Broken Okun

Robert Waldmannis honestly mystified by this post by Brad DeLong. Brad notes that firms do not appear to be hoarding labor and goes on to forecast a unemployed recovery.We Are Live at The Week with "The Jobless Recovery Has Begun".."Okun's Law." Here is the gist: if GDP (production and incomes, that is) rises otherwise falls two percent due to the business cycle, the unemployment rate will rise otherwise fall by single percent. The magnitude of swings in unemployment will always be not whole otherwise nearly not whole the magnitude of swings in GDP.Why?Four reasons: (a) businesses will tend to "hoard labor" in recessions, custody useful workers around and on the payroll even when there is temporarily nothing for them to do;[skip]Okun's Law is brokenâ€"especially with regard to the retention of workers in a downturn. [skip]Manufacturing firms second-hand to think that their most important benefit was skilled workers. Hence they hung onto them, "hoarding labor" in recessions. And they especially did not want to let go of their prime productive benefit when the recovery began. Skilled workers were the franchise. Now, by contrast, it looks as though firms think that their workers are much more disposableâ€"that it's their brands otherwise their machines otherwise their procedures and organizations that are key assets.now out of order "get ready for another unemployed recovery."Huh ? Okun's law was symmetric. Why is not the new broken-Okun law symmetric ? If the Okun's law coefficient has shifted from 0.5 to over 1, wouldn't that suggest that there will be a enormous increase in service when GNP recovers ?Semi theory after the jump.To get a small piece almost theoretical, if firms do not have hoards of hoarded workers, they will have to hire new workers in order to incrase production.I think that Brad's model, in which the change is caused by a reduction in the value of taught workers perceived by managers, should entail a forecast of a recovery with unusually an fast increase in employment.My guess is that Brad is not allowing his hypothetical speculation blind him to the fact that the last two recoveries were jobless. Based on atheoretical empiricisms (which is as Paul Krugman notes always unintentional theorizing) I too forecast a unemployed recovery, but I think that Brad's informal model implies the opposite prediction.I can reformulate Brad's model. The key variable is managers perception of the persistence of shifts in demand for their products. If they think that demand for their products will recover soon, they hoard labor. If they think that it will stay low, they lay rotten workers until they can just meet current demand. this means that a recession accompanied by a sectoral shift will cause a larger decline in employment. During the recovery, firms in the expanding sector will increase service slowly as they can only train consequently a lot of new workers (workers recalled from provisional layoff do not have to be re-trained). The story is that asectoral shift causes high unemployment, a drop in demand causes high unemployment and the combination causes a sharp decline in service followed by a unemployed recovery.Oddly, however, Brad and I have co-authored a paper with a third explanation. http://ideas.repec.org/a/fip/fedfer/y1997p33-52n1.htmlOur claim is that in the USA the Okun's law coefficient is an increasing function of the unemployment rate. The story is simple, if there is high unemployment, firms can lay workers rotten and then rehire them later, since the workers won't have found new jobs and will just have to wait to get their old jobs off. This suggests that the modified Okun's law gives a nonlinear and in particular curved in relationship between unemployment and GNP minus trend (or GNP minus peak otherwise GNP minus last years GNP). This means that the drop in GNP wich corresponds to an increase of unemployment form say 5 to 9 % is less than twice the drop in GNP which corresponds to an increase from 5% to 7%. A model in a published paper predicts well out of sample. So why is Brad psychoanalyzing businessmen ?Of course the unintentional theorist may be paying attention to the unintentional theory which says recoveries are unemployed when the President is named George Bush. Fits the information and implies a normal recovery.
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