Multiple equilibria?

by on October 10, 2012 at 7:03 am in Economics | Permalink

That’s what I think of when I see that picture.

Trust was broken, most of all in the financial system, but like a wet spill this has soaked into many parts of the economy and polity.

Labor hiring is an investment, and we must move to higher levels of investment for the labor market to recover.  For the most part, that is no longer a problem of nominal stickiness, as the quality of jobs has been varying for years, along with some wage adjustments.  The nominal wage stickiness fairy was dominant in 2009 but is today just another spirit.

Employers are reluctant to hire stale labor, at any real wage, because they fear the associated morale problems.  (Or at the requisite real wage, disability pay or idleness is a more attractive option for the worker.)  This is partly fear, partly rational statistical discrimination.  Employers will hire stale labor only when an extreme boom requires them to.  Such an extreme boom must be seen as grounded in perceived increases in real wealth and justified increases in trust.  That probably won’t come anytime soon, but we are inching our way back to it and someday it will come again.  Solving the stale labor problem requires a very different path of recovery than solving the nominal wage stickiness problem.

In one very real sense, the economy is well below potential output (though less than many people think, due to the great stagnation).  In another very real sense, that gap cannot be exploited in the short run by reflationary policy.  Once again, it requires a reestablishment of trust.  Trust is more easily broken than repaired.

In one very real sense, there is a significant demand shortfall.  Yet repairing that demand shortfall requires many building blocks.  Nominal reflation (which I favor) is only one of those building blocks.  The others are rooted in trust and perceived real wealth, which are both slower to repair and require different policy instruments, plus the mere passage of time.

Under the multiple equilibria view, it is possible for employment and the real wage to recover together, albeit slowly.  Under the nominal stickiness view, median real wages still need to take yet a further whack; oddly it is the Keynesians who are committed to the most extreme form of a TGS thesis.

It is time to integrate macroeconomics with institutional economics.

Sergey Kurdakov October 10, 2012 at 7:20 am

I see the need for two approaches:

for developing countries, which see a real bottlenecks in communication technologies, energy – to resolve those issues ( as there practical ways to make these ) ( say supercritical co2 turbines will make coal plants a) 50% efficient ( compared with 31% efficient on average now ) b) cheaper than now ( due to less material used for such turbine ), this will, I think, will work regardless of any economic theory

and another – some exercises for developed countries. what ever it is – even if it is mix of stories about poorly defined things like institutions with abstract ( and some say irrelevant ) math models – that will not harm, even if not solve anything.

what would be wrong though, is instead of solving practical and clear problems of developing countries – is to force them to ‘fix institutions’, even if the new star of institutional economics Acemoglu clearly admits that there are no ‘recipes’ how to make this.

liberalarts October 10, 2012 at 7:22 am

How do these labor force participation rates compare –before or after– with other successful economies? In other words, was there a shift during the financial crisis in other countries too? For me, that sort of thing is always a quick check for how likely the problem was caused by our own domestic policy strategies vs. other countries that tried different approaches.

david October 10, 2012 at 7:28 am

The New Keynesians have a high/low equilibrium model that looks a lot like this… in that one the curves just bend backward the wrong way though, for minimally explained reasons.

DocMerlin October 10, 2012 at 8:45 am

The RBCers have a model where the equilibrium changes. It also produces results that look like this.

Michael October 10, 2012 at 11:45 am

Yes, there are indeterminate RBC models that lack a unique solution. It’s easy enough to check the eigenvalues to see if that’s the case, but try explaining eigenvalues to non-math people. Multiple self-fulfilling rational expectations equlibria don’t always lend themselves well to intuition. Granted, it can be done, but it’s a bit of a case-by-case basis depending on the particulars of that model. Explaining the intuition behind it, or what is to be done if you’re at a “bad” equilibrium is a bit harder.

One of the easier cases to explain is one with an upward-sloping labor demand curve. The story there is pretty similar to the New Keynesian one mentioned by David.

Claudia October 10, 2012 at 7:32 am

Why trust? What evidence do you have? Why not optimism or expectations (not just real wealth, but growth in general)? What if the housing-driven financial crisis just knocked the wind out of the ‘American dream?’ The stagnation fairies also seem to be awfully popular these days, since when did doom and gloom go mainstream? Uncertainty is another specter that gets named too, though personally I don’t think you have to go to second moments to explain that graph. I am sympathetic with your broader points, but I am not convinced that the diagnosis is right. And I would think details matter in the institutional adjustments.

Andrew' October 10, 2012 at 8:04 am

Trust is just a sub-form of expectations, right? Maybe we need a less morally laden word. Although a lot of mob movies are about trust (i.e. loyalty) and how you get the new guy to murder some innocent person so you can trust them, so it shouldn’t be a laden term.

