Evidence for PSST: A Rejoinder
By Arnold Kling
What’s the best available “Guide to Discontinuity/ZMP for Skeptics”? Non-economists have always been quick to believe stories about technological unemployment. Economists have been ridiculing this popular fear for centuries. What happened in the last three years that ought to make economists reconsider?
Economists have been ridiculing technological unemployment based on the theory that the economy adjusts to equilibrium. When (homogeneous) labor needs to be reallocated due to technological change in one industry, changes in relative wages send signals and workers respond. Unfortunately, if you ridicule this form of unemployment, you also have to ridicule aggregate demand and aggregate supply, because adjustments in wages should take care of that as well.
Obviously, there must be some impediments to adjustment in order for unemployment to persist. If you think that the only impediment is nominal wage rigidity, then of course monetary expansion and inflation are the cure for any adjustment problem.
The PSST story is that a major impediment to adjustment is that entrepreneurs must come up with new uses of labor to employ workers released from sectors where they are no longer needed. This requires imagination, experimentation and evolution. It takes time.
The main evidence that I cite against the AD/AS story is the length of unemployment spells and the large number of workers who are not going to return to jobs in their previous industry, much less their previous employer. At some point, even the 99 weeks of unemployment benefits is not sufficient to explain long-term (approaching permanent) unemployment. I view the large number of workers who have permanently lost their former jobs, and for whom no similar job is available, as evidence that:
–labor is heterogeneous
–adjustment to sectoral shifts due to demand factors (housing) and technological factors (retail clerks displaced by Internet shopping) is difficult
–a reduction in real wages of 10 or 20 percent due to inflation would not be sufficient to make the old jobs viable again