I enjoyed Bryan Caplan’s post urging free-market economists to take the problem of unemployment more seriously. I would urge everyone to take the problem of unemployment more seriously! It happens to be the case that the unemployment rate for college graduates who were already employed and in the workforce as of 2007 is drastically lower than that for working-class people or recent college graduates, so it’s easy to slip into a universe of social and moral isolation from what Caplan rightly calls a grave problem.
What I wanted to add is that I find that people who’ve obtained Ph.D.s in economics seem unduly fascinated with the alleged puzzle that “nominal” shocks can have “real” effects, something that would not puzzle a person who’s never taken an economics class but instead simply noted that virtually all contracts (even things like mortgages with decades-long durations) are specified in nominal terms. Just think about the United States of America today and try to imagine some lucky scenario in which we experience a boom in jobs and output. Some clever invention comes along that happens to be extremely popular in Asia and tastes run strongly to a preference for made-in-America versions. People start hustling to set up factories to make the stuff and jobs are created all up and down the skill spectrum—from marketing specialists and engineers to factory workers and truck drivers and janitors and administration assistants and accountants and lawyers. It’s a widget export boom, and suddenly the economy is poised to add 500,000 jobs per month as long as the boom continues. That means that within six months’ time, we’ll finally be back at the pre-recession aggregate level of employment. In 18 months’ time, we’ll perhaps have caught up with population growth and the employment:population ratio will be back on track.
Happy days are here again!
But are they really? What’s going to happen when all these people get their new widget-related jobs? There’s going to be inflation. There’s going to be a lot more cars on the road. There’s going to be a lot of newly employed kids moving out of mom’s basement and driving up rents. As people start occupying more dwelling space per person, there’s more demand for winter heating fuel. And the jobs boom doesn’t narrowly target the unemployed. Some fraction of the currently employed population will take advantage of the boom to quit their current job, so currently profitable firms are going to need to start raising wages to avoid losing staff. Then of course you have your various firms in monopolistic industries—your Comcasts and your Verizons—who’ll take advantage of higher incomes to raise prices. And the increased commodity prices will cycle through into non-energy factors. Gasoline is a production input for airlines and delivery services. Electricity is a production input for everyone.
So the export boom means inflation. Except if we have a central bank strictly targeting 2 percent inflation, we won’t have inflation. We’ll have monetary contraction sufficient to prevent the increased demand for widgets from setting off price increases. That means we won’t have 500,000 new jobs per month for 18 months. The unemployed will just have to wait. Fortunately, the real world Fed has said it won’t strictly target 2 percent—they say they’ll allow us to go up to 2.5 percent temporarily. So good for them. But they’re still keeping a damper on the widget boom.
It is completely accurate to look at this story and say, hey, you know, that’s really a story about supply-side constraints not about demand. Certainly if concurrently with the boom you adopted tons and tons of awesome efficiency-enhancing supply-side policies you would mitigate the inflationary impact of the boom and allow for more job creation. And awesome efficiency-enhancing supply-side reforms are always welcome! But this doesn’t change the fact that the unemployment is real and genuinely involuntary, nor does it change the fact that demand-side policies could reduce the extent of involuntary unemployment.