Claudia October 10, 2012 at 8:42 am

Trust and expectations (of say income growth or future job loss or inflation) are not exactly the same thing. I wasn’t stuck on the moral qualities (your example notwithstanding)…but more on their slightly different roles and drivers.

Andrew' October 10, 2012 at 8:54 am

Trust is just the expectation that people will screw us at about the same rate they have been screwing us. Once they screw us at a higher rate, then they can’t get back to the old rate without us giving them a chance to regain trust, which is trusting them to screw us at a lower rate than they have been recently.

Claudia October 10, 2012 at 9:40 am

Well then it’s probably not trust problem. Households may not ‘trust’ mortgage underwriters as much after the crisis, but that’s not the main reason they aren’t taking out new mortgages, IMHO. What is then?

IVV October 10, 2012 at 10:18 am

Banks not trusting us to pay them back, mostly. Great mortgage rates out there right now. Have you tried to refinance?

derek October 10, 2012 at 11:17 am

The prices for mortgages are set below cost. It is a conscious policy decision by the Fed through the GSE’s who now do the vast majority of mortgages. I suspect there is ample literature in economics describing the pitfalls of prices being set by other than the market.

Jacob Aaron Geller October 10, 2012 at 11:46 am

I don’t understand the trust channel either. How does it work exactly? Is there a theoretical literature on this? How about empirical?

As a first approximation (*sniff test*), I look at Gallup’s polling data on trust in local, state, and federal government, and I don’t see much of a relationship between growth and trust in gov’t. e.g. here: http://www.gallup.com/poll/157673/americans-trust-government-handling-problems.aspx etc.

Claudia October 10, 2012 at 4:08 pm

IVV, it’s called default risk (or creditworthiness) not trust. I worry that an emphasis on trust will drag us back into the unseemly discussions of strategic defaults. Those made a splash in the news, but not so much in the actual data. Borrowers and lenders alike worry more about the ability (not so much the willingness) to repay loans than before the recession.

derek, sometime you can explain to me how an artificially low price squashes demand.

Jacob, I agree it’s important to have some proxies to stare at. I’ve found very little extra information in households’ approval of government policy (not really trust) and their spending. I would not surprised if there’s less trust now, but is that a symptom or a cause?

IVV October 10, 2012 at 5:39 pm

Except that even with a perfect credit history and high scores, I am still unable to refinance. Statistically verifiable risk assessment is still a form of trust.

Claudia October 10, 2012 at 8:43 pm

IVV, I still don’t think it’s trust (and I think the difference is important for the appropriate policy response, if any). A trust explanation would require that the mortgage lender now thinks it less likely that you will enter a contract in good faith (a change in willingness rather than ability to repay). Seems more likely that your default risk (chance, not choice) is seen as higher (same credit score may still be viewed as riskier than before) or the lender wants less risk in their mortgage portfolio (for various institutional reasons). Credit supply is tighter now than it was in the housing boom, but trust seems second order to me (maybe it’s there in the securitization decline?). In no way, do I mean to trivialize you situation..I just think it’s important to get the right labels on problems.

derek October 11, 2012 at 1:33 am

Oddly enough economists are the only ones flummoxed when price controls don’t work. The good being priced below cost makes it profoundly uninteresting for anyone to supply the good. Again, there are ample illustrations of price controls making things scarce.

IVV October 11, 2012 at 4:41 pm

Claudia, I would agree that it is more a result of the bank’s interest in risk management has shifted given new macroeconomic information than a change in belief that I am entering into a contract in good faith. But does trust require belief in the motives of the other party, or simply belief in the outcomes of the other party? I would argue that the latter is true, and therefore a shift in risk management policies is a change in the level of trust, whether or not the bank has changed in its opinion on my earnestness in repaying a loan.

Ryan V October 10, 2012 at 7:37 am

“Employers will hire stale labor only when an extreme boom requires them to. Such an extreme boom must be seen as grounded in perceived increases in real wealth and justified increases in trust.”

What’s the theoretical justification for that statement? Does the Phillips Curve/SRAS relationship no longer exist? Monetary expansion will increase hiring which will reduce the “staleness” of labour which will move the economy back toward the good equilibrium.

Yog Sothoth October 10, 2012 at 8:51 am

Employers don’t want to hire someone who has been unemployed for a long time because there is justifiable fear that the person is ZMP, either because his skills have deteriorated or because he was ZMP to begin with. The unemployed become unemployable, and your short term labor market friction becomes a structural decline in labor force participation.

