More Thoughts on Large-Scale Unemployment
Bryan Caplan and others have been trying to explain why wages aren’t falling, in spite of high unemployment. I applaud their efforts, since this is an important task to avoid a Keynesian solution.
However, I haven’t found these theories too convincing. (Here are my own musings on “sticky wages.”) For example, I’m pretty sure Bryan was dabbling in the idea that employers would hurt morale if they cut everybody’s wages 10%, rather than maintaining wages and letting people go. (I don’t have the link, and maybe I’m wrong and Bryan was criticizing this theory. But I know he, and I think Alex Tabarrok, were blogging about this stuff within the last year or so.)
Yet even if this is true, it hardly is decisive. Is still raises the question: Why don’t entrepreneurs open completely new locations, staffed by formerly unemployed workers who are willing to work for 90% of what their peers are making in a sister operation?
You might say, “Why would a firm go out of its way to expand operations, in the midst of a recession?” Fine, but right now there are still places that are opening their doors every month. The frequency is obviously lower than during 2005, but it is still happening. So why aren’t these new places offering starting salaries well below the “normal” amount?
My arguments here are the standard thing libertarian economists say, when the market is accused of discrimination against women or minorities. We usually say, “Well shucks, if for some reason a bunch of racist employers are paying less than what some employees are worth, worst-case a black entrepreneur would open up shop and hire fellow blacks at a slight pay raise. Since he would be making more profit per employee than his racist rivals, he would outcompete them…”
My main point isn’t so much that libertarian economists are wrong for thinking “morale” explains sticky wages, but rather that we should be consistent across arguments. If we think these sorts of things can keep wages above the market-clearing level for years at a time, then we should be open to the possibility that these types of things can keep market wages well below their “equilibrium” level for years at a time too.
There is a profit opportunity, but it is not exploited instantaneous. Isn’t the problem the omission of time? It takes time to learn and time to exploit it.
Guys like Robert Shimer agree and argue that search and matching can account for almost all of this… which is pretty much why those guys won the Nobel last year.
It does make perfect sense. One way of explaining a demand shortfall would be that it is an externality caused by the individual search costs. A stimulus is then merely one way of dealing with this problem. It does however not explain this massive unemployment in the first place, just the aftershock.
After nearly 20 years in the school system, academics of all people should know that learning costs time 😛
You are possibly explaining why some guy, starting from scratch, doesn’t open up a new store to hire all the unemployed guys at 90% what their peers make. Fine.
But there are new businesses opening up all the time, as we speak. They are finding employees who apparently aren’t taking big wage cuts (because the data don’t show a lot of negative wage changes, unless Krugman is misrepresenting the figures which may very well be the case).
So if you’re saying that it’s easy for employers to find employees willing to work at the prevailing wage, but can spend years looking for employees who are willing to take a wage cut, that sounds pretty much like, “This 10% unemployment is voluntary.” And yet that’s not what I thought we were setting out to demonstrate.
Well it’s not like the people looking for a job are the only people needing some time to learn. When people are unemployed they search for a new job but they also spend less. This is new information.
Anyhow the answer is pretty much in the question you posed. Why does it take time? The answer must be that there is a process that takes time. A more specific answer would be, based on the above that this process is non-linear, but converging. Group A sends a signal, B responds to that signal with a signal of its own that serves as the input for A to send a new signal etc.
On reflection, racism works through preferences, which I believe is Microtalk for: things difficult to change.
” that sounds pretty much like, “This 10% unemployment is voluntary.” And yet that’s not what I thought we were setting out to demonstrate.”
Why is that not what we were setting out to demonstrate?
Isn’t that sort of unemployment a necessary outcome of a post-malinvestment restructuring and redeployment process?
I would have thought, in that sort of situation, if entrepreneurs are going to employ significant numbers of employees earlier in the market re-coordination process (when there necessarily is more risk), they will require larger pay cuts from potential workers. The longer they wait, the clearer things gradually become and the higher the wage they are prepared to offer.
