Who Cares About Nominal Rigidities?
Tyler Cowen doesn’t much.
I tend to agree with Cowen. Nominal rigidities were quite the thing just before I arrived, so I think they are over rated. However, there are two points one of which is totally twitty and the other of which is a dead horse still being beaten by Paul Krugman.
OK twitty: By definition for there to be unemployment there must be three agents, an employer, an employee and an unemployed person. The unemployed person must be eager to work as the employee does at the employee’s wage. The employer must consider the unemployed person qualified. This means that unemployment can certainly be eliminated if wages fall. At some point, either the employee decides to quit and just live off savings till social security kicks in or the unemployed person decides he or she doesn’t want the job. By definition, wage rigidity is needed to explain unemployment. This is true even if lower wages do not at all cause higher employment. If nothing else super low wages can convince people to leave the labor force eliminating unemployment that way. In this case wage flexibility doesn’t help the unemployed — it makes the alternative of working worse so they consider their horrible predicment the best they can hope for. I said it was twitty.
Second, things are unusual because we are in a liquidity trap. The reason nominal rigidities usually matter is that the real money supply could increase if the nominal money stock staid the same and wages and prices fell. From 1940 through 2008 this meant that wage and price flexibility should have prevented output from fallin. N ow, however, the money supply doesn’t matter since we are in a liquidity trap. In the IS-LM model (M/P) (money divided by the price level) appears. If P is free to adjust, then there can be no problem with insufficient aggregate demand. Therefore in all of the macro literature from 1940 through 2008, nominal rigidities were considered important. The idea here is wages go down so the firms cut prices (to maximize profits they would) so real balances (M/P) goes up so aggregate demand goes up so GDP goes up. There is no need for real wages to fall.
Right now this doesn’t matter as M/P doesn’t matter. But for decades and decades it mattered a lot, so nominal rigidities mattered. In practice, wages and prices are sticky so all reality based macroeconmists (“that’s not enough I need a majority” — Adlai Stevenson) agreed that nominal rigidities mattered. Now not so much. M/P doesn’t matter so P only matters because of debt deflation (lower P makes nominal mortgage debt an ever worse problem) so wage and price flexibility won’t save us so Keynesians don’t talk about it.
As always, don’t confuse “Keynesians” with Keynes. Keynes was not interested in nominal rigidities The General Theory through “The General Theory Restated” included nothing on nominal anything.
i am not an economist, but i hope i am reality based. i don’t really understand your economics argument, but to the extent i do it doesn’t look like the reality i know… except possibly to the extent that big businesses are run by people who listen to economists.
i would expect it to go something like this: you think you can sell a product, you look at the cost to make it. you look at the cost of wages by looking around at what other workers of “similar skills” are getting paid. you go into busuiness and you do fine (or dont’… but that ends the story), perhaps adjusting wages up if you find you need skilled people and they won’t work for your because someone else is paying better. but then if you are really big enough you influence government and education policies to drive down the needed skill level, or increase the supply of people with the needed skills.
but one day you find you can’t sell enough of your product to make a profit… you might try cutting wages… but it turns out that’s not usually the problem. either your product has lost favor, or perhaps other workers in other industries that have nothing to do with you have lost their jobs and can’t afford your product… and the downward spiral begins…
now maybe there is a better analysis, or maybe yours above really does explain all this…
but i can’t help feeling it really does not explain anything in a useful way. and that’s not a criticism of you, or even of economists, but perhaps of the policy makers who rely on poorly understood theories, or theories with unexamined assumptions or missing variables… or just lies made up provide cover for special favors that congressmen do for their supporters…
“The employer must consider the unemployed person qualified. This means that unemployment can certainly be eliminated if wages fall.”
What logical connection is there between the two sentences that make up that conceptual relationship? Are you suggesting that as wages fall to some unacceptable level, as valued by the worker, unemployed workers will clamour to take the jobs, but what jobs are they going to take? Are those the jobs that did not exist when they were unemployed? Or, are those the jobs that employed workers are now giving up because the wages are falling? Oops, if so there are now newly unemployed workers. Or, are you saying that as wages fall employers will add new jobs to the jobs inventory because wages are lower? What is the source of the demand for the products or services being produced by these newly discovered jobs? I think that Henry Ford would tell you that paying lower wages will reduce the demand side of the supply and demand equation.
