By Arnold Kling
From Ed Glaeser.
Unemployment represents a crisis of imagination, a failure to figure out how to make potential workers productive in the modern economy.
That might be a one-sentence articulation of PSST. The challenge is to find the comparative advantage of potential workers so that they fit in to patterns of sustainable specialization and trade.
Glaeser points out that it is young firms that create these new patterns.
look at the period from 1996 to 2008. Every year, the new firms added more than 2.9 million jobs, on net; every year except 2000 and 2006, the other firms, considered as a whole, destroyed jobs, on net. Similarly, the boom of the 1980s was led by job creation from new firms. Even in 2009, at the bottom of the recession, new firms managed to add more than 2.3 million new jobs–though those job gains were overwhelmed by the 7 million jobs lost by older firms. The lesson here: older firms generally shrink, while new firms erupt, hire new workers, and make up for the older firms’ job losses.
Does the AD/AS paradigm predict this pattern?