Yglesias

Alan Krueger Is The Guy You Call When You’ve Given Up On Reducing Unemployment By Increasing Demand

Alan Krueger is the lead author of every progressive pundit’s favorite empirical study of the minimum wage, showing that across some important real-world margins in the United States, it doesn’t have the effect that would be predicted from modeling a friction-free fully competitive marketplace. But I think the main lesson to take away from this is that the guy President Obama wants to bring back on board is a specialist in micro-scale labor market inefficiencies. What’s the difference? Well, nationwide we have a massive plague of idle resources — unemployed workers, and unused facilities — to which the largest contributor is insufficient aggregate demand. This big chunk of inefficiency (“Okun Gap”) is what fiscal and monetary stimulus are all about. You call in Christina Romer if you want to tackle these problems.

But as I said over the weekend, there are also other things going on. Washington, DC features plenty of vacant storefronts and plenty of unemployed workers who lack bachelors degrees alongside robust unmet demand for bars and restaurants due to restricting liquor licensing. I’m not familiar with any Krueger work specifically on liquor licenses, but this kind of thing — small scale inefficiencies in the labor market — is the main focus of his work. That minimum wage paper showed that the theoretically predicted minimum wage inefficiency wasn’t there. But he also has his series of papers with Morris Kleiner about occupational licensing, a series of papers (of which this PDF is the most recent) casting doubt on the efficacy of Sweden’s Active Labor Market Policies, a few papers looking at time-use data to understand what the unemployed do, etc.

These are important issues to study since clearly in the aggregate if you add up every petty inefficient regulation in America, it’s a big deal. And I’d say it’s an especially big deal in a time like 2006 when the economy doesn’t suffer from elevated unemployment but the broad performance of the economy in terms of wages, opportunity, etc. is still disappointing. This is not, however, the issue I would be focusing on amidst a huge demand shortfall. Now I should say that David Wessel is reporting that Krueger “is likely to provide a voice inside the administration for more-aggressive government action to bring down unemployment and, particularly, to address long-term joblessness,” and I hope that’s correct. But my read of his work is that the kind of action he’s an aggressive and creative thinker about is relatively small bore, supply side changes rather than big picture efforts to fill the gap.