As Coberly, above, has pointed out in different words, there is no apparent validity to your argument. Please explain further. BTW, whence the name of the phenomenon that you describe, “nominal rigidity”? What’s nominal? And what’s rigid? Jargon designed to make a concept sound intellignetly thought out doesn’t help the argument, though it does obscure the concept.
i am just guessing about this, but i think that from the economists standpoint you are not unemployed unless you are willing to work for the prevailing wage, even if that wage is too low to pay the carfare to get to work, not to say anything about feeding your family.
from this they appear to reason that the only reason there is “unemployment” (not real unemployment because real unemployment is impossible) is because workers are unwilling to take pay cuts. of course the existence of unemployment insurance allows workers to remain idle (but not unemployed) for longer than they could otherwise.
i doubt robert is in on the whole scam, but he seems to be constrained by his education.
“By definition for there to be unemployment there must be three agents, an employer, an employee and an unemployed person.”
Can’t there be a potential employer and a potential employee?
Real question. Thanks. 🙂
Is it possible that the problem of defining unemployment stems from the fact that all employed economists are employed by employers rather than by employees and thereby are more inclined to agree with concepts that they understand those employers to prefer?
My own confusion about the issue as described in the post is that there seems to be no focus on the necessity for the employer to hire employees. Do employees serve any useful purpose in the view of economic science? Why employ employees which only adds to the cost of goods or services sold? Or, is it possible to count as employed those workers who are not defined as employees (or they might have to be paid some form of monetary remuniration) such as slaves, apprentices, volunteers and interns? I guess my confusion stems from the lack of any clear definition of employee and any clear description of what purpose an employee serves beyond increasing the cost of production.
I am guessing here, but i guess that “by definition” is more like ‘by the postulate of our theorem’ than “this is the natural relation between these concepts.”
clearly there could be unemployment if there were no employers or employed people…. using the words the way most people would use them. since “no” employers or employees” would be an unlikely situation in the world we are used to.. it is sufficient to observe that “unemployment” simply means that someone doesn’t have a job who wants one. and the theorem which, as i understand it, says that if wages could be bid down then that unemployed person would be hired… is nonsense.
I think you are agreeing that nominal wage rigidity is *not* the cause of slow employment growth. That is my view. There was a period in which many “new Keynesian” economists argued that nominal wage rigidity was the key to understanding everything. The were “New Keynesian” in the sense that they thought Keynes was totally wrong. Prominent figures include Taylor, Blanchard, Mankiw and Fischer (hint they are influential).
I was never convinced. It seems Tyler Cowen isn’t convinced.
Most of all, strong evidence that no one cares about nominal rigidities is based on the fact that almost no one commented on this post.
I assert that if wages fall enough previously unemployed workers *won’t* clamor to take jobs, that they will be glad to remain non-employed, because the alternative of working for almost nothing is so horrible. Therefore, by the definition of unemployment they will be non employed but not unemployed because they will have withdrawn from the labor force.
It is entirely possible that the wage that would eliminate unemployment is zero. The claim would be that if wages were all zero, no one would want to work. So they would be not in the labor force not unemployed.
It is also possible that the wage that would eliminate unemployment is negative — people would be willing to volutneer their time but not willing to pay for the priviledge of working.
I said the point was twitty. It is entirely a statement about the definition of the word “unemployed” which requires that the person without a job wants a job (clamors in your word). If jobs were horrible enough, there would be no unemployment.
One could also eliminate unemployment by saying that anyone found working would be shot. We would all stave, but we wouldn’t be unemployed.
Obviously this examination of the definition of unemployment has nothing whatever to do with solving social problems or deciding what to do. It is just a statement about what a sentence means.
Coberly it is “by definition” not a postulate not a natural relation, just a statement about the word “unemployment.” It is not a claim at all about the world. It is the definition of a word. It isn’t true or false. If I said unempoyed people are (my definition) and all over 2 inches tall, I would have made a claim which could be false (or over 2 miles tall). But just writing “unemployed means etc” isn’t a statement which can be false. It isn’t an assertion about the world at all — it asigns a meaning to a word.
