IAS Newsletter - Feb 2015 - page 6

My concern was that economists were not using the
optimizing principles of microeconomics to explain
unemployment. They used a top-down approach,
asking how much demand is there, how many
people do you need to produce that quantity, how
many people are there seeking work, and therefore
what is the leftover, if any? I decided to go in the
opposite direction, starting from the optimization
calculus of firms and workers and aggregating to
the whole economy, to discover how many people
are left without a job.
Youth unemployment seems to have become a
common phenomenon in many places. What do
you think the main cause is and what the
government can do to resolve it?
To analyze youth unemployment, we adopt a
bottom-up approach starting from the
micro-foundations -- individuals. By comparing the
incentives of young people with those of adults who
are aged over 25 in the labor market, we can see
young people experience more unemployment. The
reason is that young people have more incentives to
experiment with jobs until they find the job that
they like most. Their experience is similar to “job
shopping”. This phenomenon is optimal because it
helps people find the jobs at which they are more
productive and yield them higher incomes. In
developed countries, it is normal to have a youth
unemployment rate that is double the overall
unemployment rate.
The situation that causes youth unemployment a
real problem is economic recession. If a country
gets hit by recession triggering an increase in the
unemployment rate to 25%, the youth
unemployment rate would probably get worse to
50%. This is not due to job shopping but rather to
firms not creating enough jobs for young people to
try out. The companies are now “people shopping”.
When the problem arises, the government should
help the young unemployed with temporary
support. For example, the German government
subsidizes companies to hire young people as
apprentices. Other means of support exist but the
extra support should be given through the market,
not as unconditional income transfers.
Do you find any interesting or significant
differences between the European labor market
and Asian or Chinese labor market?
Labor markets comprise people, companies and a
legal institutional structure. In terms of people and
companies, all labor markets have similar
characteristics since human nature is to engage in
the labor market for the maximum reward. Even
though people are of different cultures, they share
the same aims, which as a by-product improve
productivity and lower production costs.
The critical difference between the markets is in
the legal structure. In Europe, the labor market is
relatively free from direct government intervention
while the governments provide social support to
those left out of the labor market like the
unemployed and the disabled. We call this system
”, which means free market. However,
in China, the state is following a more paternalistic
approach towards its people, through land
allocation and a large number of state enterprises.
In order to compete with other countries, China
must reform its labor market to keep up with the
fast growth rate in economy.
China needs a more up-to-date financial structure.
In the West, finance is usually driven by private
incentives. There are large management consulting
firms that advise on the running of business and
wealthy individuals who act as “business angels”,
supporting with financing new and riskier ventures
than those that can be supported by banks. Such a
structure is absent in China. The ruling party is the
IAS Chatroom
Feb 2015
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