JonF October 10, 2012 at 9:39 pm

The only way an employer can know if someone is really ZMP is if they hire them and see.

derek October 10, 2012 at 11:33 am

Monetary expansion has been going on since 2002 with a few dips. The growth of credit world wide created the effects you describe. Unfortunately it also created the situation we are in now. Monetary expansion works when the economy in general is willing to use the money to invest and take risks. Now all it does is dilute the money pool and enrich those handling the flow of funds.

Andrew' October 10, 2012 at 8:02 am

I’ve seen people ridicule the idea of ‘multiple equilibria.’ As I’ve said before, IIRC in a biological math class we were able to create a two equilibria bifurcation with I think two variables.

Andrew' October 10, 2012 at 8:13 am

Another question I’ve had is people talk about the volatility of investment (the look-ahead economy) and then they talk about demand (the steady-state economy) as if they are, and precisely because they think they are, interchangeable. ZMP employees are kind of an option on short-term growth. It would be interesting if we could compare the look-ahead variables versus the steady-state variables and maybe the traction of the AD idea is because we can’t tell the difference.

Andrew' October 10, 2012 at 11:51 am

I’m more likely to doubt there is a single equilibrium before I’d doubt there are multiple equilibria because if there is an equilibrium then it is so easy to have multiple equilibria.

Another question, we worry that wages are sticky and then we worry about deflation. Maybe it’s “thank God wages are sticky!”

Claudia October 10, 2012 at 4:31 pm

Why make this so hard? Are multiple equilibria or ZMP workers really needed to make the point? One could use a standard model and standard terminology…it’s not like the equilibrium in those models is some immutable point. Clearly something hit the economy in the fall of 2008…it does not seem impossible that some deep parameters got knocked around. Or maybe something in the adjustment to steady state got buggered up? The multiple equilibria just seems like a cop out (to a non-expert in them). Like we were living in the ‘good’ world and now we’re living in the ‘bad’ world.

Collin October 10, 2012 at 8:18 am

While you are focused on employers, there might a new expectation of the workers as well. The younger workers are not trusting their employers as much as they have the last fifty years and they are putting off marriage, children (down ~9% from 2006) and houses. Not this is a bad thing short run but I know you support more children for developed countries. With this increased mistrust in the marketplace, this creates a population stagnation. How would you recommend improving?

CR

dearieme October 10, 2012 at 8:24 am

Trust in whom? You’ve had three dud presidents in a row, your Senate and House are full of crooks, the Fed has been awful, SCOTUS is (at its worst) corrupt, and the Banks – plus of course Fraudy Mac etc – are just full of psychopaths.

E. Barandiaran October 10, 2012 at 10:39 am

Trust Big Bird!

Big Bird for President!

Stimulate the economy: Feed Big Bird!

Big Bird is not to decrepit to labor!

Andrew' October 10, 2012 at 11:47 am

Keep your government Mitts off my Big Bird!!!

E. Barandiaran October 10, 2012 at 8:43 am

Tyler, try again. First your ZMP labor failed to catch, and now your slate labor smells as “too decrepit to labor” and therefore likely to fail. You may change your strategy and focus on the positive side –maybe you can think in terms of X-efficiency labor a la Harvey L. and at least explain Obama’s last Friday success.

And thanks for making me laugh with your enthusiasm for multiple equilibria. Do you see them everywhere? I have a hard time finding just one (I will have to talk with Dr. Flynn about my dark dreams with the cobweb theorem).

bayard October 10, 2012 at 11:07 am

Besides being obnoxious, your comments hint that you have something meaningful to contribute but then you don’t follow through and explain. Please change or stop.

Tomasz Wegrzanowski October 10, 2012 at 8:45 am

It would be a more convincing argument for multiple equilibria if NGDP was anywhere near trendline.

It only shows how difficult it is for labor market to adjust to NGDP collapse.

Check similar graph in country with NGDP collapse but no standalone financial crisis (like Latvia), and then in a country with financial crisis but no NGDP collapse (like Iceland). Which one will be more similar?

mark October 10, 2012 at 12:03 pm

I think the point would be the same as to GDP, that the actual trend over the past few years and the prior trend are two different equilibria.

DocMerlin October 10, 2012 at 8:47 am

You cannot tell the difference from a multiple equilibrium model (like the NK’s one) and a model where the single equilibrium changes over time (like RBC) just by looking at the time series.

Bad Tyler!

Bill October 10, 2012 at 9:06 am

If you maintain that there are multiple equilibria, and I would agree, then you would see an argument for early, large stimulus, to push you into the higher equilibrium.

