Arnold Kling posts a quote from a commenter on an earlier post of his:
The story is that everyone has to specialize in some way, and we are never sure whether we have got it right: the signals the markets sends us are inherently ambiguous. A demand shock could be a signal about people's preferences for my particular skills or a signal about a temporary shift in demand for a broad class of services, or a combination of both. .. when demand is weak; I prefer to hang in there in the (usually justified) expectation that conditions will improve. But in normal times, if demand stays weak I will soon conclude that this isn't the line of work for me. The process is painful, maybe even tragic for me and my family, but it leaves few ripples on the national pond. In abnormal times I can't conclude any such thing: demand may be temporarily down and I might be foolish to abandon this line of work. Indeed, my response is non-monotonic in the demand shock: up to a certain point the larger the fall in demand the more likely I am to quit, but after that point a really large shock convinces me that the market is not, after all, telling me personally that I made the wrong specialization choice.
I like this story. It explains why recessions can take a long time to filter through. The deeper the recession, the more it looks like your inability to find a job is a result of... the deep recession. Whereas in good times, jobs turn over fairly quickly because people realize the economy is going well and so if they stay unemployed for a while, it really feels like maybe that job just doesn't exist.
It also seems like having 2 years of unemployment benefits could inadvertently feed into this by sending people who haven't found work in 2 years the signal that they shouldn't expect to find a job in that amount of time. The government is sort of providing justification for their desire to believe that job losses are a result of the recession and not the result of changing demand for certain professions.
Arnold continues:
I think I prefer the Garett Jones story, in which the typical worker is treated by the firm as overhead. In good times, you tolerate high overhead, because you are building capabilities for the future. In bad times, you cut down on overhead. You only increase your overhead when you have a comfortable level of profits and a positive medium-term outlook.
Because workers are overhead, there is no "marginal product" as such. Thus, there is no market-clearing wage. In bad times (meaning that firms are unprofitable and/or have a pessimistic outlook), the value of additional overhead workers is close to zero, but the reservation wage of the unemployed remains much greater than zero.
That's depressing, but in a lot of ways it seems true. What companies build are products and they need a way to build them. Sometimes that's with machines - whose costs are obviously overhead - and sometimes that's with people.
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