Love TheMoneyIllusion. But does Scott go a little too far with this proclamation?
Points 3 and 4 are empirical statements (and they are true).
Point two sounds like an empirical statement too, but it is not really. The reason is that there are many different theoretical (and empirical) notions of what exactly constitutes a "sticky" nominal wage. Most people have in mind the idea that nominal wage rates do not appear to adjust quickly to changing economic circumstances. But ideally, the concept should be defined more precisely than this (preferably within the context of an explicit economic model). At the very least, we could then be absolutely certain that we were talking about the same thing!
(The other thing I should like to point out here is that people often ignore the huge monthly gross flows of workers into and out of employment. The wages of these workers likely display much more flexibility than those workers employed for some time at a given establishment. I discuss turnover issues here.)
The first point is clearly a theoretical proposition: if X, then Y. As a theoretical proposition, it is likely to remain valid only under a set of specific conditions. Unfortunately, Scott does not provide us with the model he has in mind. And to make matters worse, he seems to want to make us believe that, whatever this model is, it "for certain" applies to the U.S. economy. (Most of what I am complaining about is probably the by-product of loose blogger language, but I think it's important for some things to be more precise.)
Now, I can certainly think of a model that might deliver something resembling the proposition in question. Think of a neoclassical labor market model, where money is somehow necessary, and were nominal price adjustment (or formulating contingent contracts) is costly. Then think of an exogenous decline in the price level (who knows what might have been responsible for that). The implication is that the real wage rises and that this reduces the demand for labor (though why this translates into an increase in unemployment, and not an increase in non-participation, is not usually discussed).
As I have argued elsewhere (The Sticky Price Hypothesis: A Critique), Marshall's scissors (static supply and demand curves) are probably not the best tool we have available to interpret the labor market. The labor market is a a market in relationships, much like the marriage market. The spot wage is irrelevant in enduring relationships; what matters is the time-path of wages and the division of the joint surplus. There are many different wage paths that cost the firm the same in net present value terms. A "sticky" wage (whether real or nominal) need not have any allocative consequences.
I therefore confess that I, for one, do not know "for certain" that if nominal wages are sticky, then NGDP slowdowns will raise unemployment.
Here’s what we know for certain about the US business cycle:
1. If nominal wages are highly sticky, then NGDP slowdowns will raise unemployment.
2. Nominal wages are highly sticky for at least some workers.
3. The period after mid-2008 saw the largest NGDP growth collapse since the Great Depression.
4. The period after mid-2008 saw a huge rise in unemployment.
Points 3 and 4 are empirical statements (and they are true).
Point two sounds like an empirical statement too, but it is not really. The reason is that there are many different theoretical (and empirical) notions of what exactly constitutes a "sticky" nominal wage. Most people have in mind the idea that nominal wage rates do not appear to adjust quickly to changing economic circumstances. But ideally, the concept should be defined more precisely than this (preferably within the context of an explicit economic model). At the very least, we could then be absolutely certain that we were talking about the same thing!
(The other thing I should like to point out here is that people often ignore the huge monthly gross flows of workers into and out of employment. The wages of these workers likely display much more flexibility than those workers employed for some time at a given establishment. I discuss turnover issues here.)
The first point is clearly a theoretical proposition: if X, then Y. As a theoretical proposition, it is likely to remain valid only under a set of specific conditions. Unfortunately, Scott does not provide us with the model he has in mind. And to make matters worse, he seems to want to make us believe that, whatever this model is, it "for certain" applies to the U.S. economy. (Most of what I am complaining about is probably the by-product of loose blogger language, but I think it's important for some things to be more precise.)
Now, I can certainly think of a model that might deliver something resembling the proposition in question. Think of a neoclassical labor market model, where money is somehow necessary, and were nominal price adjustment (or formulating contingent contracts) is costly. Then think of an exogenous decline in the price level (who knows what might have been responsible for that). The implication is that the real wage rises and that this reduces the demand for labor (though why this translates into an increase in unemployment, and not an increase in non-participation, is not usually discussed).
As I have argued elsewhere (The Sticky Price Hypothesis: A Critique), Marshall's scissors (static supply and demand curves) are probably not the best tool we have available to interpret the labor market. The labor market is a a market in relationships, much like the marriage market. The spot wage is irrelevant in enduring relationships; what matters is the time-path of wages and the division of the joint surplus. There are many different wage paths that cost the firm the same in net present value terms. A "sticky" wage (whether real or nominal) need not have any allocative consequences.
I therefore confess that I, for one, do not know "for certain" that if nominal wages are sticky, then NGDP slowdowns will raise unemployment.
It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so. Mark Twain
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