Something this site has always argued for?

bdbd October 10, 2012 at 3:58 pm

“to return you to the higher equilibrium”

The Anti-Gnostic October 10, 2012 at 9:30 am

Employers will hire stale labor only when an extreme boom requires them to. Such an extreme boom must be seen as grounded in perceived increases in real wealth and justified increases in trust. That probably won’t come anytime soon, but we are inching our way back to it and someday it will come again.

You put some gloss on this, but the underlying phenomenon appears to a real recovery as corporations and households slowly repair their balance sheets. So, jumping ahead a few steps, the policy prescriptions would appear to be lower the government’s consumption of capital, encourage savings and discourage debt. Right? But then you throw in this:

In one very real sense, there is a significant demand shortfall. Yet repairing that demand shortfall requires many building blocks. Nominal reflation (which I favor) is only one of those building blocks.

Isn’t that just more hair of the dog? Why are you in favor of reflating assets that the market had already determined weren’t worth their nominal value? Could it be that ‘trust’ relates to something real and substantial rather than just a hand-waving explanation by academic economists?

Slocum October 10, 2012 at 9:34 am

What do we make of the fact that the only other industrialized countries that have experienced anything like the same 5-point drop in employment-to-population ratio between 2005 and 2010 are….Ireland, Iceland, and Spain:

http://en.wikipedia.org/wiki/Employment-to-population_ratio

uffthefluff October 10, 2012 at 4:40 pm

Indeed, we should be looking at other available data sets.

Brian Donohue October 10, 2012 at 9:58 am

I’m not sure myself how many equilibira can fit on the head of a pin, but, when you take a longer view, the story is more interesting. Interesting perspective here:

http://catosdomain.com/?p=5210

Arthur October 10, 2012 at 10:04 am

What do you mean by trust?

What are the evidences for the lack of trust?

How can a lack of trust affect hiring decisions? Through what channels?

In what people lost their trusts?

Apparently you belive the financial crisis caused the lack of trust. What was different about this one? Why this one cause a big lack of trust while others caused no, or just a little lack of trust.

There are historical examples of lack of trust impairing hiring decisions?

I don’t think your being convincing with your lack of trust theory.

The “nominal explicit and implicit contracts sickness (Hell knows why)” theory presents much more and better evidence Tyler, and much better theory.

Olivier October 10, 2012 at 10:18 am

Tyler,
There is evidence that financial crises decrease GDP below trend for as long as 7 years (Cerra and Saxena AER 2008). Also, on investment decreasing for longer (Rioja, Rios Avila and Valev, 2012). Essentially there is an adverse level effect of fianancial crises that is pretty persistent. This graph is entirely consistent with that.

derek October 10, 2012 at 11:45 am

The question is why financial crises take so long to resolve. The banks were recapitalized, many of the ugly assets were taken off the Bank balance sheets. Could it be that a financial failure is a symptom of a deeper problem that cannot be fixed with an inflow of money?

Maybe the assumptions of a generation of policy makers, business leaders and academia were wrong, and the financial crisis is simply what can be expected.

A good rule of thumb in confusing situations. Maybe it is working as designed.

uffthefluff October 10, 2012 at 4:52 pm

Designed by who and for what?

derek October 11, 2012 at 1:46 am

Everything from the regulatory structure, the assumptions of the monetary authorities, the fiscal assumptions and policies, academia, the business management patterns that have become quite standardized, etc. Most of what I mention have the characteristic of being immune from the corrective mechanisms of a free market.

I could add a few other factors. The financialization of the economy and government operations from Clinton’s time, the Fed policies of the last few decades attempting to smooth out the business cycle. Some of these policies are deliberate, others such as the regulatory structure are haphazard and contradictory in nature.

Throw in the responses to the financial crisis which had an interesting characteristic of trying to prevent people from learning from their mistakes.

I frankly don’t know why anyone is surprised at what is happening.

Joe Smith October 10, 2012 at 11:19 am

“Trust was broken”

What a lovely, bloodless, euphemism for a multi-trillion dollar fraud.

Millian October 10, 2012 at 12:10 pm

Getting angry doesn’t solve problems. In fact, angry people hardly ever solve problems, especially complex ones.

