Youth (Non)employment

As a followup to our class conversation on summer jobs on Friday, here’s a link to an item on “What happened to summer jobs?” on the Forbes Modeled Behavior site.

A Brief Overview of Bergeaud et al.’s Paper

This paper attempts to:

  1. compare GDP per capita level and growth across 17 advanced countries over 1890-2013.
  2. compare the level and growth of the main components (TFP, capital intensity, working time, and employment rate) of GDP per capita in order to see how they contribute to the GDP per capita difference.
  3. test the convergence hypothesis of GDP per capita and its components over different sub-periods.

The second half of this paper focuses on convergence. This is the hypothesis that economies with lower per capita income will tend to grow faster than the ones with higher per capita income. There are mainly 3 types of convergence: absolute convergence, conditional convergence, and club convergence. One of the two approaches to convergence is sigma-convergence. It refers to the reduction of dispersion of levels of income across economies with time.

Through data presentation and analysis, it yields the following results:

  • All countries have at least one huge growth in GDP per capita in the 20th century, but in a staggered manner.
  • Almost all countries have faced a huge decline in GDP per capita growth.
  • The GDP per capita leadership shifted over years.
  • Overall convergence among advanced countries.
  • GDP per capita convergence to the leadership position is not always happening.
  • Employment rates and hours worked did not contribute to the overall convergence process.

My observation:

The paper claims that its analysis’ originality is that “it is presented over a long period, on a large set of countries, with data reconstituted in purchasing power parity and on the basis of, as much as possible, consistent assumptions.” However, most of the results it yields are simple observations such as “all countries experienced at least one big wave of GDP per capita growth during the 20th Century, but in a staggered manner” and “all most all countries have suffered, during the last decades of the period, from a huge decline in GDP per capita growth.” I think the paper could develop more into the implications of these observations. Also, since this is a time-series analysis, endogeneity and dual causality might present and I think the paper should address a bit more on that. For example, the paper talks about the impact of institutions on the components of GDP per capita. Is it possible that those components shape the institutions as well?

Dynamic Scoring

I post expanded notes from my weekly radio show at Autos and Economics on This week I was asked to comment on Trump’s tax proposals. That’s a moving target, so I shifted my focus to another theme of the Republican candidates: tax cuts will pay for themselves.

  1. Can you add graphs on what has happened to our structural budget deficit after previous tax cuts? – for example, those under Reagan, Bush Jr and Obama (yes, he passed a big cut as part of the ARRA, the American Recovery and Reinvestment Act of 2009).
  2. Similarly, can you set up a spreadsheet of base GDP growth versus a hypothetical tax-accelerated GDP growth rate [pick a non-trivial increment, say a bump from 2.5% to 3.0%, a 20 percent boost, greater in magnitude than the tax cut]. Do a net present value calculation of taxes!
    • under the base plan (at say 20%) and
    • those under the revised level (say 18%, or a 10 percent cut)?
    • Now that faster growth won’t be immediate, if it’s a supply-side effect, right? So put in a delay, maybe a phase-in over 4 years.
  3. How long does it take for the combination of faster growth and lower taxes to generate more revenue than under the base case?
  4. How robust are those results to modest changes?
    • if we add a demand-side effect, 3% growth from the start, how does it change our results?
    • what growth is needed for net present value to be equal (at say a 3% discount rate to reflect the low rates anticipated in current long-term bond yields)

So far I’ve not tried doing this, so I suspect what we’ll find, but don’t know the result.

Consumer Price Index

An index is used to compare economic data, typically price or quantity against a base value. Specifically, the Consumer Price Index is used to measure changes in prices of a bundle of goods and services over different periods of time for consumers. It covers a variety of goods and services that the BLS consolidated into 8 groups. These groups are food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. It can be used to measure inflation through change in consumption. The CPI can somewhat be used to measure cost-of-living but does not include governmental or environmental factors and so cannot be viewed as a complete cost-of-living index.

Capstone Topic

My topic of interest is import-substitution. Governments in developing economies sometimes try to protect developing industries by taxing or disallowing importation of the good or service produced by this industry. Most literature says that open trade policies are most beneficial to helping an economy grow. But, I would ideally like to try and find two countries with similar economies and social climates just with different protectionist policies.

