Saturday, July 12, 2014

"Unemployment is primarily a problem of macroeconomics"


John Quiggin:

If search models aren’t the right way to think about unemployment, what is the right way? The simple answer is that unemployment is primarily a problem of macroeconomics not of labor markets. If aggregate demand is far below the productive capacity of the economy, workers will be unemployed and capital will be idle.

Reminds me of something JW Mason said:

As soon as you begin to think about employment in terms of an input of labor to a production process, you've taken a wrong turn. We should not try to give supply-based explanations of unemployment, i.e. to show how the allocation of some stock of productive resources by some decision makers could generate unemployment. Unemployment is strictly a phenomenon of aggregate demand...

Unemployment rises when planned money expenditure falls for a given expected money income. Unemployment falls when planned money expenditure rises for a given expected money income. Conditions of production have no (direct) effect one way or the other.

So when we see people unemployed, we should never ask, why does the production of society’s desired outputs no longer require their labor input? That is a nonsense question that will lead nowhere but confusion. Instead we should ask, why has there been a fall in planned expenditure?

I would have missed it, had it not been pointed out twice. But Quiggin and Mason stand apart from the thinking that produces headlines like Drop in U.S. jobless claims points to healing in labor market at Reuters.

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