Category Archives: Robert E. Lucas

New Keynesian macroeconomics isn’t a progressive research programme

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Robert Lucas on the voluntary and involuntary unemployment distinction

Robert Lucas in a famous 1978 paper argued that all unemployment was voluntary because involuntary unemployment was a meaningless concept:

“The worker who loses a good job in prosperous time does not volunteer to be in this situation: he has suffered a capital loss. Similarly, the firm which loses an experienced employee in depressed times suffers an undesirable capital loss.

Nevertheless the unemployed worker at any time can always find some job at once, and a firm can always fill a vacancy instantaneously. That neither typically does so by choice is not difficult to understand given the quality of the jobs and the employees which are easiest to find.

Thus there is an involuntary element in all unemployment, in the sense that no one chooses bad luck over good; there is also a voluntary element in all unemployment, in the sense that however miserable one’s current work options, one can always choose to accept them.”

I agree that we all make choices subject to constraints. To say that a choice is involuntary because it is constrained by a scarcity of job-opportunities information is to say that choices are involuntary because there is scarcity. Alchian said there are always plenty of jobs because to suppose the contrary suggests that scarcity has been abolished.

Lucas elaborated further in 1987 in Models of Business Cycles:

A theory that does deal successfully with unemployment needs to address two quite distinct problems. One is the fact that job separations tend to take the form of unilateral decisions – a worker quits, or is laid off or fired – in which negotiations over wage rates play no explicit role.

The second is that workers who lose jobs, for whatever reason, typically pass through a period of unemployment instead of taking temporary work on the ‘spot’ labour market jobs that are readily available in any economy.

Of these, the second seems to me much the more important: it does not ‘explain’ why someone is unemployed to explain why he does not have a job with company X. After all, most employed people do not have jobs with company X either. To explain why people allocate time to a particular activity – like unemployment – we need to know why they prefer it to all other available activities: to say that I am allergic to strawberries does not ‘explain’ why I drink coffee.

Neither of these puzzles is easy to understand within a Walrasian framework, and it would be good to understand both of them better, but I suggest we begin by focusing on the second of the two.

@Noahpinion says 20% losing their jobs is a small price to pay in #fightfor15

Noah Smith is a type of friend that should make poor Americans prefer their republican enemies. At least they are not fanatics. Fanatics never give up. Evil people have other things to do with their dastardly days.

Source: A Higher Minimum Wage Won’t Lead to Armageddon – Bloomberg View.

Describing 1/5th of young people losing their jobs after a doubling of the federal minimum wage to $15 per hour as a small but real effect is a type of callousness that not even Donald Trump could stoop. What is Even Noah Smith admits that large minimum wage increases experiment with the fortunes of young people

We don’t really know what happens when you raise the minimum wage to $15 — but soon, we will know. We will be able to see whether employment rates fall in L.A., Seattle, and San Francisco.

We will be able to see whether people who can’t get work migrate from these cities to cities with lower minimum wages. We will be able to see if employment growth suddenly slows after the enactment of the policy. In other words, federalism will do its job, by allowing cities to act as policy laboratories for the rest of the country. 

These one million young people who may well lose their jobs under a $15 minimum wage are real living people starting out their work in lives in a country with a rather inadequate unemployment benefits especially for the long-term unemployed.

Noah Smith wants to throw them onto the scrapheap through a large increase in the minimum wage because he is too cheap to support a large increase in the earned income tax credit.

If doubling the minimum wage to throw 20% of the workforce out of a job passes the brutal utilitarian calculus of bleeding-heart progressives, why not double everybody’s wages? Show the strength of your conviction about these Kruger–Card minimum wage results which repeal the laws of supply and demand.

The leading reason for empirical research and economic history is to warns us not to repeat the mistakes of the past and not try experiments that are obvious folly. People and the economy should not be used as lab rats as Lucas explains in his short speech “What Economists Do”

I want to understand the connection between the money supply and economic depressions.

One way to demonstrate that I understand this connection–I think the only really convincing way–would be for me to engineer a depression in the United States by manipulating the U.S. money supply.

I think I know how to do this, though I’m not absolutely sure, but a real virtue of the democratic system is that we do not look kindly on people who want to use our lives as a laboratory. So I will try to make my depression somewhere else.