Contra Hall

Robert Hall wrote a paper (pdf warning)which is getting attention from Krugman, DeLong and their slavish follower uh here.

Neither DeLong nor Krugman is convinced, but both are respectfully doubtful, because sometimes that which seems to be arrogant recklessness is not pointless

Hall used to be famous at MIT for talks along the lines of “Not many people understand this, but the IS curve actually slopes up and the LM curve slopes down” — and then, not most of the time but often enough, his apparent craziness would turn out to be a big insight

OK Paul given the high praise for apparent craziness, I am about to critique a paper I haven’t read (yes Krugman also wrote “General recommendation: before you denounce a reputable economist for making some completely idiotic mistake, do your homework.” but you haven’t considered my careful counter argument that … shut up). Go on if you care.

I will comment on their comments on Hall and this excerpt

When employers are making high effort—-posting many vacancies and advertising their existence—-job-seekers succeed in finding jobs quickly. Unemployment is then low. Recruiting effort determines the tightness of the labor market…. A high job value results in low unemployment. The last issue is what determines the job value….

The implications of a model linking the current job value to a stale nominal variable are immediate: The more the price level rises from bargaining time to the present, the higher is the job value in real terms. A sticky nominal wage links inflation and unemployment in the way required….

The evidence that the job value moves along with the stock market has two implications for output in the post-crisis economy and in other contractions. First, events that trigger a rise in financial discounts, such as a financial crisis, will lower job values substantially, causing a corresponding increase in unemployment and decline in output. In other words, there is a direct linkage from financial disturbances, not just a response operating through a decline in the demand for output.

The point is that the phrase “job-value” has an ambiguous meaning (clarified by the middle paragraph which I will ignore). It isn’t clear if it is the value of a new hire to the employer or to the new employee. DeLong and Krugman consider the value of a new hire to the employer. In effect, Hall says that hiring is like investing — the benefit is a stream of profits in the future and there is an up front cost from finding and training a qualified worker or from uh investing. An increase in risk premia implies more discounting of the flow of expected future profits and can reduce both investment and hiring. Thus Hall has explained — nothing much. Yes private sector investment is low, but that is because investment in housing is low. Real private sector non housing fixed investment has recovered and hiring hasn’t. So far Hall’s argument must be that hiring is like building houses and not just like buying equipment and building plant.


OK so how about ignoring the middle paragraph and assuming that the “job-value” refers to the value of the job to the newly hired worker. In that case the investment is investing in costly job search and the idea is that unemployed workers aren’t looking hard, because a job isn’t worth much because of uncertainty (eat drink be merry and don’t look hard for a job because tomorrow Obama may eat our children). This doesn’t work either. It’s still investment of a sort and, whether it is by the non employed person or the firm, it shouldn’t be low if investment is normal. Also, a model explaining a modest rate of hiring should also imply a normal rate of job separation. The two are roughly symmetric in job search models. Low value of an employment relationship should cause a high rate of separations as well as causing an oddly low rate of hires given non-residential fixed capital investment and unemployment. Worker’s investment in job search depends on the value of being employed minus the value of not being employed. So equally for separations. Firms investment in posting vacancies and training workers depend on the value of an employee. So equally for separations. I am now talking about formal models of search and matching with shocks to match quality. I think the argument makes sense for realistic stories of separations due to quarrels, worker misdeeds, and slack demand. Of course separation rates are very low, just as they always are when unemployment is high. There would have to be something which reduces the incentive to firms to start employment relationships and which also reduces their incentive to end them.


This is what always happens when Keynesians generally say the problem is slack demand. If something special and not previously considered is occuring now, then it is the exact same strange thing which occurred world wide in the 30s and in Europe in the late 70s 80s and 90s (and which was mysteriously cured by loose monetary policy after October 1987 in the UK).

I say it is slack demand and the mysterious failure of nominal wages to decline is due to the myseterious nominal rigidity which is present in all rich countries (but Japan) except during the Great Depression (and which is right there in the original Phillips scatter which included two periods of extremely high unemployment only one of which was associated with declining nominal wages). The key subtle insight is that the Phillips curve is a curve and not a straight line. Macroeconomists in general have not considered this strange mysterious possibility.