...with Arnold Kling. One example:

Few people appreciate what a profound and disturbing puzzle the Depression posed. The non-economist has no trouble getting her mind around the notion of a shortage of jobs. But for an economist, such a shortage is nonsense. If there is an excess supply of, say, construction workers, then the wage of construction workers should adjust downward. As the wage rate sinks, the demand for construction workers rises, and the supply of people willing to work in construction falls. As the competitive process unfolds, bidding down wage rates, eventually supply and demand will balance.

In theory, at any rate, unemployment -- an excess supply of labor -- should accordingly be self-correcting. But evidently, as the Great Depression showed, the labor market lacks in practice the adjustment mechanisms that are supposed to work in theory.

There are hundreds of theories that try to explain the apparent inflexibility of labor markets. But I have never forgotten a suggestion made by Robert Solow. He pointed out that you never see an unemployed worker walk up to an employer and say, "If you let me have that guy's job, I'll work for 10 percent less money." There are self-imposed ethical limits on competition.

If you think about it, there are probably countless self-imposed ethical precepts that affect our economic behavior. Chances are, without the habits incorporating these ethical precepts, our market system would collapse altogether. Like the water in which a fish swims, our commercial morality is invisible to us. But it is essential.

Although it's not quite visible...

--He pointed out that you never see an unemployed worker walk up to an employer and say, "If you let me have that guy's job, I'll work for 10 percent less money."

...essentially that's exactly what happens whenever anybody applies for a job.

What irritates me is that so many jobless have such a low self esteem that they are willing to take a job that doesn't pay enough instead of demanding more.

What irritates me is that so many jobless have such a low self esteem that they are willing to take a job that doesn't pay enough instead of demanding more.

Well, that might make sense if they were truely jobless. I wonder how much of a factor unions/lawsuits/taxes were?

On another note - I have noticed that salaries tend to correlate very strongly with self esteem/arrogance - even more strongly than with ability to do the work ! So perhaps when making employment decisions, you should never hire an arrogant person because you have to assume that you are baised towards them by human nature?

Another point - that markets don't work in the absence of information. Perhaps one problem is that salaries are a closely guarded secret in most companies.

As a currently-unemployed person myself, I wonder if there might not be a simpler force at work.

I have a certain level of costs to support my life. I won't accept employment where the compensation falls too far below what would meet those costs. As time goes on and employment is not available, I might adjust my lifestyle to reduce the costs and therefore the acceptable level of compensation -- but the inertia is considerable, and places a floor on the bids I am willing to make.

Regards,
Ric

--He pointed out that you never see an unemployed worker walk up to an employer and say, "If you let me have that guy's job, I'll work for 10 percent less money."

...essentially that's exactly what happens whenever anybody applies for a job.

No, that only happens "essentially" if you are applying for a position from which someone was laid off and his old salary is no longer available. If you are applying for a completely new position, or if the previous holder voluntarily quit, was fired for stealing, etc., the above situation does not occur.

[Solow] pointed out that you never see an unemployed worker walk up to an employer and say, "If you let me have that guy's job, I'll work for 10 percent less money."

Solow and Kling may not have seen it, but plenty of people who lived through the Depression did, as many personal tales from the time will illustrate. This is actually a goofy argument, and Kling himself points to a far more likely culprit in his major point #2:

What matters most for economic performance is firms entering and leaving the market. Free entry and exit produces economic growth over time...

Mmm, yes, and what was new about the business environment in the 1930s? Why, FDR and the New Deal, that's what, the closest the US has ever come to a Stalinist top-down management of the economy. The New Deal folk instituted many innovations in government regulation that made it far more difficult for business to enter and exit markets, not to mention adjust rationally to changing market and labor conditions.

I recommend this book for a readable and detailed discussion, about which Milton Friedman, no slouch of an economist, had this to say:

"Truth to tell --- as [the author of the book] demonstrates without a shadow of a doubt -- the New Deal hampered recovery from the contraction, prolonged and added to unemployment, and set the stage for ever more intrusive and costly government."

Excepting this oddity I think Kling writes a very sensible and useful essay. However, the fact that Homo economicus, the perfectly rational actor, does not really exist has not escaped the notice of economists, I think. My impression is that there are plenty of economists who ponder a useful fusion of social psychology and economics. My economics professor at MIT, Shlomo Maital, is one. He's written a number of interesting books on improving the connection between psychology and economics.

Indeed, I suggest one of the major difficulties in incoporating psychology into economics is not a failure to realize the necessity, but the practical difficulty. Fact is, people don't like to be reminded that they're occasionally irrational, or prisoners of habit. If the President of the country, or even the CEO of a large company, were to come out and says we're going to institute economic policy X to cope with irrational, dumbass behaviour Y which all you folks exhibit, he'd be lynched.

People want their economic policies to be based around on Homo economicus, because that flatters our vanity -- because it tells us that we're perfectly rational. We're willing to tolerate quite a bit of inefficiency in our economy so long as it preserves the illusion that we are who we wish to be, cool-thinking Aristotles and Einsteins, every one of us, rather than the flighty thoughtless creatures of impulse and habit we really are.

> What irritates me is that so many jobless have such a low self esteem that they are willing to take a job that doesn't pay enough instead of demanding more.

What irritates me is the expectation that I should pay when someone doesn't find a job that suits them.

There's no shortage of things that need doing. If someone is on the dole, they should be required to do said things or provide child care for someone who is doing said things. (If they're not competent to do child care and have kids that the state hasn't taken away....)

If someone is on the dole, they should be required to do said things...

Required how? See, if you take away the dole, they'll be "required" to work by their own hunger and the unpleasantness of sleeping outside in the rain. Very little is as motivating as that.

When the wage provides less benefit than the same effort applied toward forage, the model breaks down.

When the wage provides less benefit than the same effort applied toward forage, the model breaks down.

This is also true when "foraging" includes both knocking over passers-by and grazing off the bureaucratic buffet.

Regards,
Ric

>>you never see an unemployed worker walk up to an employer and say, "If you let me have that guy's job, I'll work for 10 percent less money.

I see that all the time. It's the basic pitch in the advertising of every outsourcing company.