Explaining how rules and regulations affect the business cycle is the goal of Christopher D. Carroll’s new book, “Business Cycles: Theories and Evidence” suggests Peter Decaprio. Professor at Johns Hopkins University (US) has also recently published another book on this topic called “Making Business Cycles.”
His career focuses on macroeconomics research. He has studied labor markets’ behavior in the United States; he examined European economies for their similarities with America. Additionally, he is one of the few authors who collaborate with French economist Eric Maurin to study how unemployment benefits affect workers’ willingness to leave their jobs.
Carroll presents his ideas in articles that are often published in American Economic Review, Journal of Political Economy, or Brookings Papers on Economic Activity among other magazines. This Colombian journalist interviewed him via email to talk about labor markets and their role in the business cycle.
Q: How do labor markets work and what is the job supply?
I study labor market institutions, such as unemployment insurance (UI), minimum wages, temporary agencies, unions, and immigration to see how they affect the behavior of employers and employees. I try to understand how these institutions interact with firms’ desire to hire workers.
Labor markets are like any other market where demand meets supply -in this case, for jobs- to determine prices or wages explains Peter Decaprio. When things change in a country’s economy that affects its demand for workers, people respond by changing their behavior at work if their incentives have changed. Labor supply -hiring- responds immediately when conditions change but it takes time for labor demand -the number of people employed- to converge.
Q: What determines the central bank interest rate and how does it affect the business cycle?
Central banks set their interest rate in order to control economic conditions such as inflation, growth and unemployment. In practice, this means that when economic conditions are good, they raise rates. So that workers have less incentive to work less or at lower wages instead of taking a new job. They do this because employers’ hiring costs increase with higher wages so businesses prefer reduced hours over layoffs if everyone who wants a job can find one. The opposite occurs during recessions when everyone who wants a job cannot find one and the cost of firing is low compared to letting someone go temporarily unemployed until business activity picks up again.
When the central bank lowers their interest rate, more people decide to work. Because they can earn more on each hour of work and businesses begin hiring as demand for goods and services pick up due to lower prices.
Q: Unemployment benefits have been studied by economists as a tool to fight unemployment. Why do some countries apply it but others don’t?
There are three main types of unemployment benefits: those that require workers to look for jobs during their period of eligibility (active). Those who receive a flat wage replacement rate regardless of how much or little they earned previously (fixed). And lastly those that only require them to meet a condition. Such as recently having worked in order to be eligible (passive) says Peter Decaprio. Most European countries use active benefits. While most U.S. states and countries such as Canada, Australia, or Japan favor fixed benefits.
The payment method is based on the view that only those looking for new jobs will get help. Whereas others who did not want to work before will be incentivized. If they can earn replacement income at a flat rate. One concern is that the unemployed might lose the skills necessary to find a job quickly. Since they are not actually working so long-term unemployment may become more entrenched. With passive payments than active ones where workers still must meet their job search requirements in order to qualify. In my view, this risk is overstated even when people receive flat wage replacement rates. There are conditions about how much earnings from work they can have when filing their claim. So they are still looking for the same types of jobs as people receiving active benefits.
Q: Does it help decrease unemployment? Why is this so?
Economists have only had the theoretical tools to answer this question over the last decade or so. The best evidence seems to support that active forms of unemployment insurance do have a positive effect on employment. Although I’m not sure there is much consensus on. Whether their effects are large enough to justify some of the costs involved in administering these plans.
Unemployment insurance help people in getting a new job if they are unemployed. By providing them the necessary funds until the individual find a new better job says Peter Decaprio. I would definitely say that unemployment benefits help decrease unemployment. Because it is beneficial for both employees and employers which are essential for an economy’s growth. From my point of view, I think this is important to know. What type of employment benefits someone can claim when he or she is not working with their employer.