The Redistribution Recession: How Labor Market Distortions Contracted the Economy

The Redistribution Recession: How Labor Market Distortions Contracted the Economy

The Redistribution Recession: How Labor Market Distortions Contracted the Economy

The Redistribution Recession: How Labor Market Distortions Contracted the Economy

Synopsis

Redistribution, or subsidies and regulations intended to help the poor, unemployed, and financially distressed, have changed in many ways since the onset of the recent financial crisis. The unemployed, for instance, can collect benefits longer and can receive bonuses, health subsidies, and tax deductions, and millions more people have became eligible for food stamps.

Economist Casey B. Mulligan argues that while many of these changes were intended to help people endure economic events and boost the economy, they had the unintended consequence of deepening-if not causing-the recession. By dulling incentives for people to maintain their own living standards, redistribution created employment losses according to age, skill, and family composition. Mulligan explains how elevated tax rates and binding minimum-wage laws reduced labor usage, consumption, and investment, and how they increased labor productivity. He points to entire industries that slashed payrolls while experiencing little or no decline in production or revenue, documenting the disconnect between employment and production that occurred during the recession. The book provides an authoritative, comprehensive economic analysis of the marginal tax rates implicit in public and private sector subsidy programs, and uses quantitative measures of incentives to work and their changes over time since 2007 to illustrate production and employment patterns. It reveals the startling amount of work incentives eroded by the labyrinth of new and existing social safety net program rules, and, using prior results from labor economics and public finance, estimates that the labor market contracted two to three times more than it would have if redistribution policies had remained constant.

In The Redistribution Recession, Casey B. Mulligan offers hard evidence to contradict the notion that work incentives suddenly stop mattering during a recession or when interest rates approach zero, and offers groundbreaking interpretations and precise explanations of the interplay between unemployment and financial markets.

Excerpt

Throughout my career as an economist, I have been interested in the mutual feedback between economic activity and public policy. In studying those issues, I began to appreciate not only that taxes matter but also that public finance concepts such as tax distortions help in understanding private sector activity, even in those cases where market outcomes are less than fully efficient for reasons that have nothing to do with public policy. Like millions of other people, I turned my attention to the monthly U.S. economic data releases after Lehman Brothers failed in September 2008, except that in my mind labor market distortions were the way to organize that news. The effort yielded some surprising and unconventional conclusions, and some of the connections with taxation turned out to be as much literal as conceptual.

My essential results require only a few relatively simple economic concepts, and they point to the potential for important contributions to recession economics from fields as diverse as poverty analysis, law, political science, labor, and macroeconomics. Hoping to facilitate entry by these varied experts, I decided to rework my analysis of recent labor market events—much of it previously unpublished—into a book written for social scientists generally interested in why employment fell so much in 2008 and 2009 and has so far failed to recover. The first four chapters introduce economic jargon sparingly, with clear definitions, and leave technical notes to endnotes and appendices, and yet they are able to both identify and quantify (what I think are) the main economic forces affecting the labor market. The second half of the book pushes the argument further and offers tests of key assumptions, but in a style that is more familiar to economics graduate students than to noneconomists. All of the chapters contain the details necessary for a professional economist to replicate my results.

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