Tyler Cowen offers a qualified endorsement of a book I'm reading and enjoying very much, Casey Mulligan's The Redistribution Recession: How Labor Market Distortions Contracted the Economy:
The contributions of this book include:
1. Using data from seasonal cycles and seasonal changes to better understand supply-demand relationships during the Great Recession. These sections are excellent and highly original.
2. Showing that the normal laws of supply and demand still held and that we were not living in anything resembling wrong-ways sloping AD curves.
3. Calculation of various implicit marginal tax rates during the Great Recession and showing their relevance for labor supply decisions.
By no means am I fully on board. I believe he specifies the aggregate demand view incorrectly and significantly under-measures the impact of aggregate demand. I don’t think the AD view has to imply sticky prices or completely inelastic labor demand, for instance, although one version of that view does (p.208). I see Mulligan as underestimating labor supply composition effects and overestimating productivity growth during the period under consideration. There are other points one can complain about and overall he ends up overstating the size of the effects he is measuring.
Still, there are only a few readable books which integrate actual empirical research with a look at the Great Recession. This is by no means the whole story, but this is a book which anyone seriously interested in the topic should read. People still will be consulting it after the invective against it has long since died away.
The WSJ's review opines that:
Mr. Mulligan's thesis is that, in addition to thwarting recovery with unprecedented levels of spending, the Obama administration and Congress have made unemployment much higher than it might otherwise be. To take an obvious example, Congress increased the cost of labor—and thus decreased the number of jobs—by raising the minimum wage. (In fact, it has done so three times since 2007.) On a grander scale, Mr. Obama and his policy advisers have added to government benefits in various ways—in essence paying would-be workers for staying out of the workforce. Mr. Mulligan, an economist at the University of Chicago, estimates that about half the precipitous 2007-11 decline in the labor-force-participation rate, as well as in hours worked, can be put down to such misguided generosity. ...
In short, businesses drove up productivity by shedding workers. Why? "Businesses perceive labor to be more expensive than it was before the recession began," Mr. Mulligan writes. The reason for the added cost was that easier requirements for benefits—even as the government was pumping "stimulus" money into the economy—unwittingly reduced the supply of workers. As output began to rise, firms hired fewer workers. National unemployment has stayed so high for so long because of the government's policies, not in spite of them.
By the way, Mr. Mulligan doesn't challenge the claim that a surge in unemployment benefits, food stamps and other subsidies may have been desirable to prevent hunger or severe poverty for out-of-luck families or unemployable people traumatized by the recession. He simply and inconveniently notes that, though increasing subsidies may be compassionate in the short term, it comes with costs in the long term that eventually cause more hardship rather than less.