Words of wisdom

From Karl Smith:

…my concern is that when we think about the labor market failing to clear we mean to say that there are people looking for jobs who cannot find them.

If they stop looking this is not obviously a market failure. If it is in fact the case that the real wage is not enough to entice them to work, then they should not work.

If we were seeing a great stagnation, a supply shock, or even certain forms of hangover, this is how it should manifest itself and from a business cycle perspective does not represent any malfunctioning of the market system.

We might feel that this result is unfortunate but then what is truly unfortunate is that the marginal product of labor is too low.


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