Joe Smith October 10, 2012 at 3:37 pm

There are times when anger is an appropriate response to a situation and a motivator for change. Incoherent rage can get in the way of solutions but cold blooded, determined, anger can be very helpful in confronting unpleasant choices and doing what needs to be done.

mv_sidow October 15, 2012 at 7:37 am

True, when controlled properly I find it quite effective in increasing one’s intensity in problem solving.
I totally disagree that angry people hardly ever solve problems, especially complex ones.
My experience with anger, managed properly, is it creates focus on the task at hand at times when
no other response will work.
Joe Smith’s observation: “What a lovely, bloodless, euphemism for a multi-trillion dollar fraud.”
more accurately describes the reality of what occurred than a trust issue.
Yet, maybe it was both happening at the same time. The long term fraudulent practices of millions of people
lying on mortgages, lenders looking the other way or even encouraging fraud to get their commissions, et al.,
to continue the abyss of ‘house flipping’.
Once the scam came to a close, no one ‘trusted’ that the over-leveraged game could continue and everyone bailed.
The real “fraud” in all of this, in my opinion is the attitude of the general population that acts like it was all the banksters fault;
that their own lying and flipping had nothing to do with the bubble.
When we got to the point where my son in college with no job could walk in and by a $400k house with no skin in the game,
I knew it was over. June of 2005, that’s when I knew. This isn’t the first time; the same thing happened in early 90′s in Cali when lending got so easy a dead person could get a loan. Real estate quickly dropped 40% after the ridiculous run-up and flipping was done.
I knew in 2005 that the bubble was in, but at the time I had never heard of CDO’s and had no idea the scam the banks were up to on over-leveraging the debt they were to trying to pass off to anyone stupid enough to buy it.
Hence, the collapse of Iceland, Spain, Ireland, etc. Anywhere that real estate lending got out of hand.
All one has to do is look at Texas to see the model of where none of this collapse occurred. Why?
Because they kept strict standards on qualified lending and never got caught up in it.
They learned the hard lesson from the real estate bust of the 80′s and didn’t repeat the mistake 20 years later.
You try to flip houses in Texas and you’ll get booted right out of town.
Where you see devastation in places like AZ and Nevada is because it is geographically close to California.
Once the flippers had exhausted the market in CA, they quickly jumped to AZ and Nevada.
I was getting phone calls in 2005 from friends literally telling me the house flipping was cooked in CA and wanted to
know if they could continue the ‘ride’ in Phoenix. The level of greed and cynicism of CA real estate kooks knows no bounds.
And they move around the country like parasites, destroying local markets wherever they can find an easy mark.
That’s the real story here, never seen anyone cover that one……
these aren’t professional people either. Just average Joe’s that maybe their parents died, left them a house for a stake and they quit their job at Costco and get busy flippin. That’s actually one guy I know for sure.
He amassed over $500,000 in two yrs, I told him to bail, he got greedy and just had to ‘flip one more’.
He couldn’t recover, stuffed it all in a million dollar beach house that buried him when it collapsed.
Last guy out of the Ponzi scheme loses.
Does that sound like a trust issue or plain old scam?
cheers…..

Michael October 10, 2012 at 11:51 am

I’m not following the argument here. “Trust” is a pretty amorphous word, and I’m not following the explanation of the mechanism that leads from that amorphous word to an explanation of why that chart looks the way it does.

“Trust” strikes me as one of those weasely words like “contagion” that is so commonly used that people think they know what it means, but the more you try to pin it down, the more slippery it’s definition gets, especially when trying to rely on it for a specific mechanism in an economic model.

Joe Smith October 10, 2012 at 12:02 pm

So there are two problems – trust and stale labor. If that is right, the proper policy response in 2009 would have been (1) to move forcefully to imprison the crooks on Wall Street and effectively regulate the survivors; and (2) to run a public works program that kept labor from growing stale. It is not too late to build trust by moving against Wall Street and to run programs to re-integrate the long term unemployed back into the work force.

mark October 10, 2012 at 12:07 pm

I see your point I think. But I would use different terms than “trust” and “stale labor” which many commenters are grappling with. I would say the “risk premium” associated with investing in the “marginal worker” has gone up. Risk may be the opposite of trust.

It would be interesting to overlay a line showing the trend in yields on short and medium term Treasuries during this period. A hunch tells me that it will be somewhat similar. Making the point about risk premiums.

Millian October 10, 2012 at 12:11 pm

How does one demonstrate that this is due to “trust”, rather than a different kind of change that matters in the long run?

Should we be judging “multiple equilibria” based on an eight-year period?

R Richard Schweitzer October 10, 2012 at 12:22 pm

TC:
“. . .we must move to higher levels of investment for the labor market to recover. ”

There are only two sources for “higher levels of investmen:t” aggregated surpluses and leveraged credits (based upon estimates of rates of maturities and withdrawals of short-term obligations and deposits).

Where are the aggregated surpluses available for investment today?

With the limited exceptions of private equity and modest proprietary enterprises, the major portion of aggregated surpluses in the US economy are sequestered in the retained earnings of business enterprises, particularly those of large-scale. The beneficial ownership of those surpluses is highly fragmented through public ownership and therefore is under the control of, and subject to the motivations of, several layers of “managerial capitalism.” That is not a pejorative.

