Tyler Cowen has a post critiquing the “sticky wage” Keynesian explanation of the longterm unemployment we have been experiencing. In the post he examines five different argument, rejecting each of them:
Often when this topic comes up I feel I am playing a game of whack-a-mole. Most of all, I am struck by how little attention people pay to their own sticky nominal wage hypotheses. If that were the problem, and if unemployment were today’s biggest issue (a totally plausible claim), you might expect people to blog the microfoundations of nominal wage stickiness very, very often. You might expect ethnography. Micro-level data. Lots of juicy anecdotes and journalistic features, not just on the unemployed but on the stickiness itself. Perhaps some micro-level advice. Dozens, no hundreds of blog posts on the all-important microfoundations of the #1 social problem of our time.
But no, there’s not much of those to be seen. At some level it is understood, if only implicitly, that the sticky nominal wage theory is an embarrassment — when it comes to the unemployed across the longer run (but not the employed). It doesn’t get too close a look.
Let me offer an explanation for how sticky wages among employed workers can result in persistent unemployment for those without jobs. In many organizations, particularly large ones, wages are determined only indirectly by the market for labor. Mostly, wages are determined bureaucratically: you will be offered a wage that approximates the wage of present workers in the organization whom you superficially resemble.
The remainder of this post is neither a refutation nor an analysis of Dr. Cowen’s post but more an annotation of it.
Tyler writes:
Maybe firms don’t have enough money to take on more workers, especially since the wages of the employed are fairly sticky. Yet businesses are sitting on record-high levels of cash.
I think that this is a better explanation than Tyler does. The needs and capabilities of businesses aren’t uniform. In general new businesses are the ones creating new jobs while older, established companies are the ones sitting on the piles of cash (which in another world would be called “recapitalization”). The efforts at propping up the insolvent banks, most notably maintaining persistently low interest rates and paying interest on reserves, has made banks less interested in lending money to riskier, i.e. newer, poorer, and less established customers. Even in a period of low aggregate demand there are thousands, even tens of thousands, of businesses trying to get started or expand. The operative word is “aggregate”. In specific industries demand may be strong and growing even during a perio of low aggregate demand.
How about applying for a job at a Washington non-profit? Every time you do so you are signaling an ability to work for considerably less than what you are worth elsewhere. Yet this labor market seems to hire as many people as its revenue stream can support and employers do not throw out all applications
I think that this is somewhat more complicated than Tyler makes it out to be. I strongly suspect that non-wage compensation, e.g. contacts, exposure, need to be factored into the picture. In addition, I am wary of the phrase “what you are worth elsewhere”. Is there really that much of a difference in the market for labor and the market for widgets? A widget is worth what somebody is willing to pay for it. You don’t calculate its price by analyzing the inputs that went into it or the outputs it might produce, if any. Those are used to calculate profit or loss, not price.
Few people want to come out and utter the possibility: “They’re just too stupid and too stubborn to lower their wage demands.†Mood affiliation reigns, and the prevailing mood is to express sympathy with the unemployed. In fact that sentence is not my view, but it actually makes somewhat more sense than most of what is listed above.
Let me offer a few non-stupid explanations for persistent unemployment other than sticky wages and low aggregate demand.
- The people and jobs are in different places and an unemployed person may be unable to sell a present home or, due to bad credit, be able to buy a new one.
- High credentialing requirements impose a substantial cost and lag time. The reason that people make decisions based on the near term rather than the long term may not be stupidity but, rather, survival.
- Two (or even more) career families change the profit and loss situation on employment.
- Childcare costs may mean that taking a new, lower-paying job doesn’t make financial sense (especially if unemployment compensation is extended).
Those are just off the top of my head. I’m sure there are others.
It also occurs to me that we are continuing to look at the economic downturn incorrectly. As the State and local unemployment figures strongly suggest we are not in a general slump. Some areas have very low levels of unemployment; others extremely high. I think that what we are seeing is a local or regional depression with national implications and effects. The federal government finds it difficult to address that particular kind of situation: representation is by population or by state, not by need.
