Wednesday, October 12, 2011

Is employer uncertainty causing high unemployment?

The economy is stuck at 9% unemployment and corporations are sitting on unprecedented amounts of cash.  So, why aren't companies hiring more?  The business press is full of anecdotes where corporate officials basically say something like "there is too much uncertainty, we are reluctant to hire."

I always have had trouble with this sort of argument because there is lots of uncertainty all of the time.  Steve Jobs did not know how the iPod would turn out, but Apple introduced it anyway.  Successful businesses find a way to connect with their customers and that translates into jobs. 

A recent study by Chicago Booth economist Steve Davis (along with two colleagues at Stanford) attempts to quantify the amount of uncertainty about economic policy since 1985.  According to Bloomsberg Business Week, they constructed an index based on newspaper articles mentioning uncertainty, tax code provisions scheduled to expire, and disagreement among forecasters about inflation and government spending.  The index shows cyclical peaks around wartime, elections, and the crash of Lehman Brothers -- all instances where one would logically expect lots of uncertainty.  But here's the kicker -- the index hit its all time high last summer during the debt ceiling dispute. 

This alone does not prove that uncertainty is causing a slowdown in hiring; more econometric work will need to be done to establish that link.  Also other economists will no doubt introduce their own uncertainty indices soon.  My take: I am taking the uncertainty argument a lot more serious now that I have seen some data.

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