Papers of interest:

A Reconsideration of Import Substitution
By: Henry J. Bruton
Import Substitution and Export-led Growth: A study of Taiwan’s Petrochemical Industry
By: Wan-Wen Chu
Comparing technical efficiency between import-substitution-oriented and export-oriented foreign firms in a developing economy
By: Tain-jy Chen and De-piao Tang

Capstone paper topics

My paper topic idea is to look at the intersection of Stolper-Samuelson and the benefits of international trade for US workers. Essentially if unskilled workers are the scare factor in Stolper-Samuelson then their wages should have gone down and they would be worse off. Evidence from the past few decades confirms that in labor markets composed mainly of manufacturing industries that compete with China wages have gone down (Autor, Dorn, and Hanson). However, there’s also evidence that trade, mainly with China, has reduced the prices of goods that comprise the majority of lower class’ budget, and that this decrease in prices has actually made them better off than before (Broda and Romalis) . It’s unclear if the effect of lower wages or lower prices is larger. Essentially I am interested in looking at the effects of Chinese trade (and international trade) on inequality in the US.

For alternate ideas, Professor Anderson says I can use his Indian data for a project, but I am still unfamiliar with it and don’t have any ideas for what I would do with it. It would make doing 399 much more feasible. I am open to other ideas on macro policies and international development.

Autor, Dorn, and Hanson-

Broda and Romalis-

Dani Rodrik blog post on the idea-

Paper Topics

My idea is to look at the studies of the Great Depression in the 1930s and the U.S. subprime mortgage crisis in 2008 since the decades before both events are similar (both with an increase in liquidity, low inflation rate, etc.). Nordic countries happened to outperformed most other Western countries during the 1930s, I want to investigate the reasons behind it, and try to see if these countries performed differently in 2008. I could also look into the Nordic crisis in 1980s instead of the financial crisis and compare the labor policy to identify the key reason why the Nordic crisis happened.

Related Studies:
Mayes, “Did Recent Experience of a Financial Crisis Help in Coping with the Current Financial Turmoil?”
Peicuti, “The Great Depression and the Great Recession.”
Grytten, “Why Was the Great Depression Not So Great in the Nordic Countries?”

As an alternative choice, I could look into the relationship between export diversification and monetary policies. To be more specific, how do Brazil and Finland (or China) differ in monetary policies in a specific era and how does that contribute to the export diversification and economic performance?

Related Studies:
Whalley and Medianu, “The Deepening China-Brazil Economic Relationship.”
Jawadi, Mallick, and Sousa, “Nonlinear Monetary Policy Reaction Functions in Large Emerging Economies.”
Naude and Rossouw, “Export Diversification and Economic Performance.”


Possible Paper Topics

My first choice for a paper topic is the relationship between FDI and trade. I want to see if increases in FDI will lead to an increase in trade between the countries involved, a reduction in trade, or no change.  It will be interesting to see how FDI and trade respond to each other since they are two of the most important ways that nations can interact with each other in the global economy. If one reduces the other, it may cause policy makers to reevaluate their economic policies. Also, since many developing nations aggressively court FDI, the relationship between FDI and trade could have a large impact on how they grow.

One paper by Joshua Aizenman and Ilan Noy suggests that FDI’s relationship with trade depends on the type of FDI.  Horizontal FDI occurs when foreign companies “jump trade barriers by replicating similar plants in different markets.” This happens when foreign firms feel that it will be more efficient to replicate the entire production process in a foreign nation instead of one part of it. Conversely, vertical FDI is when a firm decides to locate one stage of the production process in a foreign nation. The authors believe that horizontal FDI is a substitute for trade while vertical FDI is a complement. They also note that horizontal trade is more common between developed nations while vertical FDI is more common when one of the nations is developed and the other is developing. Thus, for developing nations, FDI usually leads to trade.

Another paper by Bruce Blonigen states that the relationship between FDI and trade depends on what types of products are exported. His data has product level trade and FDI information for Japanese 10 digit HS products in the United States. Blonigen finds that FDI outflows from Japan to the United States increased exports of related intermediate goods, but decreased exports of related final goods.


One alternate topic that I could research is how a country’s trade behavior differs with their largest trade partners relative to everyone else. In other words, does the top export location of a particular country get a better price than everyone else, a worse price, or no difference?



Paper Sources

Aizenman, Joshua, and Ilan Noy. “FDI and trade—Two-Way Linkages?” The Quarterly Review of Economics and Finance, Real and Financial Aspects of Financial IntegrationPapers drawn from the 3rd INFINITI conference on International Financial Integration, held at the Institute for International Integration Studies, Trinity College, Dublin, June 2005The 3rd INFINITI conference on International Financial Integration, 46, no. 3 (July 2006): 317–37. doi:10.1016/j.qref.2006.02.004.


