John Grigsby has a very nice paper I saw last week pointing out that wages rose in the Great Recession. Why? Well all the low-wage people got fired, so the average wages of those remaining got hired [sic–he must mean “higher”]. Right now, we are seeing some of the opposite. People who have been out of the labor force for years are returning. Even ex-cons are getting jobs. Employers are skipping the drugs tests. Hire a lot of people at less than average wages, and average wages go down. It is possible for every individual to get a raise but the average decline.
The paper to which he refers has the following abstract:
What determines the joint dynamics of aggregate employment and wages over the medium run? This classic question in macroeconomics has received renewed attention since the Great Recession, when real wages did not fall despite a crash in employment. This paper proposes a microfoundation for the medium-run dynamics of aggregate labor markets which relies on worker heterogeneity. I develop a model in which workers differ in their skills for various occupations, sectors employ occupations with different weights in production, and skills are imperfectly transferable. When shocks are concentrated in particular industries, the extent to which workers can reallocate across the economy determines aggregate labor market dynamics. I apply the model to study the recessions of 2008-09 and 1990-91. I estimate the distribution of worker skills using two-period panel data prior to each of these recessions and find that skills became less transferable between the 1980s and 2000s. Shocking the estimated model with industry-level TFP series replicates the increase in aggregate wages in 2008-09, and decline in 1990-91. The model implies that if either the composition of industry shocks or the distribution of skills in the economy had been the same in the 2008-09 recession as in the 1990-91 recession, real wages would have fallen, while employment would have declined less. The declining industries during the 2008-09 all employed a similar mix of skills, which induced many low-skill workers to leave the labor force and limited downward wage pressure on the rest of the economy. Finally, the model inspires a novel reduced form method to correct aggregate wages for selection in the human capital of workers, which accounts for cyclical job downgrading by focusing on the wage movements of occupation-stayers. This correction recovers pro-cyclical wages, suggesting the changing composition of the workforce was crucial for aggregate wage dynamics during the Great Recession.
In textbook macro, there is no worker heterogeneity. There is just one type of worker in the GDP factory, and when demand falls, “the” wage is too high for the factory to keep all of its workers. We get an increase in unemployment until “the” real wage falls, in the textbook case due to prices rising faster than wages, thanks to monetary policy.
As you know, I don’t buy this story. I think of the economy as highly specialized, and I tell the PSST story. Some patterns of specialization an trade become unsustainable, and that results in higher unemployment until new patterns can be established. The quoted abstract struck me as closer to a PSST story than to a textbook macro story.
As an aside, I perhaps could link to John more often. I certainly agree with him often. But in choosing material to which to link, I lean in the direction of looking for facts or analytical points that are new to me or that I want to ponder further. I don’t want to automatically link to stuff just because I agree with it. And I try to stay away from the “Somebody said something wrong on the Internet” genre, meaning finding something you disagree with and acting on the urge to attack it.
I get that, though I would ask you to relax this restraint slightly, as I personally derive a lot of intellectual benefit from reading high-level, rigorous attacks against influential people irresponsibly spouting nonsense.
It is quite asymmetric because the laid off workers often ends up in their isolation on drugs and suicidal. It is very difficult to drag them back out of that position. We are witnessing evolution in action.
It is quite asymmetric because the children Born Rich self-assemble into pods that exhibit an extreme preference for drug abuse and other self-destructive behaviors. It is very difficult to drag them back out of that position. We are witnessing evolution in action.
Occasionally a member of this pod breaks rank and her father becomes president.
Other points:
1) The years of the Great Recession also so the movement to Higher Deductible Insurance plans which was a compensation cut of $1 – 2K per family and this is not included with the wage analysis since 2005. So I do economist are over-estimating the impact of higher wages today. (Probably explains the family formation is stagnant and birth rates are well below the 2000 – 2007 years.)
2) Probably most offices cut staff so far back in the Great Recession that no harder had a talent bench of young workers to promote. It was weird by late 2011 our office was already having concerns of finding the right people.
3) In reality the labor markets came back quicker in The Great Recession (unemployment hit high point late 2010) than either the S&L Recession (where 1990 had unemployment high point in summer of 1992) or Dotcom (2001 and unemployment hit high point in 2003.)
I have never seen a reason for this but the back of my mind was the labor supply in 2010 was flatter than in 1991 or 2002 as we on the other side of Boomer work force.
“Even ex-cons are getting jobs.” I think I understand that line is not to be taken too seriously, but still I’d like to point out that ex-cons getting a job is a great thing. Everybody in our society deserves a chance to reintegrate after doing their time. I think (I hope?) Mr. Cochrane agrees with me here.
