Capitalism can the best of economic systems, and the worst of economic systems. It seems especially the case when individuals expect something out of capitalism it is not set up to do or that some markets should obey the rules and others should not. I get a great deal of questions and comments on my weekly radio appearances that fall into these types of problem situations. The subtitle of this piece could be: Capitalism for thee, but not for me.
Markets and the firm
The first situation almost nobody finds objectionable and it occurs when a firm makes various different decisions about entering or leaving markets. In North Dakota the expansion and contraction of the oil companies in the Bakken area is a good example. Firms expand, hire, and operate as global oil prices allow them to do so profitably. As prices vary the behavior of the firms does too. As would be expected in this case, as prices drop firms stop or curtail production. The result here leads to unemployment of the oil workers. Markets work as predicted in your basic intro textbook.
As I mentioned, almost no radio listeners take issue with this behavior. In the policy sphere there may be discussions of tax changes to further encourage business activity. Overall though, markets working does not seem objectionable. There are some expressions of disappointment, that the company does not have the workers or the state of North Dakota in mind when making these decisions. Even with that minimal level of complaint the results of this process are largely not controversial.
Workers and Labor Markets
In the recent weeks I heard significant complaints about the unemployed. The suggestion appears to be that unemployed are not going back to work due to higher unemployment benefits. There is a great deal of muddled thinking on this, some in the name of research studies. One of my favorites pieces of intellectual counterfeiting suggests in the summary the benefits “will” increase unemployment and reduce GDP, while in the key takeaways weakens the language to suggest that these outcomes “could” occur. What a difference a word makes.
Let’s get this out of the way to start: Of course there will be people taking the money and not going back to work. That will create issues in local labor markets looking for workers as business picks up again. This is only one issue however. The COVID-19 crisis initiated massive economic and social dislocations and we are just a few months into the return to the “next normal”, whatever that will be.
This is capitalism though. People making the choices that are best for them. So let’s start delving into this. First, are these people doing anything illegal? No. Is the policy too vague? Sure. But why are we faulting workers for taking advantage of Congress’s inability to get their act together and do some math? Perhaps with the first rescue package we give them a pass and say it was so sudden, but anyone of the elected officials that thought this was going to end quickly and therefore why bother figuring out differentials across states needs to find a new line of work.
There is a significant amount of radio listener push back against these unemployed and I am not sure why. If they exhibit the rational practices of the oil companies mentioned above, and do not take jobs when the unemployment benefits compensate them more, good for them! Some research seems to suggest that higher unemployment benefits also puts upward pressure on local wages while increasing unemployment spells. Again, I caution, it is a really nuanced situation. As a counter example, Minnesota has unemployment benefits approximately three times the level of Florida, but Florida unemployment is consistently higher than Minnesota.
What other factors are there to consider? The social upheaval from COVID is not trivial and is creating significant adjustment issues for many people in multiple aspects of life. As vaccine rollouts proceed will we see further adjustments? This remains to be seen but I suspect the answer will be yes.
As for other labor market factors it is just not that simple. Other factors we need to consider include any mismatch in skills between available labor and the skills demanded by the open jobs, cost of living, and a host of other things that matter. The combination of regular factors with the special circumstances with COVID are particularly problematic to address. The fact is markets are still working, and our particular implementation of capitalism always has government interventions.