Microfoundations of Unemployment
By Arnold Kling
Why don’t the unemployed lower their wages to find a job? The more tragic you think unemployment is, the greater the puzzle here, and yet the people who stress the tragedy are often least likely to admit the positive puzzle (and vice versa).
Read the whole post. The hypothesis of downward rigidity in nominal wages makes for a good story for short-term layoffs. (I think it also makes for a good story for how state and local government employment declines in a recession. I have consistently prescribed wage cuts for state and local government workers as a way of maintaining employment there.) However, as Tyler points out, the story of sticky nominal wages becomes less compelling the more you try to apply it to the already-unemployed and the longer the duration of the recession. This is the biggest problem with trying to fit the current situation into the AS-AD paradigm.