The previous intermediary role of financial enterprises in the aggregation of surpluses has long since been displaced by industrial self capitalization and the business of leveraged credits as the principal sources of investment expansion.
These developments secondary effects have been noted and commented upon for the past 80 years, perhaps longer. Particular attention has been given to the sequestration of surpluses within large business enterprises whose beneficial ownership is extensively fragmented.

The limited development of alternatives to sequestered surpluses, such as private equity and proprietary enterprises is slow and subject to political and social constraints. Similar constraints on the deployment of leveraged credits presently exist, but may be relaxed if no intermediary functions are developed for the redeployment of the presently sequestered surpluses in large-scale business enterprises.

As noted, the uses of labor, both domestic and foreign, follow upon the redeployment of aggregated surpluses or the provisions for leveraged credits (which are now constrained). The “equilibria” currently noted are related principally to those latter constraints of leveraged credits. They are exacerbated by the longer-term trends in sequestered surpluses in large-scale business enterprises.

Ritwik October 10, 2012 at 12:45 pm

I wonder why you think the Keynesian – TGS connection is odd.

TGS is among the most solid explanations of a secular decline in the MEC. We might be going through the most Keynesian recession till date, definitely more Keynesian than the Great depression when the gold demand and high real rates stories still work.

The Original D October 10, 2012 at 1:01 pm

“Employers are reluctant to hire stale labor, at any real wage, because they fear the associated morale problems.”

Where is the evidence for this? Morale is a loaded word. Given how high profits are, one would think you could throw money at the problem. Getting a job is a pretty powerful morale booster.

MikeDC October 10, 2012 at 1:25 pm

There is no evidence for this.
Making money is quite a morale booster. Employers don’t hire more workers because they fear those workers won’t make them money.

Tyler is dancing around the elephant in the room. In the last four years we have significantly increased real minimum wages and real wage rigidity. Our new health care law is the most obvious example. This isn’t a nominal change, it’s a guarantee of increased in-kind benefits for all workers in a certain class.

That’s a real increase that gives the lie to Tyler’s point. I’m all for looking into exotic answers when the stock answer fails, but here he’s failing to even address the stock issue (what’s happened to the MB and MC of hiring another worker) and telling a soothing tale that won’t step on anyone’s toes.

mulp October 10, 2012 at 4:44 pm

Tax rates on profits aren’t high enough.

If tax rates on profits are 50%, hiring a worker for $1000 a week out of profits who in the first few weeks can only generate $500 a week in profits is no risk. If tax rates are 25% of profits, hiring a $1000 worker who averages only $500 in profits each week means a loss of $1000 in after tax profits.

For the big corporations with 10,000 employees with 35% tax rates, hiring a worker is a minor hit to profits, but the large accounting department can easily obtain the training matching funds from the Fed-State-private partnership, the tax credit for adding to payroll, the accelerated capital depreciation schedule for investing in the machine the worker operates, and the corporation gets to amend its taxes for three years back for a tax refund, multiplied by the 500 workers hired, and the corporation makes higher profits on 500 workers who for six months aren’t generating any thing to produce a profit.

The small business finds hiring to be too complicated when competing with the big corporation. How can a small business afford to hiring and give an employee the resume to get a job at the big corporation where the pay is higher and includes benefits. After all, the large corporations have Federal law to get them the lowest insurance rates, but small businesses are cherry picked to maximize insurer profits at the expense of small business profits. This is the rational behind Romneycare and Obamacare, and also a big argument for government single payer health benefits which would eliminate a big headache for businesses of all sizes.

mulp October 10, 2012 at 4:23 pm

Why are workers never treated as “small businesses”?

Can you run a food cart when the price of a sandwich or taco can’t exceed 10 cents but the price of the raw ingredients is 15 cents each and the rental for the food cart is $10 a day?

The food cart vendor setting the price of each item at 50 cents and only selling 30 per day when he can easily make and sell 300 if he lowers his price to 10 cents is obviously rational because at least he can eat for the day whatever is left over before going to sleep under the bridge, but at 10 cents he’s lost so much money he never works again.

Too much labor theory goes back to the Adam Smith era where government welfare solved the fixed cost of labor by providing free room and board off free land, or free room and board. Farm hands could sleep in the barn with the animals (which would keep them warm in winter) and eat what the animal ate which included the garbage from the landowner and the pickings off the land. The Americans provided common land with government carving plots out of the common land for those who improved the lot of everyone by improving the land. Self sufficiency was merely a matter of living off the land.