Depends on the cost of bringing them back.
I’ve long felt that high minimum wages are benefits to young people from higher social classes. Let’s say there is some unskilled labor that needs doing. Even amongst the unskilled, there are those that show up on time, present well, and are off drugs. And there are those that are not. If low minimum wages are allowed, I think that many employers (especially large ones) just settle on a low wage as a standard. The teenage kids of the middle and upper middle class decide its not worth their time, and the manager finds some way to piece together shift coverage from among the more shifty lower orders. When the minimum wage is increased, it brings unskilled but higher class labor into that market, and the manager can choose from these more agreeable shift workers.
At least that’s the impression from my own youth and it could be different today.
It’s low status and no resume boost for an upper half kid to work for money now. They are supposed to volunteer for free, at internships (best if for politicians or think tanks), research projects in academic labs, or at ideologically correct non-profits, either charitable or activist. They are supposed to be able to name-drop high status people and institutions, to associate themselves with those, and signal loyalty to the right cause and the right team, signal that they have whatever it takes to have gotten access to those scarce opportunities, and that they made it through the gatekeeper functions of the trusted leaders of those places.
This regime tends to contribute to the draininf of the potentially high quality teenage workers out of the system.
I think the level at which people start to think unpaid internships are a ticket to the good life is a lot higher than the 51st percentile. I would guess that if you Dad is an accountant and your Mom a nurse, wages are more valuable than an unpaid internship for your local paper or whatever. I think most employers would take the teenage kids of the solidly middle class over the underclass, and underclass is what you get at $7/hour.
Point taken though.
A quote from Bernanke’s book about the real wage during the Great Depression:
Well, the quote didn’t show, so here it is using my own way of showing quotes:
[quote]
Perhaps more significant, and more puzzling, than the behavior of the workweek, was the behavior of the real wage. My paper with Powell showed, for the industry data set used also in this paper, that real wages were typically countercyclical during the prewar period. This countercyclicality is equally apparent if indexes of wage rates: are used instead of average hourly earnings to measure real wages; it seems to have held for the manufacturing sector as a whole (Alan Stockman, 1983) as well as, for individual industries. The tendency of real wages to rise despite high unemployment was especially striking during the major depression cycle (1929—37): real wages rose during the initial downturn (1930—31). They rose sharply again in 1933—34 and 1937, despite unemployment rates of 20.9 percent in 1933, 16.2 percent in 1934, and 9.2 percent in 1937 (according to Darby’s correction of Stanley Lebergott’s 1964 figures). In contrast, my paper with Powell found some evidence of real wage procyclicality in similar data for the post-war period.
—Essays on the Great Depression (Ben Bernanke) (p. 207)
[end quote]
Regarding you parting comment: “As an aside, I perhaps could link to John more often…” I believe you should. Moreover, I would really like to see you interview John to discuss your views on the “mathification” of economics. I think you and John share many of the same Libertarian suspicions. For example about the effectiveness of top down economic policy and about the need to subject economic models to scrutiny. However, I take it that John believes that a better picture of the economy can only emerge from better models. And certainly, he would argue that this is essential at the micro level, like for asset pricing; and that at the macro level, rigorous mathematical models limit the arbitrariness of economic claims.
What about Australia? How can a country in a PSST world go 30 years with low unemployment and no recessions?
I have always believe that reality of Australia (and I think of Canada) is they are huge land mass nations with small populations. Australia whose size is slightly less than the continental US, have less people than Texas! (And Canada has less people than California!)
So they do have economic slowdowns but enough of everything to avoid recessions. (And think about the US growth cycle which is hitting 10 years in 2020 so the frequency of recessions has been slowing down in the post Reagan years.)
I see the U.K. and the four affluent colonies (U.S., Canada, Australia, and New Zealand) as a kind of natural experiment since 1776 and especially since 1945.
I listened to the following Mercatus podcast Marc Lavoie on Canadian Central Bank Policy, Real-time Payments, and the Post-Keynesian Tradition and was struck by two choices in American history that now dominate the structure and effectiveness of the American Fed: 1. limits on interstate banking resulting in an explosion in the number of small banks, and 2. Bretton Woods Agreements making the U.S. dollar the de facto world currency.
I’m amazed at how fiscally responsible Australia has been historically relative to other affluent nations. I’m also amazed at how many good government policies, like immigration, have come out of New Zealand.
So how do those two choices impact the effectiveness of the Fed?
Oh, and two-thirds of Canadians live in the relatively narrow Quebec City–Windsor Corridor.