Paul Seabright, GYOB
Internally at Econlog, GYOB means “get your own blog.” It is a term of disparagement used to describe commenters who frequently post comments that are longer than the original post.
In the case of Paul Seabright, I am thinking that the blogosphere could benefit from his having a blog. On my Recalculation Story, he comments,
The story is that everyone has to specialize in some way, and we are never sure whether we have got it right: the signals the markets sends us are inherently ambiguous. A demand shock could be a signal about people’s preferences for my particular skills or a signal about a temporary shift in demand for a broad class of services, or a combination of both. .. when demand is weak; I prefer to hang in there in the (usually justified) expectation that conditions will improve. But in normal times, if demand stays weak I will soon conclude that this isn’t the line of work for me. The process is painful, maybe even tragic for me and my family, but it leaves few ripples on the national pond. In abnormal times I can’t conclude any such thing: demand may be temporarily down and I might be foolish to abandon this line of work. Indeed, my response is non-monotonic in the demand shock: up to a certain point the larger the fall in demand the more likely I am to quit, but after that point a really large shock convinces me that the market is not, after all, telling me personally that I made the wrong specialization choice.
Read the whole thing. He makes a lot of points, one of which is that trying to cut your wage to the market-clearing level may send an adverse signal. It could be that starting salaries at large law firms should be $25,000 lower than the salary at which new graduates are currently being hired. But any law firm or law school graduate who proposes a lower starting salary would be sending an adverse signal of some sort. So the salary stays fixed. I think that this particular story implies that monetary inflation would work, because real starting salaries would fall.
I think I prefer the Garett Jones story, in which the typical worker is treated by the firm as overhead. In good times, you tolerate high overhead, because you are building capabilities for the future. In bad times, you cut down on overhead. You only increase your overhead when you have a comfortable level of profits and a positive medium-term outlook.
Because workers are overhead, there is no “marginal product” as such. Thus, there is no market-clearing wage. In bad times (meaning that firms are unprofitable and/or have a pessimistic outlook), the value of additional overhead workers is close to zero, but the reservation wage of the unemployed remains much greater than zero.