Now you might think my definition is not a useful defnition or that it does not correspond to the ordinary English meaning of the word. In that case, when I say, after giving the definition, that something is true “by definition” you don’t think it is true of [“unemployment” as correctly defined]. I just meant that the definition I gave (which is standard in economics) logically implies something. I did not assert that this purely verbal observation tells us anything useful. In fact I said the opposite asserting that it is “twitty” which I hereby define as “a totally pointless waste of perfectly good pixels.”
Min there has to be an actual employer and an actual employee so that there is a “prevailing wage.” An actually paid wage.
By your logic all economists are employees so we should side with employees. I mean really deducing something about a group of people from the fact that, if employed, they are “employed by employers” is a bit tooo twitty (see above for definition) even for me.
Notably there are economists who aren’t employed by employers (some are retired some freslance). They agree on the defintion of “unemployment” because, if one wishes to communicate, it is useful to agree on definitions. It is perfectly possible for an economist to say “The problem isn’t that there is unemployment but that the jobs many people can get don’t pay enough, so we have to organize unions to fight for higher wages.
Ideally a definition should not imply any claim about the world (definitions should be innocent). This is true of my definition of “unemployment.” If I went on to say that we should eliminate unemployment by any means necessary and any policy which eliminated unemployment was equally good (so I am going to blow up the world) then I would be making a policy proposal which you could criticize (if you don’t think it would be a good idea to exterminate humanity).
But you seem to be arguing that, if I note that there would be no unemployment on earth if there were not life on earth (surely you don’t mean to define unemployment so that there is unemployment on the moon do you ?), then I must be advocating the extermination of life on earth.
I believe I am being entirely fair to you and that your comments are at exactly the level of sophistication of my reducto ad no more absurdum than you are already.
yes, i think we agree. but i have seen the “wage rigidity” (or lack of it) argument used as a way to blame unemployment on unions, government, or just the perverseness of workers refusing to take good jobs unless they were paid more than they were worth (this was from the real Samuelson in his textbook explaining the non accelerating inflation rate of unemployment back in the seventies)
will pick this up after your reply to my speculation on the definition of definition below. meanwhile i am not assuming that YOU jump. but i have seen others jump.
but if a sentence means nonsense… then the “definition” it relies on is useless. if people were not working, because wages were too low to make it “worth while”, they would still be unemployed, but you’d have to change your “definition” to describe the reality and not to fit the theory you (that is, the economists) have devised, presumably to justify the magic of the invisible hand.
yes, and I can define “black” as “the color of trees in june” and no doubt use it to prove some theory about the use of pesticides. but i would be talking nonsense.
i object to your use of “the” definition. if that is “the” standard definition of “unemployment” among economists, it helps explain why they are often talking nonsense.
jack says “employed by employers” to direct attention to the fact the economists are employed by people with a political bias in favor of certain “theories” about economics. that is not being twitty, that is just using language the way ordinary people use it.
you don’t seem to realize that when you select a “definition” you are committing yourself to a way of thinking that may make sensible answers hard to recognize.
you argue here, and i think i agree with you, that you understand that the “definition” of unemployment leads to absurdities… but you don’t seem to recognize that many of your fellow economists regularly talk in absurdities. there is a chance they may “understand” what they are saying, but the absurdities get picked up by the journalists and the tea partiers who confidently proclaim that “economics 101 proves…”
we could do with less sophistication and a little more effort to make clear what we mean… if only to ourselves.
maybe (what might be a poor example) will help. if I choose to “define” a word that has a common meaning in some special way so that experts can talk about something not common in a consistent way… l that might be fully justified, but what I can’t do is this:
i can’t hire ten workers to move a ten thousand pound cargo box by hand, and then at the end of the day when they have failed to budge it, tell them that “the definition of work is Force times Distance” therefore since you have moved this box zero distance, you haven’t done any work. therefore i don’t have to pay you for your time and effort doing the task under the conditions i designed.
physicists might agree with you. but the “workers” might lynch you.