Blonigen, Bruce A. “In Search of Substitution Between Foreign Production and Exports.” NBER Working Paper. National Bureau of Economic Research, Inc, 1999.


Shifts and movements along the aggregate production function

Robert Solow’s Paper “Technical Change and the Aggregate Production Function” details a method of distinguishing shifts of the aggregate production function from movements along it. The aggregate production function describes output as a product of labor, capital, natural resources, and other inputs. Solow returns to the function to discuss how to segregate changes in output per head due to technical changes from those caused by variations in the availability of capital per head.

After explaining his method, he uses it to analyze the US from 1909 to 1949. The result is an average increase of 1.5% in output per year over the period, and found that at the end of the forty years output per man hour had approximately doubled. While his analysis was fairly “crude,” he found that on average technical change in this period was average and that the rate at which output increased grew from 1% on average during the first two decades to 2% during the last two. In addition, when the aggregate production function is corrected for these technical changes, diminishing returns are evident.

Is US Economic Growth Over?

Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds by Robert J. Gordon questions the belief that economic growth is a never ending phenomenon. He presents a history of economic growth and demonstrates how periods of expansion are driven by industrial revolutions. He states that the first industrial revolution started around 1750 with the development of steam power and the railroad. The second began in 1870 and was brought forth by electricity, the internal combustion engine, and running water. The third and final revolution was instigated by computers, cell phones, and the internet. He makes the point that before first industrial revolution, there was almost no worldwide economic growth, and that since that time, the global economy has expanded at a tremendous pace which causes many to believe that growth is the norm in a modern economy. Gordon however, ponders the idea that the past two to three hundred years have been the exception rather than the rule. He observes that the most recent industrial revolution inspired a much shorter period of growth than the first two. The first and second lasted for around a century while the most recent had an effect for only around thirty years. By inspiring growth, Gordon means that once a groundbreaking technology is developed, it is modified and applied to different areas until it its usefulness to the economy is exhausted. For example, the discovery of electricity led to lightbulbs, television, refrigeration, etc.  Gordon believes that the third revolution’s time was so short because of the emphasis placed on entertainment rather than changes in productivity. Thus, he believes that the next revolution, whatever it may be, will also be short lived.

Gordon also presents six reasons why American growth will be difficult to achieve even if we experience long periods of innovation. These reasons include: the end of the demographic dividend (females are already integrated into labor markets and baby boomers are retiring), stagnating educational attainment, income inequality, globalization, environmental policy, and household and government debt.

My main concern with this article is the premise that “innovation does not have the same potential to create growth in the future as in the past.” This claim is based upon the observation that the third revolution did not lead to as long a period of growth as the first two. However, one occurrence is not a trend and trying to anticipate the scope of future innovation is an impossible task. Just as a person in the 1940s could not foresee the internet, readers of this paper in 2015 cannot predict what technology will be available in 2090. It could be a relatively minor development when compared to the invention of electricity or the railroad, or it could completely revolutionize the way the world works. We have no idea. That is why I think his “six headwinds” are a stronger rationale for why growth will be lower in the upcoming years than his comparison of the three revolutions. We can at least see that those problems exist.

PPI Passenger / Overall PPIGraph for comments:

For air travel CPI see series CWUR0000SETG01 vs all items CUUR0000SA0. The CPI has a longer series, but it moves the same.

Producer Price Index Overview

The Producer Price Index (PPI) is an index released monthly by the Bureau of Labor Statistics (BLS). To put it in simple words, PPI measures price changes from the perspective of the sellers, as opposed to the Consumer Price Index (CPI), which measures price changes from the purchasers’ perspective.

One of the reasons that PPI is so valuable is because of its inherent ability to predict CPI as an indicator of inflation. The Fed makes use of the PPI data to prepare for future counter-inflation policies and investors can look in advance of the market and make business plans accordingly.

From the graph we can see that the percent changes from the previous year’s PPI fluctuate a lot but for the past few decades, the change is mostly positive. Note that PPI does not represent prices at the consumer level. PPI calculations use a benchmark year (1982) where the basket of goods (a weighted fixed set of consumer products and services in 1982) was measured with an index of 100.

Note that BLS states that since some PPIs such as the ones for food and energy goods, as well as wholesale and retail trade are more volatile than other goods in short-term, PPI calculates a number of indexes excluding prices for these components separately. In addition, an index for final demand less food, energy, and trade services is calculated as well. The weighting for different industries is updated once every five years. This is potentially problematic as PPI might not be able to reflect its proportion to real GDP very well.




