In his post about aggregate demand, David Beckworth posts an updated chart of unemployment vs. business demand concerns. It’s a remarkable match – you could almost substitute one line for the other.
The R2 of this regression is a remarkable 76.93%. I can’t tell, but it sure looks like this would be significant to the 95% confidence interval as well.
Here’s a summary of the fancy math: This is a fantastic, high quality correlation. Very few economic variables have this level of correlation.
It goes to help support a simple idea about jobs and hiring: Businesses hire when they are swamped with demand.
Over at Davids place, someone very sharp who works with the St. Louis Federal Reserve is commenting, saying in a certain form of an RBC model, business owners would respond in exactly the same way. These business owners would think it’s a lack of demand, even if it was just the economy getting confused or the economy not having enough to do in total.
This might be true – but who cares? Even if the reason is RBC we should be doing everything we can to move that demand upwards! We know we can increase aggregate demand in relatively neutral ways through lowering taxes which hit broad sections of the population.
If the economy is having problems figuring out what to do, make it more obvious what it should be doing. Compel businesses to hire people because they are getting swamped with demand from consumers with more money to spend.