To add one additional point – to the extent that government policy uncertainty or regime uncertainty is a factor or that intervention has disturbed the market signals necessary for re-coordination, then the risk will be higher and entrepreneurs will need even bigger wage cuts to achieve a positive NPV.
there are new businesses opening up all the time, as we speak. They are finding employees who apparently aren’t taking big wage cuts (because the data don’t show a lot of negative wage changes, unless Krugman is misrepresenting the figures which may very well be the case).
If you’re talking about this chart, the data involved in from the late 1990s, when the labor market is fairly tight. It’s possible that if you looked at the same data for the last few years there would be more negatives (both because of outright wage cuts, and because of new hires at lower wages), but I haven’t seen any data on this.
Two thoughts.
1) As Martin suggests, the discovery process takes time. Plus, it’s a two-sided process – it not only requires entrepreneurs to recognize and exploit the opportunities but also that unemployed (and owners of other unemployed resources such as land, warehouses, etc.) recognize that it isn’t worth holding out for a higher paying job or jobs in their old industry to recover, etc.
2) The massive government interventions have delayed (or perhaps in some cases halted) the discovery process, in part by polluting market signals and in part by creating regime uncertainty.
I don’t believe in regime uncertainty to be honest. In a revolution, yes, here, I doubt it is significant. It’s like the Pigou-effect.
Did you hear the recent Steve Wynn conference call regarding Obama? Keep in mind that Wynn is a Democrat, so he is not just regurgitating GOP talking points.
It’s deeds that matter not words. I think this is something all schools of economic thought could agree on. If any social science would take people at their word, they wouldn’t get very far. That’s not to say that people do not believe what they say, their actions, often are quite incongruent with their words.
I’ve seen this in education reform: students profess to be independent, but when push comes to shove, they need to be held by their hand. It can be seen in marketing where people say they’d like to eat healthier, but actually go for whatever looks tasty. And I believe it is no different in business, businessmen only expand when people come in and spend money, when people don’t come in and spend, there is no business to speak of. I am sure that in all cases the parties involved will think of some reason why they do x (instead of y), but that doesn’t mean that that is the reason they do x. It merely means that that is why they think they do x.
Bob,
Maybe I misunderstood your post but if you want to know why businesses don’t go up “sister locations” at 90% wages, it’s usually because they lack the capital to do so. Did you miss that or did I misunderstand you?
As far as “wage stickiness”, where is this data coming from? I know someone who runs a medium-sized private business (approx. 1000 employees across various operations) and they cut everyone’s pay 10% and haven’t given it back since the recession began. This pay cut occurred at the “employee” and “management” levels. They haven’t hired any employees, on net, since the recession began, either. Part of the deal was everyone got to keep their jobs within the organization but only if they took a pay cut.
Finally, the new health insurance legislation has been an absolute boondoggle. They have no idea what it will cost to insure their employees going forward and so they haven’t been able to give raises or afford new hirees until that’s figured out. If they figure out what it will cost on average to employ people they may end up having to start another round of wage cuts if people want to maintain their current benefit level.
Is it possible that workers ARE being hired at lower wages, but as soon as they are, new malinvestments go bust leaving the unemployment rate unchanged? This seems very plausible given the number of interventions and years of near zero interest rates. It would be interesting to see if the data confirms this theory.
I just ask this question:
How can unemployed people remain unemployed (in the private sector) for months, sometimes even years on end, and yet still live, to even be called unemployed people rather than corpses?
Every answer to this question, I think, gets us closest to why widespread unemployment can persist.
Living off accumulated savings? Unemployment benefits? Foodstamps? Living in their houses mortgage free? Minimum wage laws? Becoming criminals? Work for the government? Join the military? Charity?
I think folks like Krugman who are so fixated and obsessed with “aggregate demand” are either unwilling to delve into what they perceive to be uncomfortable thinking, or they just want the government to fix the problems because they have guns, and people with guns can enable one to more easily accomplish their irrational, anti-economics “solutions,” because those who intellectually resist, i.e. think, won’t stand in their way. This irrational thinking then results in bodily movements becoming irrational, which you and I and others observe as violence-based control over innocent people, and then to top it all off, they tell you that you are being harsh for not going along with it.
I just ask this question:
How can unemployed people remain unemployed (in the private sector) for months, sometimes even years on end, and yet still live, to even be called unemployed people rather than corpses?
Every answer to this question, I think, gets us closest to why widespread unemployment can persist.
