By Bryan Caplan
Suppose that a bunch of mortgage underwriters get laid off. There are two possible full employment equilibria.
(a) They can be instantly employed as dishwashers at 20 cents an hour.
(b)They can be employed as health insurance claims processors at a
salary close to what they were making as mortgage underwriters.
The reason that we don’t observe (a) is that wages are not perfectly
flexible, if for no other reason than minimum wage laws. Point conceded
But the PSST story is focused on why we do not observe (b). The
answer is that it takes time for entrepreneurs to figure out that there
is a need for more health insurance claims processors, for the mortgage
underwriters to seek and obtain retraining, etc.
Building on my wing-walking critique of PSST, I’m asking why the PSST story ignores a third, extremely plausible, full employment equilibrium:
(c) Workers continue to be employed at their old job for 5, 10, or 20% lower wages until an entrepreneur makes (b) happen.
Nominal rigidities can explain the failure of (c) to happen without invoking PSST. Can PSST explain the failure of (c) to happen without invoking nominal rigidities? I don’t see that it can.