Keep in mind that unemployment rates today are disproportionately concentrated in low-income and low-education workers. Haven't we been told, for years, that these same individuals are seeing some mix of stagnant and eroding wages? That they are experiencing downward mobility? That the real value of health care benefits has been falling and that more and more jobs don't offer health care benefits at all?
Doesn't that mean…um…their wages aren't so sticky downwards? And thus Keynesian economics is not the final story?
Or take illegal immigrant Mexican construction workers, a group which lost jobs in large numbers following the crash. Are they — who often came from $1 a day environments – also supposed to have sticky wages? They are out of work in massive numbers. A lot of them went back home, which is a sign they are willing to make major adjustments. It simply may be they were no longer employable in the United States at any plausible wage.
The alternative model is that many low-education workers are not employable through marginal changes in current conditions. It may require a big upward Schwung for the entire chain of labor, so that desperate employers at the bottom of the ladder, unable to find anyone else, grudgingly hire these not-so-productive individuals because there is no other way of expanding. In other words, it requires conditions which raise the marginal value product of these workers to the private sector, keeping in mind that the fixed costs of hiring a worker mostly have been going up due to the greater bureaucratization of society.
Under this hypothesis, the stimulus that works in the short-run is direct government employment of low-skilled labor, not funneling money through private contracting, and hoping the unemployed get picked up.
What should the government do with these workers? Does their direct employment conflict with the Davis-Bacon Act or other regulations? What wage should we pay to make sure we don't drain off workers from private sector jobs? How much longer does it take such forms of stimulus to result in sustainable, private sector jobs?
As you'll see in my Principles text with Alex, we both believe that wage stickiness (both nominal and real) is a genuine issue in market settings, even in the absence of government intervention. Still, I'm not convinced stickiness is the major problem today, at least not in a simple, direct manner.
If there is going to be more U.S. stimulus, it's exact nature should be thought through very carefully. It's an additional question whether our politics is up to that.