Arnold Kling  

Recalculation vs. Structural Unemployment vs. AS/AD

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Recalculation differs from textbook structural unemployment.

In textbook structural unemployment, there are two GDP factories, one in the north and one in the south. There is a shortage of workers in the south, and there are too many workers in the north. But you cannot tell a structural unemployment story if there are unemployed workers in both regions.

With recalculation, you can have unemployment in all skill sets and all regions. Many patterns of specialization and trade are no longer viable. New patterns need to be established. That means that people have to try to create new businesses that utilize unemployed resources and produce profitable goods and services. Many of the attempts to do this will fail. Eventually, some will succeed.

In microeconomics, supply and demand curves represent economic laws that have a compelling logic behind them. In macroeconomics, aggregate supply and demand is nothing but a metaphor, with very weak logic behind it. Pretty much everything in AS/AD is riding on the hypothesis that labor supply is highly elastic at the nominal wage and labor demand is reasonably elastic at the real wage. There is nothing for entrepreneurs to figure out--they will employ more workers as long as you can trick those workers into taking lower real wages.

A bunch of of information technology workers used to be employed in projects for firms that were creating and trading new forms of mortgage securities. Those information technology workers have been laid off. Can they get their jobs back by being tricked into working for lower real wages? No. They need to make a living some other way.

The information technology workers laid off from financial firms may need different skills in order to be able to work on projects in nonfinancial businesses. They may need to start their own enterprises.

The task of figuring out patterns of sustainable specialization and trade is very difficult and subtle. The AS/AD metaphor makes it seem much simpler than it is.


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COMMENTS (11 to date)
Steve Carlson writes:

I have advanced the notion that federal govt can create greater Just-in Time Hiring by taking off the restraints of illegal affirmative action and human resources departments structured to enforce comparable worth control of the hiring process.

These practices actually keep qualified people from working, shrinking the labor pool in a given area (and making foreign locations without these time and cost restraints more attractive), and so they create artificial structural unemployment by skewing the numbers. They are enforced by gate-keepers inside the employer whose goal is to reduce the number of men in more attractive jobs and replace them with women (thus attempting raise the comparable wage of women, the state intent of such practices), often with the use of technology. The Mpls Fed Res site has articles on this.

These same numbers would show up in a Barrier Adjusted Aggregate Supply curve (adjusting for the time and cost barriers imposed on employers by these factors--and there are other factors, such as uncertainty and an adverse tax environment, which would skew the Aggregate Demand curve as well).

Unfortunately, these barriers also show up in the Recalculation phase (which I understand is a period in which new industries/start-ups recalculate what labor is available based on skill sets that are somewhat transferable, and also calculate a market-wage, not a comparable worth wage). Until we eliminate these barriers of illegal affirmative action (for those businesses who are covered by the EEOA now, or will be as they grow) and comparable worth forced bureaucracies designed to give women control of the hiring process (and all bets are off at that point!), the recalculation phase will like occur in another market in another country.

Part of my purpose in running is to combat these insidious, job-killing practices, to free America, and 4th and 5th Congressional Districts of Minnesota (parts of a single labor market) to create private sector jobs and grow the private sector economy.

I address this in the context of my campaign website at:

david writes:

If the failure of one industry alters the sustainability of patterns so much that specialization and trade of industries far away from the bubble sector also has to change, there's identically no reason for patterns that are now sustainable in the current low-demand situation to be sustainable in a recovered high-demand situation. Therefore, to encourage the formation of new, desirable PSST we should be propping up conditions that are in some way similar to what we expect a recovered economy to look like: at those tax rates, wage rates, etc. PSST will then evolve to fit those conditions.

(presuming here that the creation of PSST is difficult to accelerate via manipulating real wages, etc. - identically, once real wages increase on their own "naturally", PSST will remain difficult to change. The theory implies that it is possible to get stuck in undesirable PSSTs for extended periods of time)

Rebecca Burlingame writes:

In a sense, profits and sustainability are the same thing. It's just that people think of them as opposing circumstances that are not necessarily so. Perhaps the ways we tend to measure both point to the dilemma. Sustainability, one thinks of the whole earth, or perhaps a nation. Profits, one thinks of an individual or a multinational. In other words, the huge or the tiny environment to measure inputs and outputs within specific settings. Local and regional measures of profit/sustainability seemed to die out with the rise of the multinational, but they were a valuable way to seek control of many variables in understandable ways.

Lord writes:

Yes, but why aren't they viable? They aren't viable because the price level has undergone a tectonic shift. Restoring the old price level is difficult, but not so difficult as innovation. It is difficult for the Fed to boost the profitability of all other industries, but not so difficult as creating new ones. It is not the unemployed one needs to trick into accepting lower wages but the employed. Naturally they resist, but that is all that is needed to restore employment. It is the employed that are being overpaid, but as long as their nominal wages are steady with their fixed costs they have no basis to complain.

R Richard Schweitzer writes:

Is there not also the element of mariginal productivity [MP] to be considered?

OR, has MP been subsumed into the concept of AS, without considering that it is quite discrete (micro) in the supply definitions.

Doc Merlin writes:

I take it a step farther than you do, Arnold. I don't believe AD is an actual demand. In most models AD is treated as exogenous, but in reality it isn't it isn't even a function. Demand aggregated together shouldn't create a curve or number because it doesn't aggregate linearly. Its better to think of it an an N dimensional vector where N is the number of goods. The idea of AD talks about the magnitude of the vector, which is a somewhat meaningless concept since humans are really supply constrained NOT demand constrained. Recalculation talks about the direction of the vector.

GabbyD writes:

"Many patterns of specialization and trade are no longer viable."

what does pattern of specialization mean?

If ALL specialized skills are no longer demanded, then isnt it a failure of AGGREGATE DEMAND?

Mr Econotarian writes:

I can't help but think (based on what I am hearing from individuals) that much of the gap between openings and hiring is due to sticky wages. People hired before the recession were expensive and laid off, and companies are trying to hire back cheaper people, but even the unemployed don't want to take a career pay cut.

If it was just a skills issue, you would think more companies would hire and train. But training makes their employees even more expensive.

There certainly are very hurting industries (manufacturing, construction), but even computer programming jobs are going unfilled for months.

Underwater mortgages causing lack of mobility is another issue. Too bad the GSEs can't put together some kind of guaranteed underwater mortgage swap program for people relocating. With current ultra-low interest rates, it should be simple.

Silas Barta writes:

@GabbyD: If ALL specialized skills are no longer demanded, then isnt it a failure of AGGREGATE DEMAND?

Only if you regard it as a "failure of aggregate demand" that people won't buy junk.

Which is what most mainstream economists think, and why they suggest such bizarre policies as eroding people's money to get them to pointlessly buy stuff.

WhiskeyJim writes:

AD is close to pre-2008 levels. But we have close to 9m less people employed.

If we have an AD problem, do Keynesians then believe the economy is now that much more productive? In other words, were we running so 'fat' that over 1 in 10 people could be cut?

Whether we had slack in the system or not, how does a government stimulus help AD other than spending tomorrow's production value today to slow the adaptation of those workers to a new reality?

jgo writes:

What if the skills of the workers in the south are in demand in the north, while the skills of the workers in the north are in demand in the south... but the employers don't see the costs of flying people in for interviews or relocating workers to be worth the costs?

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