In the event featuring Tim Harford and Alex Tabarrok, this issue came up. The issue is how fluctuations in output and employment become broad and long-lasting. For advocates of real business cycles, the challenge is to explain the breadth of a recession. For example, if you want to say that the recession in 2009 came about because we overbuilt housing, you have to explain why so many other sectors declined. To standard macroeconomists, the breadth of the slowdown requires an aggregate-demand story.
On the other hand, as Alex points out, the many years over which the high unemployment has played out raises questions about the aggregate-demand story. In the AS-AD paradigm, sticky wages and/or prices play a crucial role. But five years on, are sticky wages such a plausible story, given all the churn that has taken place in the labor market? Alex also challenges the idea that “menu costs” could account for price stickiness lasting so long and with such devastating effects.
I agree that sticky prices are important but only a part of the problem. There are also slow monetary growth and reduced risk taking, the decline and slow rebuild of wealth, deleveraging, if not stagnation at least low investment in innovation, no investment in capacity that is already in excess, lack of new profit engines and declining wage shares, continued labor arbitrage and technology displacing the higher skilled. Churn probably doesn’t help much since most are reticent to hire or be hired at much lower wages and the non churned workforce which constitutes most of the staff probably can’t be cut at all beyond freezing, those that do accept cuts and are hired contribute to lowering demand, and the most significant prices are product prices which can’t be cut without hurting brands. It really depends on what you want to throw into menu costs, a disgruntled workforce or a damaged brand can be a terribly expensive cost. To argue against demand being a problem raises even more incredulous explanations, stretching minor effects to the point of absurdity since they cannot explain recessions at all.
In this, churn does not solve the problem unless there are as many leaving for better jobs as those accepting worse ones. Without that, all churn accomplishes is burning in the demand shortfall into the permanent structure of prices. That we have a case of the latter does demonstrate a structural problem but one with policy, not the economy itself.
I use cycles theory all the time and don’t believe in it, except going down hill. If the economy is doing cycles then their are components in the economy doing samplings, to keep up. Like sampling the GDP, or sampling shoe inventory. Big guys sample long term trend, small guys short term. Sampling must be on time, otherwise you cause phase shift, like the phase shift in getting third quarter gdp right, or the difference between GDI and GDP. When the big guy is late to his sample he introduces a slowly varying cycle, the sidband. When that happens, the other big guys have to have big capacitors to filter this out. If the biggest guy is inceasingly late, the capacitor size approaches infinity and they blow up.