The Selgin-Sumner-Tobin Model vs. PSST
U.S. NGDP was restored to its pre-crisis level over two years ago. Since then both its actual and its forecast growth rate have been hovering relatively steadily around 5 percent, or about two percentage points below the pre-crisis rate.The growth rate of U.S. average hourly (money) earnings has, on the other hand, declined persistently and substantially from its boom-era peak of around 4 percent, to a rate of just 1.5 percent.** At some point, surely, these adjustments should have sufficed to eliminate unemployment in so far as such unemployment might be attributed to a mere lack of spending.
However, he subsequently writes,
one can clearly see how, while NGDP plummeted, hourly wages kept right on increasing, albeit at an ever declining rate. Allowing for compounding, this difference sufficed to create a gap between wage and NGDP levels far exceeding its pre-bust counterpart, and large enough to have been only slightly reduced by subsequent, reasonably robust NGDP growth, notwithstanding the slowed growth of wages.
The puzzle is, of course, why wages have kept on rising at all, despite high unemployment.
The survey data clearly shows the zero rate point is significant. Now some people argue that this shouldn’t matter, as the average wage increase is still positive, slightly under 2%. But that includes people working in healthy industries who are getting 4% increases, and other workers getting zero percent. It’s an average. So even at this level the zero boundary may be imposing some wage rigidity.
The zero bound is the reluctance of employers to try decreasing wages, as opposed to freezing them. In my view, the worst offenders at this point are state and local governments, who are cutting vital services rather than cutting nominal wages.
If you go back and read James Tobin’s presidential address to the American Economic Association, you will find this exact model of aggregate supply. Two-sector labor market, nominal wages sticky downward at current levels, a shock requiring an adjustment of relative wages. At higher levels of inflation, relative wages adjust more quickly, and employment is higher.
this time around, job destruction is happening faster than job creation, at least for certain types of workers. Demand for jobs involving routine work is rapidly falling since those jobs are the easiest to automate. As entrepreneurs discover and invent new ways to employ the laid off workers, the economy should come to a new equilibrium and re-employ those who lost their old jobs. However, even though the overall economic pie will likely grow, the new equilibrium may involve lower wages for many types of workers, and many may choose to drop out of the labor force entirely, as they have over the past decade.
Erik tells more of a PSST story. I think everyone agrees that there is some combination of the PSST story and the Tobin story. And most people would agree that as time goes on, the proportion of unemployment attributable to the Tobin story falls.