Thursday, August 12, 2010

Mankiw and Mulligan on Seasonal Employment as a Challenge to Keynesians

University of Chicago economist Casey Mulligan attempts to disprove the main argument of Keynesians - that the chief macroeconomic problem remains lack of aggregate demand - but pointing to seasonal employment figures for (out-of-school) teens, which confirms that even during recessions the labor supply impacts overall employment theories (see here). He takes this as a fundamental challenge to Keynesianism. Greg Mankiw suggests (here) that it only challenges more extreme versions of Keynesianism.

There are some problems with this challenge to Keynesianism, some (but not all) of which have been pointed out in comments following Mulligan's article. First, while seasonal employment clearly continues to affect the labor supply, overall levels of seasonal employment have been dropping since the onset of the recession, and continue to drop this year compared to last year (according to Mulligan's own charts). Second, I doubt whether Mulligan or Mankiw can identify any Keynsian, "extreme" or otherwise, would who not concede the point that seasonal workers affect the labor supply even during a recession. To concede the point is simply to concede a truism. Finally, to the extent Mulligan is primarily concerned to repudiate Keynesian arguments about the fall in aggregate demand, his data provide no basis for drawing any conclusions about the overall level of aggregate demand. It is possible (and perhaps likely), for example, that a sectoral analysis of seasonal employment would show that most of those teenagers are going into jobs in counter-cyclical industries such as fast-food, Walmart, etc. The rise in seasonal labor demand in those industries could be offset or more than offset by declining demand in other industries, e.g., construction. Thus, seasonal employment might rise even as aggregate demand falls.

UPDATE: My economics guru, Peter Grossman, explains to me that I have missed the gist of Mulligan's argument, which is of course entirely possible. Peter's explanation, which I won't go into here, seems sensible to me, and far more explanatory (for non-economists) than what Mulligan wrote in the NY Times. However, even after Peter's explanation of Mulligan's arguments, I still don't see how it leads to the conclusion that calls for additional stimulus to fuel aggregate demand are misguided.

FURTHER UPDATE: For an economist's critique of Mulligan's "silly" op-ed, see here.

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