Sunday, March 8, 2015

Yes David: Unemployment is Sometimes Involuntary

My pal David Andolfatto doesn't like it when I say that some unemployment is involuntary. Here is my response:

I am happy with the way you characterize my beliefs in the first paragraph of your blog. Unemployment is clearly not Pareto optimal.  Everything you say after that is at best misleading and at worst dismissive of everything we (at least some of us) learned from Keynes. 

The idea of involuntary unemployment was introduced by Keynes in the General Theory. But you already knew that. It is defined as a situation where (in modern language) the ratio of the marginal disutility of work to the marginal utility of consumption is not equal to the real wage. That seems a pretty accurate description of the equilibrium outcome of labor search models.

Saturday, March 7, 2015

Labor Force Participation is Secular: Unemployment is Cyclical!

Updated data at the request of Andrew Sentence on participation and unemployment in the U.S.  
Business cycles are about unemployment; not about changes in the participation rate.
(c) Roger E. A. Farmer March 2015
See my twitter posts today on this topic. 

If people choose to look for a job; that's their business. If people can't find a job; that's our collective business as a society.
Participation is a voluntary choice.  Unemployment is not. 
The idea that unemployment is voluntary is classical nonsense.
Anybody want to explain to me why they think labor force participation is a cyclical phenomenon?
Participation is not cyclical! Unemployment is!  
The secular trend in participation dwarfs the cyclical movement. That's an important fact! 
Follow me on twitter @farmerrf