My dad (who was politically liberal, BTW) used to say that he could never be “unemployed.” He’d go door-to-door selling pencils, then take the money and buy some more pencils wholesale. Indeed he made good money as a 12 year old in 1933, scrounging around for scrap metal and other odd jobs. He also understood that not everyone could do this as well as he could, which is why he was an FDR Democrat.
Most people distinguish between “real jobs,” and ways of scrounging up some money when unemployed. I’m pretty sure Tyler Cowen agrees with that distinction. Where we disagree is whether sticky wages force people to move from real jobs to scrounging-up-money jobs. Tyler has a post where he discusses an unemployed man’s attempt to scrounge up some money picking up empty cans, and then says this:
It is difficult for me to see how Murdock’s predicament “” is it a typical one? “” is well-described by the theory of nominal wage rigidity. I don’t mean to bait Scott Sumner, but I will again mention the difference between “nominal aggregate demand” and “real aggregate demand.” If society were much more prosperous and people had higher real wealth-backed demands to buy a lot more products, Murdock probably could get a traditional job of the kind he is seeking. In this sense you can attribute Murdock’s joblessness to a shortfall in aggregate demand. That said, it is not clear why juicing up nominal variables should do very much for him. His wage and workplace condition demands are already quite flexible, as he is willing to settle for what he can get. Is money illusion his problem? It seems there is no need to trick him, using monetary policy, into a lower real wage.
A few comments:
1. In my view there is no such thing as “real aggregate demand.” There is nominal aggregate demand, SRAS, and real output. I understand that others disagree. But “real aggregate demand” only confuses issues.
2. I’d guess Murdock would like a shiny new pickup truck, and a job in an auto factory making $25 hour.
3. He can’t get those things because of sticky wages. But (and this is where people are confused) not because wages are sticky in the auto industry (they aren’t that sticky) but rather because aggregate wages are sticky. That makes aggregate wages too high for full employment. And if he goes to a factory offering to work for 1/2 the wage as an equally good current employee, they won’t hire him. It’s not wage rigidity of the unemployed that is the problem, it’s sticky wages attached to jobs, not attached to people.
4. If aggregate wages were flexible, the current level of NGDP (higher than in 2007) could support many more jobs.
5. Of course wages are not flexible, but if NGDP was raised sharply then aggregate nominal wages would not rise as fast, allowing more jobs for Murdock making pick-up trucks, and more income to buy those pick-up trucks. This is what “Say’s Law” is really trying to “say.” If we can produce more stuff, society will be rich enough to buy that extra stuff. No matter how much we produce, there is always some price level where we are rich enough to buy all the stuff.
6. I’m wrong if structural factors like extended unemployment benefits have raised the natural unemployment rate to 8.5%. (Unlikely.) Interestingly, I’m not wrong if the 40% jump in the minimum wage a few years back raised the natural rate of unemployment, as monetary stimulus would lower the ratio of the minimum wage to NGDP. That’s the key variable, not “real wages.”
I believe Tyler is wrong because he assumes that what he observes is inconsistent with the sticky-wage model. Just the opposite. Indeed if there weren’t people like Steve Murdock picking up cans I’d completely abandon my belief in the sticky-wage model. If all the unemployed were watching TV, and none were trying to scrounge for cash, I might become one of those conservatives who believe unemployment is “voluntary.”
I think it’s useful to think of people who are unemployed as being forced out of the high productivity sticky-wage sector where they can work with lots of expensive capital to make pick-up trucks, into the flexible-wage scrounging economy where they can pick up cans, play guitar for tips, do odd house repair jobs, babysit for money, prostitution, deal drugs, etc, etc. Because these jobs are less productive, RGDP falls. And because they pay less than regular jobs, some people who aren’t desperate will rationally choose to watch some TV instead of working. That would probably be my choice (internet, not TV.)