Do higher interest rate increase unemployment? I look at the evidence and find it lacking.

Blair Fix

Download: PDF | EPUB  For the last few months, I’ve been studying the distributional effects of interest-rate hikes. There’s been no shortage of surprising results. In this post, I’ll discuss an effect that is surprising because it’s underwhelming. Many economist claim that when interest rates rise, unemployment will increase. The idea is that higher rates make businesses tighten their belts, leading to less hiring and greater unemployment.

Interest Rates and Unemployment: An Underwhelming Relation

Björn Brembs

*[During my [flyfishing vacation last
year](http://blogarchive.brembs.net/comment-n862.html), pretty much
nothing was happening on this blog. Now that I've migrated the blog to
WordPress, I can actually schedule posts to appear when in fact I'm not
even at the computer. I'm using this functionality to re-blog a few
posts from the [archives](http://blogarchive.brembs.net) during the
month of august while I'm away. This post is from [June 20,
2011](http://blogarchive.brembs.net/comment-n751.html):]{style="font-size: 12px;"}  
*

In a recent [report on German public
TV](https://www.wdr.de/tv/monitor/sendungen/2011/0616/arbeitsamt.php5){target="_blank"
rel="external"}, a sad but tragically very commonplace procedure is
being described as the latest, most extreme case of worker exploitation:
scientists continuing to do science while being officially unemployed.
![scared.png](http://blogarchive.brembs.net/e107_images/emotes/yellow/scared.png){decoding="async"}

On the face of it, the report seems to be correct in claiming that
people who are working despite being paid unemployment benefits are
incriminating themselves -- which is what people colloquially call
social parasites. However, the idea of paying these benefits is to
enable people to look for jobs, maybe even to go and learn a new, more
promising trade. In short, to give the candidate the leeway to do
everything possible to secure a new job as soon as possible. Now what is
the best way to secure a job in science? To do more science, get more
papers, get more teaching experience, etc.: whatever pads your CV is
what will enhance your chances to get the next job in science.

Moreover, scientists are so highly specialized, unemployment agencies
are not able to find adequate employment for them. This means that
German unemployment offices who have experience with unemployed
scientists are actually complicit: they will specifically allow you to
keep working as a scientist while they pay you, because they know that
this is the best thing in this situation. In fact, they realize that it
would be counterproductive to force you to stop doing science. If you
are a scientist in Germany and unemployed (pretty common species), go to
your local unemployment agency and ask them if they'll let you continue
working and they'll say yes, I promise. That's how normal this situation
has become, with 65% of all jobs in German science being on short-term
contracts.

This doesn't mean that it's a good thing that the money for science in
Germany comes partly from the social budget and not exclusively from the
science and education budget. Far from it. It is despicable that in some
departments, the majority of PhD students will write their dissertation
on unemployment benefits. If it weren't so sad, it would be laughable
that so many of the 'excellent elite' PhD students who were able to
secure a scholarship for their PhD, will not even get unemployment
benefits, but have to finish their degrees on welfare. There's nothing
positive about scores of postdocs finishing their last experiments and
writing their papers while simultaneously writing the grant for the next
projects and being paid from the wrong government branch. But it is
neither criminal nor some exploitation perpetrated by unscrupulous
professors in some isolated departments at German universities. It's
just the deplorable standard situation in a totally messed up scientific
career system and it's not even the worst part, not by a long shot.

And here is another reason why this practice will be difficult to
change: the German taxpayer saves a lot of money. Think of this one
scientist in the report who worked on short-term contracts for 17 years.
For four years he was on benefits, which in Germany is 60% of your last
salary. This means that in this time, the German taxpayer, who would
have been paying him a full salary, only paid 60% for the same service
and part of that is even paid for by the scientist himself in the form
of his unemployment insurance. That's some major savings right there.

What would the rational reaction of German politicians be to this
report? Certainly not to try and prevent this gigantic money saver! More
likely, one would expect them to demand to cut the salaries of
scientists by 40% because 60% seems to be sufficient to keep them going.
![devilmad.png](http://blogarchive.brembs.net/e107_images/emotes/yellow/devilmad.png){decoding="async"}


*During my flyfishing vacation last year, pretty much nothing was happening on this blog. Now that I’ve migrated the blog to WordPress, I can actually schedule posts to appear when in fact I’m not even at the computer. I’m using this functionality to re-blog a few posts from the archives during the month of august while I’m away.

Messaggi di Rogue Scholar

Interest Rates and Unemployment: An Underwhelming Relation

Scientists as social parasites?