I recently ran across the Christiano, Trabandt, and Walentin (CTW) paper titled “Involuntary Unemployment and the Business Cycle”. I was excited. I have devoted a great deal of my own research to modeling involuntary job loss (IJL) that occurs by the millions in U.S. recessions. (See the Table below.) I admit to having become discouraged by the lack of attention paid to the crucial problem in the academy’s mainstream teaching and research. But maybe things are looking up. CTW are confronting the issue. Being part of the ECB’s working paper series encouraged hope that they would make a serious stabilization-relevant effort.
I was disappointed. The paper does not close to living up to its title. It is little more than another mainstream Ptolemaic effort to defend the consensus market-centric DSGE theory, featuring selective awareness of available facts about the nature of forced joblessness and producing unserious analysis. Given the authors’ apparent objective to force some notion of involuntary unemployment (IU) into consensus modeling, they simply ignore how economies actually behave.
CTW have a peculiar understanding of involuntary unemployment. Homogeneous firms arbitrarily ration their labor hiring; job seekers are heterogeneous in how hard they look for employment; available jobs are allocated to those who exert sufficient effort in their job search. Those who are looking for work but exert insufficient effort to obtain a job are both in the labor force and involuntarily without work. CTW exclusively populate their IU with these relatively lazy job seekers. Layoffs, forced job loss that everyone knows to be centrally characteristic of business cycles, do not exist in CTW’s world.
While I will testify from experience that every feature of the CTW model set-up is unsatisfactory to stabilization policymakers, most problematic is the absence of IJL, especially as it results from adverse nominal demand disturbances. What use is CTW unemployment, given its independence from the cyclical behavior in employment, to stabilization policymakers? Why do modern theorists insist on wholly rooting involuntary unemployment in job search motivated by voluntary job quits or voluntary labor-force entry instead of admitting what they already know, i.e., most IU results from IJL? GEM macroeconomists recognize the fundamental problem here to be the inability of market-centric modeling to coherently accommodate meaningful wage rigidity (MWR) that is needed to suppress wage recontracting and generate IJL.
Tackling 21st-century stabilization problems with a 19th-century market-centric models forces macroeconomics to be policy-irrelevant. Modern theorists must know, deep down, that manipulating voluntary job search cannot provide useful insight into actual involuntary unemployment. CTW must have known, prior to writing “Involuntary Unemployment and the Business Cycle”, that lazy job seekers will never usefully elucidate recessions. They must also know that their model identifies no market failure that justifies monetary intervention by the central bank. Is that their message? Should the ECB believe that, along the lines of Lucas’s famous argument, involuntary unemployment is outside their policymaking writ?
CTW indicate some belief in stabilization authorities’ passivity with respect to involuntary unemployment: “Another interesting implication of the model is its prediction that high unemployment in recessions reflects the procyclicality of effort in job search.” (p.44) Do they really want us to take that seriously? The CTW model provides to serious motivation for the hypothesized cyclicality of job search by lazy job seekers. Nor do they provide any insight on why persons turn out to be lazy, although personally I do not care. The entire exercise is at best silly. A stabilization policymaker would have to be out of his or her mind to take it seriously.
If CTW would focus on explaining rational wage rigidity sufficient to induce IJL in response to adverse demand disturbances, they would not find themselves out in left field fooling around with lazy job-seekers. But instead CTW insist on digging an ever-deeper Ptolemaic hole: “There is some evidence that supports this implication of the model. The Bureau of Labor Statistics (2009) constructs a measure of the number of ‘discouraged workers’. These are people who are available to work and have looked for work in the past 12 months, but are not currently looking because they believe no jobs are available.” (p.44) Their interpretation of that evidence illustrates nothing more than their Ptolemaic blinders prevent explanations of how the macroeconomy actually works. CTW conveniently overlook that the jump to believing no jobs are available is not ex machina. Don’t we all know the increased pessimism was caused by jumps in forced job loss and the consequent reductions in overall employment and hiring that are characteristic of recessions? Remove the blinders and it is easy to see that the cyclical behavior of discouraged workers in no way supports the primacy of lazy job-search in the creation of IU.
Perhaps some constructive advice would be helpful. Understanding involuntary unemployment requires explanation of forced job loss. It requires meaningful wage rigidity to suppress wage recontracting, a necessary condition for IJL existence, and consequently requires the generalization of optimizing exchange from the marketplace to the large-establishment work-place. That is the message of the GEM Project. Micro-coherent market-centric general-equilibrium modeling can never accommodate IJL. That hard fact has been pushing CTW and their mainstream colleagues ever deeper into a Ptolemaic quagmire, ubiquitously producing results that cannot be stabilization-relevant and are increasingly embarrassing. Effective response to the ugly quagmire requires better theory. The GEM Project featured in this website provides the much-needed analytic framework capable of coherently elucidating recognizable involuntary unemployment and generating usable stabilization theorems to deal with it.
INVOLUNTARY JOB-LOSS BEHAVIOR IN U.S. RECESSIONS
Peak-to-Trough Changes in:
Unemployment Rate Job-Losers Incidence Job Losers (000)
1969-70 +2.4 ppts +8.2 ppts +1,230
1973-75 +3.8 ppts +16.0 ppts +2,599
1980 +1.5 ppts +7.4 ppts +1,315
1981-82 +3.6 ppts +11.2 ppts +3,433
1990-91 +1.3 ppts +6.8 ppts +1,373
2001 +1.2 ppts +6.0 ppts +1,423
2007-09 +4.8 ppts +13.1 ppts +5,807
Blog Type: New Keynesian Chicago, Illinois