Quiggin Takes My Euro-Bet
I’m pleased to report that noted blogger John Quiggin has accepted a slightly revised version of my proposed bet on European unemployment. The only revision: I sweetened the point spread to 1.5 percentage-points. Average European unemployment must be at least 1.5 percentage-points higher than average U.S. unemployment over the next decade in order for me to win. On these terms, I think my odds of winning are about 60%, which is good enough for me to put my money down.
In his acceptance post, Quiggin makes an interesting observation:
Caplan initially proposed 1 percentage point, which I rejected with a
counteroffer of 2.5. He rejected that and we ultimately settled on 1.5.
Assuming our offers truthfully reveal our beliefs, that suggests
Bryan’s point estimate for the average difference in unemployment rates
is between 1.5 and 2.5 percentage points, while mine is between 1 and
1.5. Considering we have very different understandings of the economy,
these estimates are pretty close.
It’s a fair analysis. But I see Quiggin’s 1-1.5 percentage-point estimate of the European unemployment surplus as large. Here’s why:
Suppose that the U.S. averages 5% unemployment, and Europe is
1.25 percentage-points higher (the mid-point of Quiggin’s range). Even if labor markets clear (so anyone able to do a job and willing to do it for the market wage gets it) there’s always going to be some frictional unemployment. 4.5 percent seems like a reasonable figure. So to compare labor market performance, we really need to look at the difference between the actual rate and 4.5. In my hypothetical, this difference comes to .5% for the U.S.; for Europe, in contrast, it’s 1.75%, over three times worse.
If my metric seems unreasonable, think about how tough it was to find a job in the U.S. back in January, 2009, when our unemployment rate was 7.2%. The plight of the job-seeker wasn’t 30% worse than it was in May, 2008, when the unemployment rate was 5.5%. It was probably more like two or three times worse. Now imagine turning 7.2% unemployment into a way of life. It’s pretty awful to imagine, isn’t it? Well, you don’t just have to imagine it, because in France and Germany, 7.2% is normal. The horror!
P.S. Thanks for pointing out my mis-spelling of Quiggin’s name.