2013-07-20

Correcting An Error

Simon Grey writes:
Imagine someone cryogenically frozen in 1950 is woken up today.  The first thing he sees is an op-ed calling for increased immigration to handle America’s labor shortage.  The second thing he sees is the U-6 unemployment rate, which is over 13%.*  He’s going to be very confused.  How can someone look at an unemployment rate of 13% (with depressed, inflation-adjusted wages to boot) and say the problem is a labor shortage?
Next, he writes:
When the unemployment rate is 13+% but employers are complaining of a labor shortage, it is not unreasonable to assume that some people’s rights are somehow being violated.  
I believe Grey is confused about what U-6 unemployment actually measures, so I am going to quote the definition from the very link Grey supplies:
The U6 unemployment rate counts not only people without work seeking full-time employment (the more familiar U-3 rate), but also counts "marginally attached workers and those working part-time for economic reasons." Note that some of these part-time workers counted as employed by U-3 could be working as little as an hour a week. And the "marginally attached workers" include those who have gotten discouraged and stopped looking, but still want to work. The age considered for this calculation is 16 years and over 
A concise way of saying this is that U-6 unemployment counts not only people who don't have jobs, but people who consider themselves "under-employed," i.e. they have a job, but not the particular job they want to have.

The "puzzle" Grey points out is not so much a puzzle as it is a misinterpretation of the U-6 unemployment rate. Classic Austrian Business Cycle Theory (ABCT), along with its modern cousins such as Arnold Kling's "Patterns of Sustainable Specialization and Trade" (PSST), predicts that whenever a macroeconomy has over-invested in a certain kind of labor, there will be a bubble, followed by a recession. During this recession, economists argue that the challenge is in converting capital into new and more marketable uses, along with diverting labor into more "sustainable" specializations.

Suppose an unsustainably large number of employees hold PMP certifications. If there is malinvestment in project management, then a large number of employees will have earned their PMP cert. When the bubble "bursts," a large number of unemployed people will be certified project managers. Once their unemployment benefits run out, they will get to work looking for new jobs as Project Managers. According to ABCT and PSST, we expect that the economy will experience a long period during which many PMs compete for only a few PM jobs; meanwhile, businesses are trying to hire employees in other areas, say, database developers.

So, a few PMs get the last remaining PM jobs available. A few other former-PMs, those who had prior experience in database development, will take new jobs as database developers. Note that if these latter jobs pay lower salaries than PM jobs, as they do at my company for example, then these former PMs will be both gainfully employed and part of the U-6 unemployment rate. That is a very important feature of the U-6 rate.

While that is occurring, some of the former PMs are now going back to school to get some other type of training that is more applicable to the current job market. Many of these folks will have taken jobs at, say, Costco or Starbucks, in order to pay the rent while they buttress their skills. Or maybe they take jobs as General Managers of retail stores or fast-food restaurants. In all of these cases, the former PMs probably do not count as being "unemployed" in Simon Grey's mind. I mean, perhaps they do, but I doubt it. This is why the U-3 unemployment rate is the "official" unemployment rate, while the U-6 rate is something generally used to stoke the flames of anti-immigration or pro-union sentiment.

Of course, Grey might counter that because U-3 and U-6 are both "official numbers" and hence "large calculations," then they are all bunk, anyway. But it was his choice to invoke U-6 unemployment, so I am really just closing the loop here.

How might an open borders policy help the situation? Well, if you accept the ABCT/PSST argument above, then it should be clear to you that immigration helps in two ways. The first is by increasing the supply of low skill labor that impacts both U-3 and U-6, but does not impact the job search of former PMs. If you're looking for stereotypes, then consider these the agricultural workers and cleaning service personnel. The second is by increasing the supply of high skill labor to fill the labor shortage felt by employers. Here, the applicable stereotype is the foreign-born database developer who does not need additional training to fill those positions.

One final objection Grey, et al, may raise is: "Why can't employers just hire Americans instead?" This question misses the point, because in the scenario I have described above, there is a shortage of workers capable of doing the work. Employers can only hire Americans if Americans are applying for, and qualified for, the work required. You wouldn't hire a Project Manager as a heart surgeon, and you wouldn't necessarily hire one as a database developer either.

Thus, Simon Grey's "property rights violation" argument (which, by the way, is different from the classic "property rights" anti-immigration argument) is, I believe, an invalid conclusion based on a misunderstanding of what the U-6 unemployment rate measures. Foreigners aren't immigrating to steal our project manager jobs (for example), but rather to fill the gaps caused by our own misguided economic malinvestment in project management. They can't steal "our property" (if "property" means "jobs") because the "property" doesn't actually exist - we merely thought it did. Such is the nature of malinvestment.

I'll close with a short parable. Suppose you and four friends play a weekly game of poker, but there are six seats at the table and as many as ten other friends who are interested in joining you. There are many possible resolutions to this dilemma.
  • You might hold a weekly lottery in which one of the ten friends has the ability to win a seat at the table. This represents the Diversity Visa lottery program.
  • You might hold an auction and award the seat to the highest bidder. This represents the investment visa program.
  • You might allow one of your friends to fill the seat with a relative who, he assures you, is a really great guy. This represents the family-class visa.
  • You might say that you simply don't want that seat filled by one of the other ten friends, because three of the five of you have sons who want to play poker, so the seat ought to be filled by them instead, and besides, it's your right to determine who gets the seat because the seat is your private property. Those other ten guys can start their own poker game, elsewhere, if they want. This represents the xenophobic argument.
  • Or, you might invite everyone over under the assumption that there is another table in the next room that can accommodate a second poker game; or maybe the other ten can decide for themselves who gets the seat and the rest just come to watch and socialize. Maybe you just tell everyone that there's only one seat at the table, but they're welcome to come anyway.  (Competition on the labor market) Maybe you actually decide to pull up a couple more chairs. Maybe you move the game to a larger table that can accommodate everyone. (Domestic entrepreneurship and job creation) Maybe one of the ten newcomers brings a long a card table and some folding chairs to accommodate the additional players. (Immigrants who start businesses once they get here) But at any rate, the more the merrier as far as getting together on poker night is concerned. This represents the open borders position.
Now, I don't expect my parable to do much to change the minds of anti-immigration hard-liners, but my belief is that folks like Simon Grey and Sonic Charmer are closer to the margins of this issue than they realize. I don't think they're racist, I just think they've bought into racist arguments in exactly the same way that someone with no economics training might support unions under the belief that unions are working for their interests. It wouldn't make them true socialists, it would just mean that they have unwittingly accepted the arguments of the socialists.

As per the above, if Grey makes a non-racist argument against immigration, such an argument can be responded to. But if the argument basically reduces to "they're different, and we don't want different people around," then there's not much to say to that, other than to call it what it is.