What’s the actual problem in the labor market?

David Leonhardt has a very good piece which presents some relevant facts about unemployment.  Felix Salmon summarizes one part of the piece as follows:

In 2008, only 13.2% of the labor force was unemployed at some point. That compares to 18.1% in 1980, and 22% in 1982.

Real wages, which normally fall during recessions, have risen in this one. Even nominal wages are up.

Also from Felix:

The overriding impression is of most Americans actually doing OK, with an unemployable underclass bearing the brunt of the recession.

To those observations I would add that corporate profits are doing fairly well.

Those facts, in a nutshell, are why I am not AD-obsessed when it comes to explaining the current economy. 

Furthermore, I don't buy the idea that so many of the unemployed are stupidly and stubbornly holding out for a higher wage than they can get, while at the same time they can be reemployed by a mere bit of money illusion.  There are so many blog posts written to the Fed, to Bernanke, etc. "Hey guys, goose up the money supply!  Bernanke, read your old writings!" 

Yet I have seen not one such post to the unemployed: "Hey guys, lower your wage demands!  It's good for you!  You'll get a job and avoid the soul-sucking ravages of idleness.  It's good for the country!  It's good for Bernanke, you'll get those regional Fed presidents off his back!  Why not?  The best you can hope for is to get tricked by money illusion anyway!  Show up those elites and get to that equilibrium on your own!  Take control!" and so on.  If such posts would seem patently absurd, we should ask what that implies for our underlying theory of current unemployment.

I sooner think of these unemployed individuals as having gone down economic corridors which are no longer promising and not facing any easy adjustment to set things right again.  Furthermore I consider that portrait of their troubles to be more consistent with the general tenor of liberal, left-wing, and progressive thought, not to mention plain common sense.

Elsewhere, Matt Yglesias has an interesting post on the recalculation argument and its relation to political ideology.  He claims that promoting the argument will make people like capitalism less and that may well be true.  I would add:

1. The Industrial Revolution also was a tough slog for quite a few decades.  Yet it was both worthwhile and it gave capitalism a bad name for a long time.

2. Alexander Field argues that the Great Depression brought greater productivity improvements than any other decade in U.S. history.

3. If one wishes to consider state intervention, in light of recalculation, one is pointed in the direction of direct employment of the struggling workers; the recalculation argument does not rule out intervention per se.  This advice could potentially be useful and I don't see why even libertarians should consider it necessarily worse than $800 billion of fiscal stimulus.

4. Like Matt and many others, I favor a more expansionary monetary policy.  But the last stimulus was oversold and there is no reason to oversell this one.  We really don't know how well it will work (and I'm not referring to liquidity traps).  But if the Fed tries more monetary expansion, we'll see how much of the current employment is cyclical and AD-related in the traditional sense.

5. By its very nature, a recalculation argument ought to be somewhat agnostic as to how much (and what kind) of recalculation is actually required.  See #4.

Addendum: Bryan Caplan comments, non-ironically.


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