Recalculation vs. Structural Unemployment vs. AS/AD
By Arnold Kling
Recalculation differs from textbook structural unemployment.
In textbook structural unemployment, there are two GDP factories, one in the north and one in the south. There is a shortage of workers in the south, and there are too many workers in the north. But you cannot tell a structural unemployment story if there are unemployed workers in both regions.
With recalculation, you can have unemployment in all skill sets and all regions. Many patterns of specialization and trade are no longer viable. New patterns need to be established. That means that people have to try to create new businesses that utilize unemployed resources and produce profitable goods and services. Many of the attempts to do this will fail. Eventually, some will succeed.
In microeconomics, supply and demand curves represent economic laws that have a compelling logic behind them. In macroeconomics, aggregate supply and demand is nothing but a metaphor, with very weak logic behind it. Pretty much everything in AS/AD is riding on the hypothesis that labor supply is highly elastic at the nominal wage and labor demand is reasonably elastic at the real wage. There is nothing for entrepreneurs to figure out–they will employ more workers as long as you can trick those workers into taking lower real wages.
A bunch of of information technology workers used to be employed in projects for firms that were creating and trading new forms of mortgage securities. Those information technology workers have been laid off. Can they get their jobs back by being tricked into working for lower real wages? No. They need to make a living some other way.
The information technology workers laid off from financial firms may need different skills in order to be able to work on projects in nonfinancial businesses. They may need to start their own enterprises.
The task of figuring out patterns of sustainable specialization and trade is very difficult and subtle. The AS/AD metaphor makes it seem much simpler than it is.