Arnold Kling  

Microfoundations of Unemployment

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Tyler Cowen writes,


Why don't the unemployed lower their wages to find a job? The more tragic you think unemployment is, the greater the puzzle here, and yet the people who stress the tragedy are often least likely to admit the positive puzzle (and vice versa).

Read the whole post. The hypothesis of downward rigidity in nominal wages makes for a good story for short-term layoffs. (I think it also makes for a good story for how state and local government employment declines in a recession. I have consistently prescribed wage cuts for state and local government workers as a way of maintaining employment there.) However, as Tyler points out, the story of sticky nominal wages becomes less compelling the more you try to apply it to the already-unemployed and the longer the duration of the recession. This is the biggest problem with trying to fit the current situation into the AS-AD paradigm.


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COMMENTS (6 to date)
M.R. Orlowski writes:

I'm starting to come around to those lines myself. However, if we're going to come around to these beliefs, then would I suppose any further monetary expansion is a wasted effort. Perhaps the lack of any meaningful gains in employment really does have to do with real factors affecting real factors as opposed nominal factors affecting real factors(a case where monetary expansion is called for). If we're going to focus on real factors, then I think that Bob Higgs' story of "regime uncertainty" deserves much more attention.

TallDave writes:

Yep. Good that you and Tyler are paying attention to this.

Bryan Willman writes:

Do macro-economists ever actually run businesses?

For most commercial entities, even if the unemployed who show up at the door are *free*, you *don't want them standing around*.

The why's of that are legal, long-term economic, cultural, but above all about business dynamics. How do I manage these people? How much time must I spend finding things for them to do? What will it cost me to undo the things they should not have done but did anyway? If I have 6 salespeople standing around in a place that only ever needs 2, does the "crowd" drive people away?

PSST/skills mismatches make it worse. If I need three good welders, having 3 really cheap cellphone salespersons will surely be a negative output proposition.

Lord writes:

It is all about AD. Without demand, more hiring is counterproductive.

Noah writes:

Agree. AD-AS is a short term theory. Short-term theories can never explain long recessions.

However, Cowen leaves out one popular explanation - the "balance sheet recession" idea, i.e. a regime change in people's willingness to borrow money (caused perhaps by a regime change in expectations about returns in risky asset markets).

I think that that is the strongest competitor to the PSST/complex-systems explanation of long stagnations.

Arthur_500 writes:

Why look for a job that returns less than your prior one unless there is an overwhelming need?

Many years ago I became a simgle parent and lost my job all about the same time. the next day I took a job for barely above minimum wage. It paid the food and shelter.

Later I got another job for more money.

Why not just sit around and wait for government progrmans to pay my rent and feed me? I needed the money today and not six weeks from now.
Our 99-weeker's are getting food and shelter from somewhere. Without any need, they won't lower their expectations.

When these people are in need then they will figure something out. Maybe they will learn to weld so they can take a welding job. maybe they will start a new business that suits their skills.

However, as a businessman, I will continue to replace people with technology and only hire those few I feel best suit my company. I will never hire a 99-weeker because they don't care enough!

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