If people are unable to find work they generally are forced into a state of dependency on others. For example, I know a couple of people who lost their jobs and were forced to move back in with their parents because they couldn’t find work. No doubt lots of others have been forced to rely on charity, or some kind of government assistance.
It’s not clear to me what implications you think are supposed to follow from this. Is the idea that it should be easier for unemployed people to starve to death, so as to discourage unemployment?
Is the idea that it should be easier for unemployed people to starve to death, so as to discourage unemployment?
That’s the idea. After enough deaths they will be willing to work for peanuts. We could own our little slaves but it will be all voluntary!
“It’s not clear to me what implications you think are supposed to follow from this. Is the idea that it should be easier for unemployed people to starve to death, so as to discourage unemployment?”
That seems like a pretty disingenuous reading of his post. I don’t know what MF’s exact thought process but if I had to make an assumption on what implication is supposed to follow it would be closer to something like, “in the eyes of the individual it is more beneficial to be living off savings, living with parents, etc. than accepting a job at the wage level they are currently worth.”
Again this is just my guess, I am sure he can clarify the matter himself. I just found it a bit ridiculous that the only plausible implication you thought could be drawn from his point is that it should be easier for unemployed people to starve to death…
I mean hopefully we can agree that reducing the relative scarcity of goods (ie increasing wealth) is the ultimate goal, not employment for the sake of employment.
Or as the rapping Hayek said, “Jobs are a means, not the ends in themselves. People work to live better, to put food on the shelves. Real growth means production of what people demand..”
So if the wealth of society has grown so much that one is able to be unemployed as opposed to working at the prevailing wage, maybe that’s not necessarily a world ending calamity?
So if the wealth of society has grown so much that one is able to be unemployed as opposed to working at the prevailing wage, maybe that’s not necessarily a world ending calamity?
Strictly speaking mass starvation of the unemployed isn’t a world ending calamity either. The world will continue to turn even if you are dead.
Nevertheless, it is a large scale tragedy. It’s a tragedy in materials terms both for the individual and for society (we would be a lot richer if the millions of people looking for work found productive employment). But even beyond that, jobs for most people are about more than just the material reward. They provide a sense of identity and self-worth.
Wow,
I think I’m going to have to abandon this conversation. You continually equate unemployment to starvation. I am trying to get you to recognize that IF the economy becomes so productive and wealthy that people’s basic needs can be met being underemployed or some even unemployed for large stretches of time, then clearly a persistent rate of high unemployment does not follow that people will be starving to death.
That’s the whole point of this economics thing. To increase the abundance of highly valued good and services. I am going to stipulate a priori that goods and services vital to sustaining one’s life are the most highly valued. As such if an economy is so wealthy that segments of that economy can remain unemployed for stretches of time, it does not follow that they are moving closer and closer to starvation the longer they remain unemployed.
It could instead mean that people have the luxury of being unemployed and not facing the immediate prospect of starvation. This could be a scenario where unemployment does not represent a fatal flaw in an economy that must be corrected before every starves to death! but could in fact be a choice that is permitted by the relative wealth of said fictional economy we are discussing here.
Regarding your last comment of a sense of identity and self-worth, there is nothing stopping one from performing jobs, activities, or other tasks that provide those same feelings even if said activities do not quality as official employment.
You continually equate unemployment to starvation.
No, I’m not.
Let me put it to you this way. I was just watching your interview with Jeff Tucker about the FBI shutting down online poker sites and freezing your bank accounts.
Does the fact that the government did this mean that you are going to starve? Clearly not. We live in a wealthy and productive society, so starvation is pretty rare. The government’s actions might mean that you are worse off materially than you would have been otherwise. You might have to take a job that pays less or that you don’t enjoy as much. If worst comes to worst you might have to rely on support from friends or family, charity, etc. But you aren’t going to starve because of it.
Does the fact that you aren’t going to starve because of it mean that what happened to you is not a big deal? No. What happened was an outrage.
There are currently millions of people out there who are unemployed because of things the government screwed up. That is also an outrage. Is it the same as mass starvation? Of course not. But the fact that, living as we do in a wealthy society, things aren’t as bad as they could be is not a reason to dismiss what has happened to them.
