Saturday, January 28, 2017

Voluntary unemployment: what it really means

I was teaching the conventional labor market story in the intermediate macro class last week. I showed students how, involuntary unemployment would be by definition a contradiction in terms in the neoclassical model, since unemployment, other than frictional and voluntary, was not possible in equilibrium. In disequilibrium, unemployment results from some friction or market imperfection, or a shock, but it can be solved by lower real wages.

But in equilibrium, unemployment basically means that the person, even though was looking for job, was unable to find one because it decided not to work at the given real wage. As I told students, they have accepted, more or less uncritically, from their principles textbook, the notion that involuntary unemployment does not exist. I joked that all of them accepted without knowing the idea that workers that are unemployed are lazy, and do not want to work basically (jokes aside that's actually what the model suggests).

Yesterday this exposé of the views of Fed officials was published (h/t Rohan Grey). Charles Plosser, prominent real business cycle (RBC) macroeconomist, and ex-president of the Federal Reserve Bank of Philadelphia, according to the transcripts, argued that lack of "work ethic" was a common problem and that "passing drug tests, passing literacy tests, and work ethic are the primary problems [a friend] has in hiring people." His wife too, according to him had heard that "literacy, work ethic, and drugs as impediments to hiring." Not surprisingly, for him the unemployed are dumb, lazy, drug addicts. Well, at least he is consistent with his model.*

* Worth remembering that fluctuations in employment for RBC authors are all about shocks to the labor demand curve, productivity, and that the labor market is essentially always in equilibrium.

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