors acknowledge that while the set of identities, prescriptions and the pairing of Persons One and Two were imposed here, they might be endogenous in a more complete model.

The model is then applied to three different scenarios:  Gender and the Workplace, Poverty and Social Exclusion, and The Economics of the Household.

(I’ll finish this summary once I can install the fonts needed to read the technical appendices)

• I think that all fines issued for misdemeanours should not be for a fixed amount, but for a percentage of the transgressor’s income. When faced with the prospect of a $400 fine, somebody earning $20,000 a year will pay attention, but somebody earning $200,000 will not care nearly as much. I also think that any money raised through fines (a) should not be available to the department that issued the fine, but go into broader government funding (the police should not have a direct economic benefit from fining people for speeding) and (b) should be carefully tallied and reported publically on a regular basis. People need to be able to see that, for example, the money raised through speeding fines is contributing to funding hospitals.