Graphs added in association with comments

test to see whether commenting works

Will commenting now work on new posts, given changes made by Helen of ITS? I still apparently have to enable comments in old posts by clicking the option, which shows up only in the “quick edit” screen.

Fall 2015 Schedule & Syllabus

These should now appear correctly using the tabs at the top. I initially failed to shift the menu location of this term’s syllabus so it didn’t show, WordPress issues.

Update on the economy

I do a weekly radio segment on the economy on WREL, the local radio station. Here are my notes from the Aug 20th show. These are not necessarily the order in which I presented them, and I avoid numbers when I can – radio is not the medium for conveying data – but I like to have them in front of me. [See Autos and Economics on blogspot for subsequent weekly radio notes.]

Employment: I won’t talk details, but job growth has continued on trend somewhat above population growth, with no sign of acceleration. projecting out, we won’t return to normal levels of employment for at least 2 and likely 3 more years. I’ll return to that topic later in the fall.

New Residential Construction: out Tuesday. slow improvement, especially  of multifamily units. but still only level of Jan 1992 when the population was 20% smaller [321mil today vs 255mil]. so the adjusted rate is still below any point of the last 60 years – we’re at about the 1990 trough, but still below the level of the early 1980s housing bust. the recent peak was in Jan 2006, per capita starts are at 49% or less than half that level. times are good only relative to April 2009 – we’re now 2.4x that level.

the bottom line is that housing continues to be a big drag on the economy.

CPI:  headline CPI for July was 0.2%, and Jan-Jul [geometric avg of 0.09%] implies annual 1.0%. now there’s the drop in gas prices, while food prices are falling despite the California drought. those pull down the headline number; inflation less food & energy is higher at 2.3%, but past 3 months trend down. [query for students: how volatile are the data? do 3 months a trend make?]

the standout: services excluding energy-related rose at 2.8% and shelter at 3.5%. but “medical care commodities” rose only 1.9% and “medical care services” only 2.2% both below overall “core” rate and below the level for recent years, perhaps reflecting cost controls of medicare

too many numbers to discuss but: 16% trimmed-mean CPI and median CPI down a bit to 2%. sticky price CPI at 2.1%, up a bit. as noted, overall headline rate 0.2% from year ago, but headline inflation less food and energy at 1.8%. I calculate rates above using an annualized rate of a geometric average of 7 months data.

Energy: in California recently, gas prices over $4. now back here, approaching $2. huge impact – though CA has more taxes and due to smog issues a more expensive type of basic gasoline.

separately, drill rig count down 50% so far this year. now the 50% still drilling are the most productive, but well output drops quickly in places such as North Dakota and Oklahoma (falling by half over two years). so total output won’t keep rising, but neither will production collapse. meanwhile the weak global economy means demand isn’t strong.

is this collapse due to a Saudi conspiracy, to preserve their market share? that misses the arithmetic of what output changes do. the Saudis are now a smaller part of global market and have less impact. if they cut output 10% or about 1 mbd, it could – would! – drive up prices, but my back-of-the envelope calculations suggest by perhaps 5%, not by enough to increase their revenue. so their income would drop 5%. with a burgeoning population (and an ever-bigger royal family!) that has higher expectations, the Saudis need money to buy off their people. it’s made worse by Islamic fundamentalism that draws on the Wahhabi movement. but its the Wahhabis who helped the Saudis grab power, and the House of Saud supports them today, bankrolling Wahhabi schools around the world. the irony: our “good friends” the Saudis as a nation support the movement that feeds the ideology of terrorism (and some individual Saudis feed money to the terrorists). in contrast Iran’s Sunni fundamentalism is less violent, more nationalist than terrorist – indeed they are quite effective in fighting ISIS and el Qaida. why are they our enemies? that’s a topic for Mark Rush (W&L politics) and Pat Mayerchak (retired VMI Intl Studies) on their WREL radio segments, as both are more knowledgeable about the region than I am.

ACA:  In California I saw a video put together by a reporter who asked people on the street, most hated “socialist” Obamacare, but loved the Affordable Care Act. of course they are one in the same thing. so if the people on the street base what they say on experience they get it right, the policy has been a big success. but the average person is unable to translate that into what they hear on Fox news and the presumption that Obamacare can’t be very good that comes from “balanced” reporting that gives air to “the other side” (even when the facts show there is no other side!!)

