What Causes Unemployment?

by Jerry O’Driscoll  

Last week, there was a testy exchange between the Editors of the Editorial Page at the Wall Street Journal and the Director of the National Economic Council, Lawrence H. Summers.  On the April 13th Page, the editors quoted Summers from a 1999 essay on the causes of long-term unemployment.  According to Summers 1999, there are two causes: “welfare payments and unemployment insurance.”  

Summers 2010 has a different view and the Journal printed his letter on April 16th in which he accuses the editors citing him “out of context.”  The true cause of the current unemployment is deficient aggregate demand.  Extending unemployment insurance bolsters consumer spending, “thereby contributing to employment.”  

The editors countered with an even more lengthy quotation from Summers’ 1999 essay on the microeconomic causes of long-term employment. They observe, correctly in my view, that Summers’ new theory amounts to the proposition that “pay people for not working, and more people will work!”  And they address a central issue occupying us at TM: whether macroeconomic effects outweigh microeconomic incentives.

It is instructive reading.