It may not be prominent in the academic literature but I suspect one of the underrated aspects of full employment is the wellbeing benefits of being able to tell your boss to go f***k themselves if they’re being unreasonable.
If you're right Matt, and I believe you are, the small business lobby is going to be angry for a pretty long time. Right now, they are grasping at straws because of the bonus UI that runs out in a few weeks, but what do they blame after that?
The reality is that many if not most small business owners operate businesses that, most of the time, require almost no innovation, clever pricing strategy, or in many cases, even risk. Some are risky because the unit economics are on the margin (see: restaurants). But the common thread you get at here is that many small businesses have never had to *recruit* workers at all, and now they find themselves in a game they are entirely unprepared for, and they're mad.
Imagine going your entire business life under the idea that the best way to motivate your people is to "let the beatings continue until morale improves", then suddenly be in a full employment world where that particular management technique starts to fail spectacularly.
Maybe we should start new job training programs for these poor guys so they can learn how to make it in this new world of small business that requires effective implementation of a talent strategy?
"Instead of workers competing with each other for jobs that are scarce, we want employees to compete with each other to attract work. We want the -- the companies to compete to attract workers. That kind of competition in the market doesn't just give workers more ability to earn a higher wage, it gives them the power to demand to be treated with dignity and respect in the workplace."
I did not know that Biden had expressed this view and it really raises my respect for him. This is exactly the right way to think about labor issues and I would love for the Democratic Party generally to take this line. The counterpoint to the respectable Republican "you don't want the government telling you how to live your life, do you?" argument is "well, I don't want my employer doing that either", and setting up a situation where workers (not unions, workers) have more power to stand up to a given employer and demand better is a way to promote individual freedom just as much as "getting the government's boot off your neck" is.
FWIW I worked at one of the regional Feds in 2016 with some labor economists, and folks in research departments took very seriously that Obama CEA report about how most of the LFP gap was structural (not cyclical). The hot question back then was "what share of the remaining LFP gap is due to opioids vs. disability vs. video games vs. criminal records vs. ..." But interest in that question seemed to wane by 2019. I suppose a vindication of Matt's views.
The only real cost to overheating the economy is inflation. Moderate inflation ain’t so bad. It involves an increase both in prices and wages (indeed it can be driven by wage increases) so it is not inherently anti-worker. As an econ undergrad, I was taught that inflation is unpopular because workers attribute nominal wage increases to their skill and wonderfulness and feel that inflation robs them of the fruits of their industry. Employers feed this dynamic by providing raises based on performance reviews rather than cost of living adjustments plus truly merit biased raises.
I’m not sure this theory explains all or even most of the elite horror against inflation. I do know inflation is really bad for bond holders. If you are getting 5% from high quality corporate debentures and inflation climbs from 1 to 4%, your real income has cratered by 75%. The effects on mortgage holders are similar. Most economists want to consult for banks and other institutions that have very good reasons for hating inflation. Furthermore, economists are basically taught that self interest is not only natural but the cornerstone of the economy. They can be just as whorish as lawyers.
The late 40s were the golden era of the American working class— the first time in history any working class anywhere began acquiring enough money to buy houses and send children to universities. This is one of our greatest national achievements. Not coincidentally, it was presided over by a highly leveraged federal government that was happy to print money and have 6% inflation. The best of times for workers and the worst of times for rentiers. Let’s do it again!
Is it just me or is it super weird how little this is talked about or written about? Like if you ask voters jobs are almost always the top issue. Politicians talk about jobs literally all the time, but it's kind of a big secret that monetary policy is constantly trying to prevent us from having too many jobs.
I'm genuinely not equipped to have an opinion about the economic modeling but it's kind of shameful how much it's talked around and voters are treated like children.
Matt, I paid $48 for you to popularize ideas like this. I think its smart to dump the TDS and admit that this was a really stellar achievement by Trump as well. He convinced Dems they needed to do something. This was a very well argued piece. Well done!