Online poker does not create wealth anyway.
“Is the idea that it should be easier for unemployed people to starve to death(hi!),”
“Strictly speaking mass starvation (hi!) of the unemployed isn’t a world ending calamity either. The world will continue to turn even if you are dead (hi!).
Nevertheless, it is a large scale tragedy.”
“It’s like saying that trapeze artists don’t die(hi!) when they fall because there is a safety net,”
Ya I have zero interest in continuing the conversation that started out with me commenting on how flawed your deduction that MF was suggesting it should be easier for unemployed people to starve to death, to this never ending game of changing the argument.
I’m going to reply to the post below about online poker and wealth to highlight the absurdity of the blog comment argumentation method and be done with it. It’s time for a swim!
A real tragedy that could very well be solved with a Job Guarantee that is not adopted because of the imaginary problem of budget deficits.
“Online poker does not create wealth.”
2 very separate points need to be made. Who ever said it did? In a discussion over the fact that employment is not the ultimate ends and that instead wealth is, you type X doesn’t create wealth. Bingo! You’ve now proved that employment is necessary and wealth creation isn’t? It’s insane I’ve wasted this much of my time on this….
Point 2.
Although your statement is a total strawman that belies an inability to have a discussion on the actual topic, it also happens to be totally false.
Wealth is subjective. While I suggested that goods/services that prevent death by starvation are more highly valued than others, that does not mean other goods have zero value.
Let’s also look at the increases in advertising, customer support, marketing industries that result from the online poker industry. Weren’t you just arguing that employment is the most vital possible service and needed without which people must starve to death?
Now an industry that creates tens of thousands of jobs and offers a valued entertainment product creates no wealth!?
Does the movie industry create wealth? Music industry? Arts? You have once again beautifully demonstrated why even the deepest understanding of mathematics and accounting is not sufficient when addressing the realm of economics.
I wish Keynes had suggested the government hired people to play poker during a recession. We’ll be all Keynesians now!
No, online poker creates no wealth, it just shuffles it around like the cards used to play the real game.
By that measure actors, artists, therapists, financial advisers, advertisers, musicians, and athletes also do not “create wealth”. I’m a little disheartened to see such a fallacious idea offered by someone who comments so vociferously on an economics blog.
First, this is a religion blog, not an economics blog.
But you are right, most of the examples you gave create no wealth either.
Or do you think the government should hire people to play poker during a recession?
“First, this is a religion blog, not an economics blog.”
Which, were it true, would make you no less wrong on the point.
“But you are right, most of the examples you gave create no wealth either.”
If you were to ask economists at the time of Adam Smith, a good deal would have probably agreed with you. Most modern economists, of almost any school, however, would beg to differ. My guess is, as in many other arguments I’ve seen you engage in, you’ve substituted the understanding of the term from an accounting perspective for the economic term. If you want to use the term that way – something more akin to “material wealth” – then that’s fine…but that’s not how most people on this blog are going to employ the term.
“Or do you think the government should hire people to play poker during a recession?”
You’ve packaged two premises together here; let’s unbundle them. It doesn’t follow that I would think the government should follow any particular fiscal policy based on my understanding of the term “wealth.” On the one hand I could very well believe that employment via government programs would produce wealth and yet I could oppose it still for political or philosophical reasons. On the other hand, I could point out that a good deal (actually most) of goods the government provides are just as immaterial as online poker and psychiatric therapy. And better yet we could question to what extent any particular instance of government spending actually produces “wealth” in the first place. You could have the government pay people to take giant boulders and paint them red. Yet if nobody considers it a valuable resource to facilitate their happiness or well being I think we’d be stretched to call it wealth…..at least in the realm of economics.
I don’t know what MF’s exact thought process but if I had to make an assumption on what implication is supposed to follow it would be closer to something like, “in the eyes of the individual it is more beneficial to be living off savings, living with parents, etc. than accepting a job at the wage level they are currently worth.”
If that’s the argument then it is a bad one. It’s like saying that trapeze artists don’t die when they fall because there is a safety net, therefore their falling is voluntary.
That analogy is not valid at all.
That analogy is not valid at all.
Why not?
