Saturday, March 21, 2015

Entropy and unemployment

Here's the same model from this post, except without the periodic boundary conditions and transitions can happen from any cell to any cell. In this case, I called the first cell the "unemployed sector" and during the recession a point (i.e. a member of the labor force) in the first cell can't leave the unemployment sector. The results are basically identical to the previous post, except now the fraction of people in the cell gives us the unemployment rate. It falls at a fairly linear rate (which I noted in this post from awhile ago), whereas output rises faster immediately after the recession and slower later. Here are the results:


The fraction of points in the first cell (the unemployment rate) is given in red. Here is the animation as well:


6 comments:

  1. Great animations! You are truly a wizard of the graphs. Makes a very interesting analogy with the economy too, I think- being trapped in the unemployment sector leads to a reduction in the entropy of the economy.

    A question for you would be: what information equilibrium mechanisms could cause a temporary entropy reduction in an economy?

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    1. Thanks Todd; I figured out how to make gifs from the graphs that aren't 100s of MB in size so I'll probably be doing more.

      Regarding the cause -- I still like the coordination mechanism I discussed here:

      http://informationtransfereconomics.blogspot.com/2014/10/coordination-costs-money-causes.html

      One way coordination could happen is through news, like I've been reading in this new paper that I am working on a post on ...

      http://www.voxeu.org/article/confidence-aggregate-demand-and-business-cycle-new-framework

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    2. Interesting. So if "recovery hinges on ‘restoring confidence in the economy’" as they state in the voxeu.org article because of coordinated "lack of confidence", it certainly leads to the conclusion that the government should temporarily spend lots of money and hire people to free them from their unemployment state until consumer and business confidence recover. Something like a Job Guarantee program then, which has the Federal Government hire people in a recession (at minimum wage of course) until they can get a better job in the private sector once the economy has recovered?

      http://en.wikipedia.org/wiki/Job_guarantee

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    3. That seems to be a plausible policy implication -- however, the model is somewhat agnostic as to the specifics. It could be deficit spending brought on by tax cuts, infrastructure spending or just so-called "helicopter money" from the central bank.

      http://informationtransfereconomics.blogspot.com/2015/01/keynesian-economics-in-three-graphs.html

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    4. "I figured out how to make gifs from the graphs"

      I've done this before using a free website and a bunch of graphs (I think from Excel). Can you do it directly from Mathematica (or whatever is is you use)?

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    5. Directly from Mathematica -- and in a way that didn't take up hundreds of megabytes as it had previously.

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