I get the sense that opposition to these ideas is not always drawn from economists and debates over models anyway. Instead it seems like some people are profoundly uncomfortable with burger flippers, uber drivers, and hair stylists having bargaining power and/or are profoundly uncomfortable with government stimulus boosting wages. I see this expressed in two ways. First, there are assertions made that people at the bottom of the labor pool don’t *deserve* higher wages and bargaining power. If they were truly clever, hardworking people they wouldn’t be at the bottom. Meritocracy! Second, there is a suspicion that rising wages are fake. That is, the only reason wages are going up is because employers have to compete with the “artificial” expanded UI benefits and stimulus money. Once that is withdrawn, as some states are already doing, then the “natural” conditions of the employment market will return. Although I haven’t heard it expressed this way, I take it to mean that wages will fall or at least stop growing.
To be fair to restaurant owners, they've been through hell for the last 15 months. I think the bonus UI is playing at least some role in the current worker shortage, and that we won't really know if "some" is 10% of it or 70% of it for a while. The transition to a post-pandemic is totally new and has lots of uncertainty. A legitimate fear is raising wages by $5 per hour to get fully staffed to only find out 4 months later that the shortage was a blip. If the new wage level turns out to be a plateau, restaurants will adjust. Higher wages, higher prices, and potentially some shrinkage in the industry because if a restaurant meal costs a new, higher multiple of eating at home, some people will cut back eating out a little (though probably after a summer binge that may also prove temporary).
I agree that this is a good piece, but it misses a basic point that economists tend to be too concerned with their models, and not concerned enough with data. Many years ago, when I was a graduate student at UCLA, I used to attend a seminar run jointly by economists and theoretical biologists. They were using similar models and thinking about things in similar ways, but theoretical biologists had to deal with more empirically oriented colleagues in a way that economists didn't. Tony Atkinson and his crew (Piketty, Saez, etc.) are now playing that role.
I wish this was one of the posts that was available to everyone, not just paid subscribers, because this is one the most consequential issues of our time and "preaching to the choir" on such an important issue is a real downside of the paid subscriber model.
This is an excellent piece. I strongly endorse the conclusions that the business "cycle" is not a cycle, not symmetrical, and largely a reflection of random downward shocks (plucking). I also endorse the view that macro policy has, in recent decades, been insufficiently expansionary and too quick to put the damper on expansions. That being said, I think the analysis here is in some ways incomplete. I would like to see future posts address two points:
(1) Is the "accelerating inflation model" that started as heterodox and became orthodox in the 1970s and 1980s really wrong, or has it just not yet been tested in the 21st century? According to that model, the level of real output depends, in part, on the relationship between contemporaneously observed output prices and the expected level of input prices. During episodes of unexpected acceleration of inflation, observed output prices exceed expected input prices, leading firms to undertake higher levels of output and staffing than they would, in retrospect, have wanted if they had had better information. Such episodes result in temporary periods when output in a meaningful sense does rise above its long-term potential. In a period that includes such episodes (say, the 1960s and 1970s, but not the 21st century so far) you can't draw a red line along the cyclical peaks and call that "potential real output." A sequel to this post should include a discussion of whether that model still applies to the US economy, and if not, why not.
(2) Another point regarding inflation: Modern Monetary Theory (MMT), which perhaps for slightly different reasons, shares the view of this post that it is a good idea to run the economy hot, includes a safety mechanism to avoid excessive inflation. That safety mechanism is to raise taxes when inflation threatens. That is great in theory, but unfortunately, the US political system includes no mechanism to actually adjust taxes in that way. Is that institutional constraint an important consideration in deciding how hot to run the economy? Would it be a good idea to implement institutional reforms that would allow flexible adjustment of taxes for purposes of avoiding unwanted macroeconomic outcomes?
My parents were just road tripping and saw $15 an hour wages advertised at the Cody, WY Walmart. I see a minimum advertised wage of $11 at fast food places in Cheyenne (which even before may have been competing with Fort Collins, especially for workers with a car). I hope this keeps going.