The implication is that if a trapeze artist falls he will die. As true as that may be, you are implicitly assuming the point you are trying to make. Which is that unemployment leads to death as well.
My whole point is that the goal of economics is wealth creation, not merely a zero rate of unemployment. Further, if a society is so wealthy that large segments have the option to remain unemployed, it is specifically because said abundant wealth has eliminated the “work or die” dilemma. That’s something to be celebrated.
The implication is that if a trapeze artist falls he will die. As true as that may be, you are implicitly assuming the point you are trying to make. Which is that unemployment leads to death as well.
No, I’m not. I’m pointing out that you can’t assume the opposite.
If that’s the argument then it is a bad one. It’s like saying that trapeze artists don’t die when they fall because there is a safety net, therefore their falling is voluntary.
Terrible analogy, because it removes the possibility of living doing more than one thing, which is necessary in my arguments, but in your analogy, it’s life or death, which suggests the choice I am presenting is work or else die, which is clearly NOT what I am claiming.
My argument is that IF high unemployment persists, and IF those unemployed are not dropping like flies, then it must be the case that they are being supported by others in some way. My argument is purely ontological, which is if we want to know why unemployed people are not getting hired, then asking what the heck is supporting them can serve as an explanation for why they choose the support, rather than the shittiest job for the lowest pay imaginable, thus resulting in a lowering of unemployment statistics.
I am not making any normative argument on what people ought to do, just what they are doing.
Suppose that we lived in an incredibly wealthy society, when all of a sudden, a huge wave of unemployment takes place. The overwhelming majority of the unemployed end up being supported by others.
Suppose that the alternative facing each unemployed worker is “stay dependent and have a higher standard of living” and “work for pittance, abandon dependency, and have a lower standard of living.”
Is it really crazy to suggest that the reason high unemployment would persist would be primarily because of the support?
I’m not saying the support should be removed, I am just saying that the reason for the unemployment is because of the support.
If people are unable to find work they generally are forced into a state of dependency on others. For example, I know a couple of people who lost their jobs and were forced to move back in with their parents because they couldn’t find work. No doubt lots of others have been forced to rely on charity, or some kind of government assistance.
The more lucrative the alternatives to taking a minimum wage job are, the less likely one is going to take a minimum wage job.
It’s not clear to me what implications you think are supposed to follow from this. Is the idea that it should be easier for unemployed people to starve to death, so as to discourage unemployment?
I wasn’t making any normative, ought style argument. It was purely economic and ontological.
The question of whether one ought to support the unemployed, and the question of what exactly is generating the high unemployment, are two separate, but definitely related, questions. I was only considering the second question.
On both this and the previous “sticky wages” question, you need to take a look at private debt in the economy, both the gross debt/asset level of your average worker, and his rate of savings/ dissavings.
If a worker is saving a little each week, and has a bit of savings set aside, he may well be more capable of dealing with a pay cut by running down his accumulated savings, and of course he doesn’t have to put that weekly savings aside, he can spend it. and maybe he has to skip a meal each week.
However, if another worker is living hand to mouth and has fixed debt expenditures- mortgage, credit cards etc, that can’t be weaseled out of, a 10% paycut can suddenly make his family insolvent, and or going hungry.
These two workers are in different situations, and should bargain accordingly, as should their employer.
Let’s say I have a shop making furniture and 10 loyal, but indebted-to-the-hilt journeymen carpenters. each one makes a chair every week at his workbench, which is then sold on Friday. One Friday, I find that I can’t sell all the chairs, but only nine. I decide that I’ve either got to cut staff by 10% or cut hours by 10%. In the first case, I’ll bankrupt one of my workers for sure, but keep the others employed and the firm going. In the second case, I’ll bankrupt all 10, and force them to look for other work that will meet their fixed debt obligations.
Reading the linked article, I see you’re cognizant of this in your explanation of wage stickiness as a natural outcome of the desire by both workers and employers to have predictable wages.
As to this idea that capitalists can just close up and open another business across town or something, That’s a very difficult and expensive proposal for just about any business to pull off, especially if they don’t know when conditions will improve. Not only that, but this has to be done at a time when they are revenue and capital constrained (because loans have dried up).
I’m probably missing something, and I don’t know whether the facts reflect my debt explanations.