Bryan responds to my question. Scott Sumner also responded in the comments on my original post.

My question is how to reconcile low employment with low unit labor costs. Presumably, low unit labor costs would cause labor demand to be higher rather than lower.

My translation of what they have to say is this:

Bryan: Notwithstanding remarkably low unit labor costs, if unit labor costs were even lower, we could have full employment.

Scott: Notwithstanding remarkably low unit labor costs, if we had higher nominal GDP, we could have full employment.

Each of their positions amounts to a non-falsifiable hypothetical. Not that we should be shocked by non-falsifiable statements. This is macro, of course.

Neither of their positions serves to explain the phenomenon I highlighted. Instead, they amount to saying, “Nothing to see here. Move along.”

Tyler Cowen agrees with me that this is worth wondering about.

Even if you believe a sticky-price story that disconnects employment demand from real wages, there is still something to puzzle over. Historically, the price markup has been strongly pro-cylical. My guess is that the macroeconometric modelers at the Fed and private consulting firms are having to put gigantic fudge factors into their markup equations to get them to track recent behavior.

[update: Scott offers a longer answer that still is not an answer. He says that instead of looking at real unit labor cost we should look at wages divided by nominal GDP per capita. Here is what the two series measure:

real unit labor cost = wage rate divided by nominal output per worker. Simplifying the fraction, it is the wage rate times employment, divided by nominal output.

Sumner’s measure = wage rate divided by nominal output per capita. Simplifying the fraction, it is the wage rate times population, divided by nominal output.

So, the ratio of Sumner’s measure to real unit labor costs is population divided by employment, which goes up when the unemployment rate goes up as a matter of arithmetic.

The graph I copied shows the price markup rising, which means real unit labor costs have been falling. Sumner’s measure has been rising. Arithmetically, this means that population divided by employment has been rising, i.e., that there has been higher unemployment.

But that is the mystery! Why has unemployment gone up, in spite of lower real unit labor costs? ]