Arnold Kling  

Mankiw vs. PSST

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A commenter on this post points to a paper that Greg Mankiw wrote on real business cycle theory.

If workers were unemployed voluntarily in recessions because they were moving to new jobs in other sectors, we would expect high unemployment coinciding with high job vacancy.

Thus, he dismisses the multi-sector real business cycle model. A couple of points.

1. What Mankiw is describing here is not a standard real business cycle model. As he points out elsewhere in the paper, in a standard RBC model, productivity is temporarily depressed, and so workers prefer leisure until productivity gets back to normal.

2. The multi-sector model that Mankiw describes is closer to what I am talking about with patterns of sustainable specialization and trade. However, in the multi-sector RBC model as he describes it, the new patterns do not have to be discovered. The job vacancies are there, and the problem is that it takes workers a while to find them. In contrast, the way I think of PSST is that the new jobs have not yet been created. Entrepreneurs are still experimenting within the new technological environment. Until a lot of those experiments prove successful, job creation may be very minimal.

Suppose that in the near future many people will be working with biotechnology, as this conference might suggest. That does not imply that right now there are job openings in this sector.

Again, I will say that the most hand-waving I have to do with PSST is explaining how there can be a large imbalance, with some sectors declining before other sectors expand. Again, my hand-waving approach is to suggest that productivity rises sharply in a sector with relatively inelastic demand. That frees labor in the sector, but we do not yet know where that labor is going to land.

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CATEGORIES: Macroeconomics

COMMENTS (2 to date)
david writes:

I do confess I was merely attempting to demonstrate, quickly, that multi-sectoral RBC models do exist, are old, and are somewhat well-known (which is why I dredged up a New Keynesian's brief summary of it rather than any papers focusing on multi-sectoral RBC - it was the only mention I could dimly recall and google in a hurry). Mankiw is certainly not pushing RBC here.

But never mind that. The standard model has workers and employers searching for each other, with associated empirical predictions etc. on labor markets. Yours has entrepreneurs searching for, presumably, what consumers want to buy (?). So at least some of the similarities hold - we should be seeing lots of different experimental attempts, shouldn't we? But the conventional wisdom is that startup formation and R&D investment is procyclical, not countercyclical.

It may be different this recession, of course, but of that I have not heard any new data. Have you?

Lord writes:

Technological explanations have a long history since Kondratieff. Since most firms are me too firms or bridges between existing and new firms created in response to a pioneers success one probably couldn't tell from numbers but perhaps from breadth or success, though success should be easier since there is reduced competition at such times.

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