Today, camping on common land is limited, and even requires paying a rent. And living off the land near work is often impossible so one needs a car, something that didn’t even exist when labor axioms were set. In much of the world, if transportation is required to go between housing and work, public transit exists, but in the US, the claim is it would be cheaper to give everyone a car than to provide public transit. Of course, when it comes to welfare, having a reliable car disqualifies you in many States, making getting to work and off welfare impossible.

If the economy sets the value of work below the marginal cost of a worker, then workers will be idle and not contribute to the economy. If the price for labor is set high enough to clear the marginal cost of labor, but that allows mere survival consumption by workers, the economy will not be getting the demand from workers required to drive full employment and maximum productivity of the economy.

Every reference to sticky wages is basically railing against the laws of physics – energy out needs to exceed energy in to satisfy the economist’s theory of how an economy should work. If only there were perpetual motion machines and zero point energy modules….

derek October 11, 2012 at 1:57 am

So why do economists almost unanimously agree that raising the marginal cost of employment by inflation is supposed to be a solution to the problem?

I agree with what you said. Add to it that there are a couple of billion people that have lower marginal costs and are available to do the jobs.

On one side you have the costs of employment as you describe them, on the other you have costs to the employer. Both are either static or increasing, creating the situation where it is in everyone’s best interest to do nothing at all.

Tom October 10, 2012 at 8:48 pm

perceived real wealth,

Since at least 1995, if not earlier, the US economy was in a house price asset bubble — unsustainable GDP growth and over-employment, as well as malinvestment. The dot com bubble pop hid some of this, but the tax cut recovery of 2002 made it worse, until 2006.

There is no sustainable way to get back to the 95-2006 trend line.

The fall in Net Worth is why buyers have so much less “money”. Monetarists who don’t explicitly include Net Worth in their Mx models where MV=PQ, will continue to fail when there is a big Net Worth change, altho this admittedly happens only seldom.

On stale labor, the US gov’t should experiment with more part time gov’t jobs — all those who make more than $100k (more than twice the median taxpayer) should start working half-time, and get only half pay. Of course, they could leave and get real jobs (but few would), and this would reduce gov’t costs some and increase total employed by the gov’t some (hiring new part time folk). But part time workers are not as stale as unemployed.

The US can, and should, be moving toward more part time employment. For higher quality of life for more workers. At least until the unemployment rate is down to 6%.

Claudia October 10, 2012 at 10:13 pm

Tom, just because house prices ended in a bust does not mean they started in a bubble. As far as I know, the dating of when we moved from house price growth supported by fundamentals to a house price bubble is debatable. It’s important for thinking about a realistic trend going forward. One has to be very careful about how you define ‘over’ or ‘mal’ as ex ante they may be a different notion than ex post.

As for your part-time push…I don’t see why this is a government only idea. I will say that in my five years of working (yes, in the government…a real job) I have seen more in part-time work. Technology is the main enabler as well as shifts in work place culture. I work in a very team-oriented place (yes, economists can do that too) but between our laptops and blackberries we can accommodate less office time and less work time. I am skeptical that part-time will be a big boost to total employment, but it probably raises efficiency and morale. On your final point, part-time work is better than no work (and probably even better than UI benefits for many) but it’s not full-time work…either in total pay or in career prospects. I doubt anyone would call a final labor market victory on a rise in part-time workers alone.

mv_sidow October 15, 2012 at 7:56 am

Yet, this is exactly what is being done by business after business.
It is almost impossible now to find a full time job.
Olive Garden and Red Lobster just announced to cut employees to part time to avoid giving health coverage.
Soon, we won’t have to worry about unemployment.
Most of the work force will be dead before they hit 50 with no access to health care.
Then we’ll have low unemployment, problem solved. lol

JonF October 10, 2012 at 9:42 pm

Stating the companies are not hiring to avoid damaging moral is the most bizarre thing yet I have read on this blog, and it definitely points to Tyler’s ivory tower isolation from the real world of work. Far from damaging morale, new hiring generally boosts it in the workplace since it implies the company is doing well, and people’s jobs are secure.

dred October 10, 2012 at 10:53 pm

Isn’t there a way to fix the economy really fast? My life kind of depends on it.

mm October 10, 2012 at 11:35 pm

Is stale labor = aging baby boomers ? It will be interesting to see if their is any change in mix of people getting employment – if there is a transition in hiring mangers age – this could explain reluctance to hire aging baby boomers.