This is a terrific post from Matt. I think one thing I'd add is that the "we're at full employment" chorus to my recollection started MUCH earlier than 2015 and that the econ blogosphere spent a lot of time kicking around ideas that (1) the natural rate was like 5-6% unemployment and (2) even if that was the natural rate, the difference between the natural rate and the current rate could be explained by the near/actual 0 value add of many of those employees.
I'm a big MR fan but the subsequent developments in the labor market make e.g. these posts look not so hot:
But it really is the case that TC, along w many others, just didn't (doesn't?) grok make up growth. He'd later post:
"…being unproductive in one job doesn’t mean a lifetime of unemployment. A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. "
Clearly his premise is that there's some "real" reason the economy will get booming again when it's pretty literally just making sure all the NGDP the CB implicitly promises ends up back in the economy after a miss. If that premise doesn't anchor your analysis, you can come up w all kinds of reasons the number of folks the economy can employ might suddenly change for the worse.
Parenthetically: I realize that Cowen is not an orthodox economist but as much as Matt's point that economic orthodoxy has still not come around to any of the "run it hot" strands of thinking is important, I think remembering the policy debate that produced the Biden consensus is similarly relevant. Cowen is easy to foreground bc he's prolific and his blog still exists.
I think there is something to the point about ‘mathiness’ and models. But fundamentally, I believe the expert econ community decided some time ago that a 2% constraint (not an average) is the RIGHT target for inflation. But why?
So I asked Claudia Sahm why the Fed uses a 2% benchmark instead of say 3 or (gasp) 4% target (check out the Regan/Volker era and 4% seemed to be the target they were shooting for). She didn’t know why 2 was the magic number and crowdsourced it among her Twitter followers and I feel like someone just made up 2% in the 80s-90s.
In other words, I think a fundamental premise backing the right amount of inflation in our country (if not the world) seems to be based on intuition and not on any well grounded study...with consequential impact to our economy and polity.
It may not be prominent in the academic literature but I suspect one of the underrated aspects of full employment is the wellbeing benefits of being able to tell your boss to go f***k themselves if they’re being unreasonable.
If you're right Matt, and I believe you are, the small business lobby is going to be angry for a pretty long time. Right now, they are grasping at straws because of the bonus UI that runs out in a few weeks, but what do they blame after that?
The reality is that many if not most small business owners operate businesses that, most of the time, require almost no innovation, clever pricing strategy, or in many cases, even risk. Some are risky because the unit economics are on the margin (see: restaurants). But the common thread you get at here is that many small businesses have never had to *recruit* workers at all, and now they find themselves in a game they are entirely unprepared for, and they're mad.
Imagine going your entire business life under the idea that the best way to motivate your people is to "let the beatings continue until morale improves", then suddenly be in a full employment world where that particular management technique starts to fail spectacularly.
Maybe we should start new job training programs for these poor guys so they can learn how to make it in this new world of small business that requires effective implementation of a talent strategy?
"Instead of workers competing with each other for jobs that are scarce, we want employees to compete with each other to attract work. We want the -- the companies to compete to attract workers. That kind of competition in the market doesn't just give workers more ability to earn a higher wage, it gives them the power to demand to be treated with dignity and respect in the workplace."
I did not know that Biden had expressed this view and it really raises my respect for him. This is exactly the right way to think about labor issues and I would love for the Democratic Party generally to take this line. The counterpoint to the respectable Republican "you don't want the government telling you how to live your life, do you?" argument is "well, I don't want my employer doing that either", and setting up a situation where workers (not unions, workers) have more power to stand up to a given employer and demand better is a way to promote individual freedom just as much as "getting the government's boot off your neck" is.
FWIW I worked at one of the regional Feds in 2016 with some labor economists, and folks in research departments took very seriously that Obama CEA report about how most of the LFP gap was structural (not cyclical). The hot question back then was "what share of the remaining LFP gap is due to opioids vs. disability vs. video games vs. criminal records vs. ..." But interest in that question seemed to wane by 2019. I suppose a vindication of Matt's views.
