Paul Krugman writes:
Liveblogging Bob Hall (Serious Wonks With Paid Subscriptions Only): A good discussion of search models of unemployment — which I really need to master — and a great picture about the problem with any attempt to pin blame on productivity.... If hiring depended on the ratio of labor productivity to the cost of hiring labor, we should be having a huge employment boom! Very nice words about my 1998 paper.
Nice point about how Ned Phelps declared, 40 years ago, that “we have made a landing on the non-Walrasian continent” and that “the days of Q= min[S(p), D(p)] are over” — when in fact, as Bob says, exactly that story — the short side determines output and employment — is exactly the way we do useful macro, even now....
[T]he point, as I get it, is that zero-lower-bound models work very well in practice, but have a problem in theory: it’s not at all clear how to reconcile them with Diamond-Mortenson-Pissarides-type models of the labor market.
My first reaction — but I think it’s wrong — is, so much for DMP. But he’s right: we do need to figure out what’s actually going on in the labor market (although I don’t think I agree with his proposed reconciliation).
$3 trillion of foregone output because we insist on having currency...
OK, my two cents: prices as well as wages are sticky, firms aren’t perfectly competitive, and the marginal revenue product of workers can be very low when the economy is depressed even though their marginal physical product is high.