This should serve as a caution as the Republican primary heats up. Most of what I’ve heard doesn’t make sense, and some of what is coherent is either wrong or would be bad policy. The primary is about putting together sound bites, not putting together policy. As we approach next year we’ll have platforms and position papers (speeches), but for the moment most of what is said on the hustings leaves me as an economist speechless, nothing to analyze.

Interest Rates: Fed already acting. Taper: $2.09 tril to $1.94 tril or -9%. most of the other special lending has been nil for 5 years. 30-year rates not as low as early this year, but have been falling since June and are under 3% so in fact didn’t lead to rising rates. now realistic expectations that the Fed will boost short-term rates by the end of the year. but remember rates are 0% and boosting will be to 0.5% at most, still low! in expectation 1-year rates have gradually risen to 0.4% and 3-year rates to 1%. the implication of a fairly flat yield curve is that a 1-year bond in 2018 will yield only 2.5%.

markets expect interest rates and inflation to remain very low.

China: lots of talk of depreciation, but it’s really a dollar appreciation, so overall the RMB (official name, yuan in common parlance) is stronger than a year ago given what’s happened in Europe, Japan, Korea and Southeast Asia as well as Canada and Mexico. the flip side is that it’s a great time to be an American tourist abroad. Japan is cheap – Airbnb at $50 a night – and Paris good. London less so, but they’re not on the Euro. anyway, to date the change is fairly small at 4% [update Thu afternoon: 5.6%], well within the range of volatility of major currencies.

that still leaves them with a strong yuan relative to a year ago, and certainly relative to 3 years ago.

furthermore China is doing what we’re asking, liberalizing their markets. Chinese savers (which includes lots of companies that can no longer find investments equal to their cash flow) don’t have diversified portfolios. all domestic, heavy on stocks and real estate and bank deposits that pay 0%. so foreign assets appear very, very attractive. now we’re poised to raise rates, while Chinese rates are falling. so if you were Chinese where would you park your savings? yes, in dollars!! so of course the dollar appreciates (the yuan falls) and that provides a trend that gives all the more encouragement for the large block of trend-driven Chinese investors to buy dollars while the getting is good.

[for students: Rudi Dornbush explored this in one of the early rational expectations macro models]

Fall 2015

I will add a schedule and syllabus in late August. This iteration will incorporate many changes, but you can look at the Winter 2015 Archive for an inkling of potential topics and content.

South Korea’s aging population

We have discussed the impact of aging population quite often now. The elderly depends heavily on savings for their expenditure especially after retirement. However, having already attained important assets such as housing and car, older people tend to spend less money than younger population does. In most developed countries, the proportion of older people has been expanding. This trend will seriously undermine these nations’ aggregate demand. South Korea is one of the countries currently experiencing this impact. The graph below shows the rapidly aging South Korean population.

Screen Shot 2015-04-06 at 2.06.40 AM

The Bank of Korea (BOK) has cut the interest rate three times since August 2014.Right now, the rate stands at an unprecedented 1.75 percent. However, there are few signs of strength in consumption. On the contrary, the household savings rate rose to the highest level in ten years in 2014.
Screen Shot 2015-04-06 at 2.16.14 AM

Economists believe that the record-low rates have not been effective in encouraging consumption because they have failed to encourage the elderly to borrow and spend or invest. The BOK governor Lee Ju Yeol acknowledges that Korea’s aging population has altered how monetary policy affects the economy. For South Korea, the biggest hurdle to economic recovery may be weak domestic demand with growing elderly population who are reluctant to spend their savings.


World’s Reserves are Now Shrinking

The long-term surge in foreign-currency reserves held by central banks is beginning to come to an end. Global foreign exchange reserves declined to $11.6 trillion in March, down from a record of $12.03 trillion in August of 2014. The upward trend in reserves globally began in 2004, according to Bloomberg Business data. Some suggest that the drop may be overstated due to the strengthening of the U.S. dollar reducing the value of other currencies, such as the Euro. This drop in reserves can be potentially problematic however. It could eventually make it harder for emerging-market countries to boost their money supply and secure economic growth. It could also add to the decline in the Euro and decrease demand for U.S. Treasury bonds.

It is estimated that these developing countries, which hold about 2/3 of global reserves, spent a net $54 billion in the fourth quarter of 2014. This was the largest amount since the global financial crisis in 2008. China, as the world’s largest holder of reserves, contributed to most of the decline, as central banks sold dollars to offset outflows. Chine cut its stock-pile of $4 trillion in June, to $3.8 trillion in December of last year. Russia and Japan, in similar nature with China, burned through large shares of reserves in 2014. Most economists believe that this trend will continue into 2015 in many of these developing countries.