The only real cost to overheating the economy is inflation. Moderate inflation ain’t so bad. It involves an increase both in prices and wages (indeed it can be driven by wage increases) so it is not inherently anti-worker. As an econ undergrad, I was taught that inflation is unpopular because workers attribute nominal wage increases to their skill and wonderfulness and feel that inflation robs them of the fruits of their industry. Employers feed this dynamic by providing raises based on performance reviews rather than cost of living adjustments plus truly merit biased raises.
I’m not sure this theory explains all or even most of the elite horror against inflation. I do know inflation is really bad for bond holders. If you are getting 5% from high quality corporate debentures and inflation climbs from 1 to 4%, your real income has cratered by 75%. The effects on mortgage holders are similar. Most economists want to consult for banks and other institutions that have very good reasons for hating inflation. Furthermore, economists are basically taught that self interest is not only natural but the cornerstone of the economy. They can be just as whorish as lawyers.
The late 40s were the golden era of the American working class— the first time in history any working class anywhere began acquiring enough money to buy houses and send children to universities. This is one of our greatest national achievements. Not coincidentally, it was presided over by a highly leveraged federal government that was happy to print money and have 6% inflation. The best of times for workers and the worst of times for rentiers. Let’s do it again!
Is it just me or is it super weird how little this is talked about or written about? Like if you ask voters jobs are almost always the top issue. Politicians talk about jobs literally all the time, but it's kind of a big secret that monetary policy is constantly trying to prevent us from having too many jobs.
I'm genuinely not equipped to have an opinion about the economic modeling but it's kind of shameful how much it's talked around and voters are treated like children.
Matt, I paid $48 for you to popularize ideas like this. I think its smart to dump the TDS and admit that this was a really stellar achievement by Trump as well. He convinced Dems they needed to do something. This was a very well argued piece. Well done!
I get the sense that opposition to these ideas is not always drawn from economists and debates over models anyway. Instead it seems like some people are profoundly uncomfortable with burger flippers, uber drivers, and hair stylists having bargaining power and/or are profoundly uncomfortable with government stimulus boosting wages. I see this expressed in two ways. First, there are assertions made that people at the bottom of the labor pool don’t *deserve* higher wages and bargaining power. If they were truly clever, hardworking people they wouldn’t be at the bottom. Meritocracy! Second, there is a suspicion that rising wages are fake. That is, the only reason wages are going up is because employers have to compete with the “artificial” expanded UI benefits and stimulus money. Once that is withdrawn, as some states are already doing, then the “natural” conditions of the employment market will return. Although I haven’t heard it expressed this way, I take it to mean that wages will fall or at least stop growing.
There's plenty to like in this post, but I will never understand why you enjoy spending time in airports.
To be fair to restaurant owners, they've been through hell for the last 15 months. I think the bonus UI is playing at least some role in the current worker shortage, and that we won't really know if "some" is 10% of it or 70% of it for a while. The transition to a post-pandemic is totally new and has lots of uncertainty. A legitimate fear is raising wages by $5 per hour to get fully staffed to only find out 4 months later that the shortage was a blip. If the new wage level turns out to be a plateau, restaurants will adjust. Higher wages, higher prices, and potentially some shrinkage in the industry because if a restaurant meal costs a new, higher multiple of eating at home, some people will cut back eating out a little (though probably after a summer binge that may also prove temporary).
I agree that this is a good piece, but it misses a basic point that economists tend to be too concerned with their models, and not concerned enough with data. Many years ago, when I was a graduate student at UCLA, I used to attend a seminar run jointly by economists and theoretical biologists. They were using similar models and thinking about things in similar ways, but theoretical biologists had to deal with more empirically oriented colleagues in a way that economists didn't. Tony Atkinson and his crew (Piketty, Saez, etc.) are now playing that role.
I wish this was one of the posts that was available to everyone, not just paid subscribers, because this is one the most consequential issues of our time and "preaching to the choir" on such an important issue is a real downside of the paid subscriber model.
