Multiple equilibria?

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.


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