The solution to unemployment

It's now virtually an article of faith that the the US economic system is a marvellous engine of job creation, especially when compared with Europe, and that the source of this vitality is its flexible labour market and relative lack of social welfare. As I've mentioned previously, what is less well known is just how huge the US prison population is (around 2.2 million, or many times higher per unit population than any other wealthy country), and how this affects our view of unemployment.

Bruce Western at Princeton has tried to account for the effect of the prison population on unemployment numbers, and among other things, has found that the Black male unemployment rate during the 90s boom was a whopping 39%. Put this alongside France's much publicised 20% rate for its minorities, and you have the seeds of an interesting debate about which country is actually doing worse for it's “underclass”. Along with Katherine Beckett, Western has also shown that if you account for prison numbers, US unemployment was consistently higher than Europe's in the 90s. This is a remarkable turnaround of the conventional wisdom. Writing in the mid-90s, when the prison population was a mere 1.6 million, Western predicted that to keep official unemployment low, the prison population would have to rise further. Indeed, in the decade since, it's gone up a whopping 37% to around 2.2 million.

But why should we account for incarceration when we are interested in unemployment? I think the answer to this lies in thinking for a second about why it is we care about unemployment in the first place. We care about unemployment because it is unpleasant to be unemployed. That's it. It's the well-being of the jobless that is the issue. If the unemployed, were, for some reason, perfectly happy to be without work, and if the rest of the labour market was functioning just fine without them, the issue would cease to be of consequence.

Yet being incarcerated is surely at least as bad as being unemployed (and taking into account endemic features of violence, sexual assault and psychlogically devastating things like solitary confinement probably much worse). At the time the standard measures of economic well-being were formulated the prison population was so small - as it still is in most of the world - that it was unnecessary to account for it in national measures of economic health. But the population affected by the criminal justice system in the US is now so large that neglecting to account for it means missing out a huge part of the labour market in that country, and, in my view, leads to a much too rosy view of unemployment there.

These prisoners are not only not gainfully employed, but deprived of basic liberties, and in many cases lose many rights for life. Furthermore, their sorry outcome, unlike that of the unemployed in Europe, is simply erased from the economic accounts (well, actually all the guarding and prison building actually adds to GDP, but that's another story). Personally, I find the way in which the outcomes of these millions of people are effectively erased from US measures of well-being really disturbing, because mass incarceration not only reduces well-being, but perversely gives the impression of increasing it.

Viewed in this way, perhaps Europe's greatest "failing" is actually trying to count all its citizens in economic measures. How much better would European unemployment look if we simply imprisoned a large chunk of the poor and unskilled, and hired some of the remainder to guard them?

Urban America

In just over a year living in the USA, perhaps nothing has surprised me more than the contrast between the much-vaunted wealth and dynamism of this country and the often mediocre quality of life in its urban areas. This post from urban planning writer Josh Stephens makes this point far more eloquently and passionately than I can:

http://www.planetizen.com/node/23517

A nice, and in my view very accurate, observation from the piece:

Many Americans rightfully take pride in so-called gems like San Francisco, New York, Portland, and even Los Angeles on a clear day. But Mercer's analysis indicates that we're fooling ourselves: we're so far from the top that, in true Platonic fashion, we can't even imagine what the top looks like.

You could say that Stephens is being a little tough on the US here. Perhaps US life is fundamentally centred around the car, and that it is this fact that changes everything in terms of how cities are designed. To be fair, I know Americans who dislike European cities because they have pedestrian zones and public spaces and because you have to walk between shops: so perhaps it's just a case of to each his own.

Unemployment in Germany and the US

A standard piece of conventional economic wisdom says that Germany's labour-friendly regulations and high level of social benefits result in a high level of unemployment. It's not unusual to see unemployment figures as high as 12% quoted in the press, usually in juxtaposition to a US rate of 5% or thereabouts.

But is the difference really as great as that? The German government's numbers are calculated in a very different way from the US. As far as I'm aware, in Germany if you work upto 15 hrs a week but register a desire to work longer, you count as unemployed. In the US, if you work just 1 hour a week, you're employed. The OECD tries to correct for these sorts of accounting difference in its "Standardised Unemployment Rates". The current rates for Germany and the US are 7.7% and 4.6% respectively:

http://www.oecd.org/document/50/0,2340,en_2825_495670_38234290_1_1_1_1,00.html

However, Germany's social benefits in themselves surely increase the chance that an unemployed person is formally recorded as unemployed: he or she has much to lose by being "off the books". This "pull" factor is very likely much weaker in the US, so I'd expect a greater chunk of the unemployed in the US to be unrecorded than in Germany. Admittedly, this is hard to correct for. Also, the US figures don't include that country's enormous prison population of well over 2 million. It seems reasonable to assume that a good chunk of these people would be unemployed if they were not incarcerated. Accounting for these differences would surely add at least 1% to the US figure bumping it up to around 5.6%.

Finally, while you can never control for all the many relevant factors, there's one event in recent German history that simply cannot be ignored. This is, of course, reunification. If unemployment is three times higher in the East than West, a back of the envelope calculation suggests that unemployment in West Germany is probably around 6%.

This leaves us with a very minor difference in unemployment rates between the US and West Germany. Put this together with the fact that West Germany had really low unemployment for decades previously, and this must surely put a question mark over the claim that social welfare must lead to joblessness.