Tyler Cowen looks at Christina Romer’s take on the current unemployment problem, and comes away unimpressed. It relies too heavily on aggregate demand shocks. Yet job creation has been especially low, and it’s hard to get there from a purely AD shock. He says
Yet the nominal wages on those jobs-to-be are not constrained by previous contracts or agreements. Tell stories as you may, but it’s hard for me to see that as exclusively an AD problem.
I wonder what is the behavioural postulate for how long all these unemployed workers are all staring jobs in the face yet persistently stubborn about their appropriate nominal wage. I’m all for behavioural economics, but I don’t buy the necessary story here.
I’m not sure you need this to get stickiness. Employers might be reluctant to hire new people at dramatically lower wages than their current employees; such differentials rarely go undiscovered, and they tend to produce big headaches for management.
Still, I broadly concur with Tyler and Arnold Kling: I don’t think you can explain this all by falling aggregate demand. Consider that, as Romer notes, unemployment is about 1.7 percentage points higher than can normally be explained by the change in GDP. That doesn’t sound like so much. But it’s really quite a lot. If you assume that the natural rate of unemployment is probably somewhere around 5.3%, that means the total shift has only been 4.4 percentage points. In other words, almost 40% of our currently elevated unemployment rate comes from something other than the decline in GDP.
Moreover, we know that there are large sectors that require structural readjustment: autos and construction. Those workers are geographically and skill-constrained. To think that the current level of unemployment is all about aggregate demand, you have to think that there are lots of jobs into which those displaced workers could easily transition. But if you own a house in the Detroit era, or have a spouse who still has a job, this is just clearly not the case.
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