Dave,
#3 and #4 certainly affect my family. As I mentioned in a previous post, I will probably return to full-time work this fall or maybe this winter (depending on how long the government application process takes and what the offer is, assuming I’m selected). As part of that decision I made some estimates as to how much employment would cost me (actually I updated a previous estimate I did a couple of years ago). I added up childcare costs, transportation, taxes and some other factors and arrived at a figure of around $30,000. 1/2 of that is childcare expenses and 1/4 is taxes (it turns out that increasing our income by 50% results in a doubling of our effective tax rate – and this is Florida so there’s zero state and local income tax and it also assumes the child tax credit remains in place as well as the deduction for child care expenses.). The remaining 1/4 is everything else. For childcare expenses I would be paying for two kids in a before-and-after school program and 1 child for full-time care. Given the numbers, plus all the other child-related complications (ie. taking a day off because a child is sick and can’t go to daycare), it’s not a surprise that larger families cannot have two working parents unless they are very wealthy and can afford a nanny (~30k a year at the low end, depending on location).
The pay scale for this job ranges from $33k-60k a year. I assumed $45k for my calculations. I’m not sure what I’ll be offered but if it’s at the low end it will probably not be worth my time.
Isn’t this just the notion of opportunity costs? What is your next best paying job. What is the next best productive activity for the resources for making a widget?
Oh, in other words you agree with Cowen. 🙂
Cowen isn’t saying that we can’t have persistent unemployment, it is an empirical fact. What he is doing is questioning the new Keynesian assertion that it is stick wages. For a short term explanation it works, longer term it doesn’t and then you’d look for other (non-stupid) reasons.
I wasn’t disagreeing with Cowen. As I said in the body of my post, I was riffing on what he had to say—sort of an annotation.
Wages for workers in my specialty have not dropped, even with an overabundance of workers. What I wish I could do is only hire healthy people. The insurance increases over the past few years have been large.
Steve
Few people want to come out and utter the possibility: “They’re just too stupid and too stubborn to lower their wage demands.”
This just doesn’t match up with the reality I have experienced personally. When you offer to work for less, or take a job that pays less than what you made before, the employer will invariably say, “Well, you will just leave for another better paying job at first opportunity, so I won’t hire you.” (It doesn’t seem to occur to them that this is always true, but that’s another issue.)
This has been my experience, which makes it merely anecdotal. However, I know a large number of unemployed people these days, and every single person who has been out of work for longer than two months has had this same experience, multiple times. There are no exceptions, and this is something I ask about when meeting new people who are unemployed. So I am certain that this is actually how employers are treating potential new employees offering to work for less, in the Orlando area at least. I have no reason to suppose that most other areas work differently.
Offering to work for less will not get you a new job when the current employees will work for less (rather than lose their jobs) AND when there aren’t enough jobs for everyone that wants one.
So it comes down to this: The cause of all this unemployment is that there aren’t enough jobs.
There aren’t enough jobs because there isn’t enough demand for businesses to expand (especially when they are upping their productivity levels by working their current folks until they fall apart), nor enough demand for new businesses to form.
There isn’t enough demand because functionally people have less to spend. The problem of newly unemployed people spending less is obvious. The same is true for part-timers who used to be full-timers. However, people with jobs who have had their hours cut (if wage earners) or their salaries reduced (if salaried) also have less to spend. Additionally, as (medical) benefit expense goes up, more gets passed on to the workers, thus reducing their effective spending power further. Add in reduced quality of jobs because of globalization, too.
On top of all of that is the personal debt overhang. Personal debt is at huge levels in the nation. That means more and more of diminishing income levels are going to servicing debt, or should be.
And realize that debt is ultimately just a way of satisfying demands now that otherwise couldn’t be satisfied until the future. That’s great as long as the future remains safely in the future. But what happens when the future is now? That is what we are experiencing.