An 84-Word Reply to Arnold
By Bryan Caplan
I challenge any supporter of the sticky-wage story (Bryan? Scott?) to
write a 500-word essay explaining how this graph does not contradict
their view. If employment fluctuations consisted of movements along an
aggregate labor demand schedule, then employment should be at an
all-time high right now.
Quick answer: My view is not that unemployment is caused by sudden spikes in real wages. My view, rather, is that whatever causes unemployment, lower real wages would restore full employment.
You don’t need to have any particular view about the relative importance of supply and demand factors in agricultural markets to blame farm surpluses on price floors. And you don’t need to have any particular view about the importance of supply and demand factors in labor markets to blame unemployment on sticky wages.