Wednesday, May 19, 2010

The Cost of Recessions

I am a retired labor economist. Back in the day, there was an interesting debate about the "scarring effects" of unemployment. Intuitively, does being unemployed make you less employable in the future? Papers such as this one said yes. The mechanism might be that an unemployed person's skills atrophy as he drinks more booze, stops shaving and bathing. If such "scarring effects" are large then this provides a microeconomic reason to take Keynesian counter-cyclical policy seriously.
Government investments today in "aggregate demand" help to preempt this depreciation of the human capital stock.

Now a new line has emerged in this paper.

Joblessness and Perceptions about the Effectiveness of Democracy
Duha Tore Altindag, Naci H. Mocan
NBER Working Paper No. 15994*
Issued in May 2010

Using micro data on more than 130,000 individuals from 69 countries, we analyze the extent to which joblessness of the individuals and the prevailing unemployment rate in the country impact perceptions of the effectiveness of democracy. We find that personal joblessness experience translates into negative opinions about the effectiveness of democracy and it increases the desire for a rogue leader. Evidence from people who live in European countries suggests that being jobless for more than a year is the source of discontent. We also find that well-educated and wealthier individuals are less likely to indicate that democracies are ineffective, regardless of joblessness. People’s beliefs about the effectiveness of democracy as system of governance are also shaped by the unemployment rate in countries with low levels of democracy. The results suggest that periods of high unemployment and joblessness could hinder the development of democracy or threaten its existence.


I am reading a biography of IKE and there is a short section about Hitler's rise to power. The Post WW I German data point does provide a supportive case study for this paper's core thesis.

Do desperate people blame themselves or "institutions" for their bad fortune? Now that economists are studying social interactions --- it is certainly interesting to ask how participation in a revolution/rioting starts up -- how much is push versus pull of giving up on the incumbent institutions?