mv_sidow October 15, 2012 at 8:36 am

I’m 56,
I left the job market (telecommunications at Fortune 500 company) at 35 years old.
Went in business for myself, made more money ever since.
Statistically, I’m one of those ‘boomers’ that you refer to as stale,
yet, how is it I am better off financially than 95% of the twenty to forty somethings?
My vast experience and knowledge is precisely why I can’t be hired by corporate
America. Why would some mid level jack-wad want me there making him look like the
incompetent fool he really is to his bosses?
No, they’d rather hire 20 somethings that still live with their parents that they don’t have to
compete with.
That’s why I left years ago and it was the best move I ever made.
I have a retired friend, 66 years old that was pushed out recently because the VP’s
he worked for made less than they paid him to contract his services.
Yet, since he left, they have found no younger replacements with the knowledge
to provide the service he did and have suffered for it just because they were jealous of his
paycheck. Pretty stupid.
He, on the other hand, decided to get back into his love of Harley Davidsons and has been making
a bundle flipping Harley’s on the side. Besides having a set in his garage of some absolutely gorgeous bikes worth a ton of money, he’s making serious bank on his little side venture.
Is that the ‘stale’ labor you guys are referring to? He’s part of that 4% that is not returning, but he’s doing quite well, thank you.
If the only real job skill left for a job is how well you can text message each other as a ‘team’,
I’ll stick with being my own boss…..
Don’t forget, Steve Jobs was my age – the vast knowledge of my generation has been lost in America.
The thieves like Jack Welch at GE decided years ago to throw us under the bus, but guess what….
not all of us lost our way. My son is 26, still lives at home, has a degree but needs me to support him because all he can get is part time work. Who’s the one that’s stale?
Not one person here, with all their Economics degrees, has yet to describe the problem with American labor. And guess what?
I know the answer;
but being that 56 yr old guy that is no longer needed or respected in this country, I’m not telling you.
I got a life, and it’s good.
Figure it out for yourselves, you won’t find it in a chart…..
If you’d like to get your checkbook out though, I’ll tell you for a fee.
:D

bubblicious October 11, 2012 at 10:25 am

I see only one equilibrium in that picture, on the right side. On the left I see a bubble, which by definition is a short-term disequilibrium.

Or do you think that all those bubble jobs–construction workers to build houses, real estate agents to sell them, decorators to decorate them, bankers to finance them and refinance them and refinance them again–were real?

Ed Dolan October 11, 2012 at 12:27 pm

Check out this nifty little article on catastrophe theory and its implications. http://opinionator.blogs.nytimes.com/2012/10/08/dangerous-intersection/
I think the employment-population graph fits into this framework somehow, no?

Eric H October 11, 2012 at 10:41 pm

Explanation #2: The Eurocheerleaders tell us that they have lower labor participation rates because people don’t need to because the social safety net is so well crafted (not generous, mind you, but just effective). And our Right believes Obama is a Eurosocialist (despite the handouts to business). Clearly, his policies are working as advertised and believed.

joey2times October 12, 2012 at 6:26 am

And yet no mention of the Singularity…which may be a big factor. Look and listen to the automation around you.

https://en.wikipedia.org/wiki/Technological_singularity

saucymugwump October 12, 2012 at 8:24 am

“Employers are reluctant to hire stale labor, at any real wage”

This is 100% true. Virtually all companies have adopted an approach of extreme intolerance.

“Solving the stale labor problem requires a very different path of recovery”

For the high-tech business, the solution starts with stopping the STEM Act — just the latest attempt to bring in yet more foreign workers to replace Americans — and putting an indefinite hold on any more H-1B and L-1 visas. Then inform American companies that they need to hire Americans with stale skills and give them a little training.

Of course, this will never happen. Romney is already on record as opposing such measures and Obama has already proved himself via inaction and incompetence.

The Keystone Garter October 13, 2012 at 6:17 pm

The Jobs Act that didn’t pass last yr, was an attack on charities for jobs. Mainly infrastructure. The NRA is unusually powerful in the USA. I wonder if it shouldn’t be separated. Taking away the charitable status would be a deadly move, but it is more like a secial interest club. Charities are closest to daycare I guess, apart from the NRA. Churches and Habitat for Humanity and such forth. It is difficult to get a multiplier of charity ROI. There is a time component that needs to be quantified. Maybe a poor person’s time is worth $3 an hr or something…alternate measure to GDP seldom laydown a figure. UNDP uses 1/4 as GDP component of quality-of-life.
Buffett Rule and Obama’s administrative caps fight the USA debt. When Ryan referenced Canada, I bristled as we have both of these. Our deficit is still 1/2 USA’s: not good.

fluoxetine 10mg October 24, 2012 at 2:06 am

Eric, I am totally agree with your thoughts. Keep doing these type of work.

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