This is an excellent piece. I strongly endorse the conclusions that the business "cycle" is not a cycle, not symmetrical, and largely a reflection of random downward shocks (plucking). I also endorse the view that macro policy has, in recent decades, been insufficiently expansionary and too quick to put the damper on expansions. That being said, I think the analysis here is in some ways incomplete. I would like to see future posts address two points:
(1) Is the "accelerating inflation model" that started as heterodox and became orthodox in the 1970s and 1980s really wrong, or has it just not yet been tested in the 21st century? According to that model, the level of real output depends, in part, on the relationship between contemporaneously observed output prices and the expected level of input prices. During episodes of unexpected acceleration of inflation, observed output prices exceed expected input prices, leading firms to undertake higher levels of output and staffing than they would, in retrospect, have wanted if they had had better information. Such episodes result in temporary periods when output in a meaningful sense does rise above its long-term potential. In a period that includes such episodes (say, the 1960s and 1970s, but not the 21st century so far) you can't draw a red line along the cyclical peaks and call that "potential real output." A sequel to this post should include a discussion of whether that model still applies to the US economy, and if not, why not.
(2) Another point regarding inflation: Modern Monetary Theory (MMT), which perhaps for slightly different reasons, shares the view of this post that it is a good idea to run the economy hot, includes a safety mechanism to avoid excessive inflation. That safety mechanism is to raise taxes when inflation threatens. That is great in theory, but unfortunately, the US political system includes no mechanism to actually adjust taxes in that way. Is that institutional constraint an important consideration in deciding how hot to run the economy? Would it be a good idea to implement institutional reforms that would allow flexible adjustment of taxes for purposes of avoiding unwanted macroeconomic outcomes?
I look forward to more on this topic!
My parents were just road tripping and saw $15 an hour wages advertised at the Cody, WY Walmart. I see a minimum advertised wage of $11 at fast food places in Cheyenne (which even before may have been competing with Fort Collins, especially for workers with a car). I hope this keeps going.
This is a terrific post from Matt. I think one thing I'd add is that the "we're at full employment" chorus to my recollection started MUCH earlier than 2015 and that the econ blogosphere spent a lot of time kicking around ideas that (1) the natural rate was like 5-6% unemployment and (2) even if that was the natural rate, the difference between the natural rate and the current rate could be explained by the near/actual 0 value add of many of those employees.
I'm a big MR fan but the subsequent developments in the labor market make e.g. these posts look not so hot:
https://marginalrevolution.com/marginalrevolution/2010/07/zero-marginal-product-workers.html
https://marginalrevolution.com/marginalrevolution/2011/01/scott-sumner-on-zero-mp-workers.html
But it really is the case that TC, along w many others, just didn't (doesn't?) grok make up growth. He'd later post:
"…being unproductive in one job doesn’t mean a lifetime of unemployment. A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. "
https://marginalrevolution.com/marginalrevolution/2011/01/cowen-and-lemke-on-the-job-market.html
Clearly his premise is that there's some "real" reason the economy will get booming again when it's pretty literally just making sure all the NGDP the CB implicitly promises ends up back in the economy after a miss. If that premise doesn't anchor your analysis, you can come up w all kinds of reasons the number of folks the economy can employ might suddenly change for the worse.
Parenthetically: I realize that Cowen is not an orthodox economist but as much as Matt's point that economic orthodoxy has still not come around to any of the "run it hot" strands of thinking is important, I think remembering the policy debate that produced the Biden consensus is similarly relevant. Cowen is easy to foreground bc he's prolific and his blog still exists.
I think there is something to the point about ‘mathiness’ and models. But fundamentally, I believe the expert econ community decided some time ago that a 2% constraint (not an average) is the RIGHT target for inflation. But why?
So I asked Claudia Sahm why the Fed uses a 2% benchmark instead of say 3 or (gasp) 4% target (check out the Regan/Volker era and 4% seemed to be the target they were shooting for). She didn’t know why 2 was the magic number and crowdsourced it among her Twitter followers and I feel like someone just made up 2% in the 80s-90s.
In other words, I think a fundamental premise backing the right amount of inflation in our country (if not the world) seems to be based on intuition and not on any well grounded study...with consequential impact to our economy and polity.