Some McDonald’s Workers Not Satisfied by New Wages


The recent announcement by McDonald’s that they would increase their minimum wage for restaurant employees was initially met with celebration by many. After years of protests and demonstrations arguing for higher pay, employees seemed to have finally won the battle with the golden arches and been awarded the higher pay they had been fighting for.

However, while “McDonald’s raises wages” makes an exciting headline for its employees to read, the fine print and details of the agreement are much less satisfying for many. The wage boost will only be in effect for employees of corporate-owned store locations. Those working for stores owned and operated by franchisees are not guaranteed the same raise. In addition, the raise itself amounts to $1 more per hour, whereas many employees were demanding a $2 per hour wage increase, or even wages exceeding $10 per hour. Julia Andino, a McDonald’s employee living and working in New York, is one of many employees who are calling for $15 an hour as the base wage for employees of McDonald’s and many other retailers.

Many retailers and restaurants have given in to the demands of protesters over the past several months, with many increasing their minimum wages to over $9 an hour compared to the federal minimum wage of $7.25 an hour. The raises made by McDonald’s are expected to only affect 90,000 of its employees nationwide, while 750,000 employees of franchisees will see no pay increase.

While many of the protesters adhere to the claim that they are not currently earning “livable wages,” it seems many employees fail to recognize the implications of their demands.  Many workers only have part-time employment and are calling for higher wages so that they are able to support themselves with their current hours. However, many fast food employees are also customers of fast food restaurants,  and unaware of the effect that higher wages will have on prices for themselves as consumers. While the record profits being earned by fast food restaurants are cited as justification for why workers should receive better pay, the reality is that consumers will most likely bear the brunt of the burden of increased wages.

While there are moral implications with the idea of a livable wage for fast food restaurant employees, I believe the issue boils down to a simple question: do you think that fast food restaurant employees deserve to be paid $15 an hour for their work?

Chinese Corn Stocks Given Enormous 15% Increase

Many recent forecasts have predicted that China’s corn stocks (an important crop for feeding livestock) would be significantly decreased in the upcoming months, resulting in a greater need for corn importation, much to the benefit of leading grain export nations such as the United States. However, the UN Food and Agriculture Organization has significantly revised previous estimates of China’s 2014-2015 corn stock by an increase of 15% to 95.4m tonnes. Many agricultural traders have been gearing up for an increase in China’s demand for grain and corn, so the FAO’s revision comes as a shock to many who were poised to capitalize on the situation. Some Chinese exporters claim that even the the 95.4m estimate is too low, and that the projected need for corn in China will be far below anyone had previously expected.

The unexpected revisions to China’s corn stock will have many U.S. agriculture exporters rethinking their original expectations for exportation. The exact impact this change will have on the health of the U.S. agricultural industry and overall amount of income from agricultural exports remains to be seen, but one can expect that this projection change will have a noticeable effect given the unprecedented magnitude of change from the original Chinese corn stock estimate.

Effect of Iran Agreement on Oil Prices

The recent tentatively agreed upon nuclear arms deal with Iran will impact oil prices in the global economyoil111614. Successful implementation of the agreement will result in the removal of current economic sanctions on Iran, and will allow the country to take advantage of its oil reserves and increase the supply available in the global market. Naturally, the supply increase will cause an overall drop of oil prices around the globe. The sanctions currently in place have reduced production to 2.8m barrels of oil per day and exports are at a level of 1.1m barrels per day, which is half of what export rates were in 2011. The prospect of an upcoming increase to oil supplies already decreased the price of crude oil by 3.8 percent to $54.95 a barrel.

The agreement may throw some prior predictions about the fate of oil prices for the rest of this year and next few years into flux. A recent Reuters post (presented on this blog by Matthew Moore) had analysts predicting oil prices to stabilize in 2015 and then rise in 2016 and 2017 due to an increase in consumer demand in response to low gas prices.  However, the Iranian agreement changes this story, as the demand shift will be met with a supply increase as well, perhaps lowering oil prices even further in the future. The effects of low oil prices have been felt by oil suppliers in the U.S., as oil and gas industries were two of the biggest losers in terms of employment in the recent March job report. While consumers may rejoice at gas prices being lowered below $2.00 a gallon once again, producers and suppliers in the U.S. will likely have to respond by laying off more workers. This certainly does not bode well for job outlook for the near-future in the energy sector, but perhaps the benefits to consumers and firms which will save with lower gas prices will be able to offset the job loss with increased consumption.