Coppola Comment

This post originally appeared on Pieria in July 2014.  Roger Farmer has a blogpost in which he shows that labour markets don’t clear. Specifically, employment varies with the business cycle, whereas the labour force participation rate and hours worked only show long-term secular trends. During cyclical downturns, therefore, we must conclude that there is more labour available than there are jobs. New Keynesians say that the reason for this is sticky wages . If only nominal wages could fall enough,the market would clear and there would be no cyclical increase in unemployment. Therefore there should be labour market deregulation so that wages can flex with the business cycle. Roger Farmer questions this: he argues that the market simply does not clear at any wage. I disagree. I think the market does clear – when wages fall to starvation level. Humans need a minimum income to sustain life, but employers have no responsibility for ensuring that the remuneration of employees me

"We need to discuss the complete disconnect between the marginal product of labour and labour wages," said Sir Chris Pissarides, speaking on the closing panel of the Lindau Economics Meeting. I tweeted this comment. Laurie MacFarlane of the New Economics Foundation promptly responded with this chart that brilliantly illustrates Sir Chris's point: "Quite why marginal productivity theory is still taught as something which explains the real world is beyond me," commented Laurie. Marginal productivity theory says that profit-maximising firms will only employ workers who can generate at least as much additional return for the firm as they are paid. Expressed like this, it seems sensible: why would a firm employ a worker who is a net cost? But marginal productivity theory also says that the amount firms pay their workers is equal to their marginal product - in other words, that wages rise in line with productivity. This is demonstrably untrue. Wages have no