How Tom Sargent’s human capital got hit because of rational expectations revolution…

IMF’s online research bulletin has started a new feature – Conversations with Visiting Scholars.  It usually covers  literature survey on select topics.

The first such interview is with Tom Sargent, 2011 The Prize winner.

He points how the extended unemployment benefits is a trap and points how his human capital got hit:

Well, think about what can happen when workers suffer a permanent hit to their incomes, and you offer then the alternative of generous and long-lasting unemployment benefits. For older workers, particularly, the benefits become an attractive option relative to looking hard for another job, which is not going to pay as much because your human capital just took a hit. And getting retrained is hard.

I mean I was just 30 when my human capital was hit. You know I went to Harvard, right? I actually got  pretty good at playing around with the IS/LM model, which is what I learnt there. And then a new thing—rational expectations—came along and I had to learn all this math and it was hard.

Well, if you’re in your 50s you’re not going to be eager to try out the hard thing . You’ll try to get by with the unemployment benefits. You end up with lots of workers who are detached from the labor force. I think that’s what happened in Europe in the 1980s. They’d  always had more a generous welfare system but the impact  of that wasn’t felt until the nature of the shocks to incomes changed in the manner that I described.

Imagine Tom Sargent’s human capital getting hit. It is such a joke!! I am sure he would have picked up all even in his 50’s..

He gives insights  on European crisis as well. ..

Apart from this there is lit survey on

  • Foreign Direct Investment and the Crisis:Is This Time Different? (there were indeed some differences in this time with some kind of FDI being volatile)
  • Food Prices and Inflation (Developing countries should not exclude food prices from inflation)
  • Unemployment through the Prism of the Great Recession (7 Qs on the topic)

Superb reading on several topics..



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