Tyler Cowen writes:
How are nominal wages sticky for the unemployed?: Why don’t the unemployed lower their wages to find a job?… There’s pretty clear evidence that, during the crisis, when the elderly wanted to work more, the elderly were able to work more…
Let's see--the latest employment-and-earnings report http://www.bls.gov/opub/ee/2011/cps/tablea13_201107.pdf:
In July 2011 7.6% of those 75+ were in the labor force and 7.2% of those 75+ were employed. In July 2007 http://www.bls.gov/opub/ee/empearn200707.pdf 6.9% of those 75+ in the labor force, 6.6% employed. 0.7% more of the population looking for work, 0.6% more of the population with jobs. A marginal employment rate of 6/7.
70-74: in 2010 18.9% in the labor force, 17.5% employed; in 2007 17.4% in the labor force and 16.5% employed. 1.5% more of the population looking for work, 1.0% more of the population with jobs. A marginal employment rate of 2/3.
65-69: in 2010 31.0% in the labor force and 28.9% employed; in 2007 29.6% in the labor force and 28.4% employed. 1.4% more of the population looking for work, 0.5% more of the population with jobs. A marginal employment rate of 0.36.
55-64: 63.8% and 59.0% in 2010 and 63.8% and 61.7% in August 2007. You cannot calculate a marginal employment rate.
If Tyler really wants to characterize this as a labor market in which marginal elderly entrants have an easy time finding jobs, I have several bridges I could sell him--in fact, I can see two bridges right now, quite attractive (or I could see them if the fog were to lift), which I am willing to let go for prices that make them very good values indeed. Even for the select 75+ group, the unemployment rate rose from 3.8% to 5.2% between July 2007 and July 2011. For the 65+ as a whole, the unemployment rate rose from 4.2% to 6.7%. The deterioration in the labor market matching process for the elderly looks to me as of the same order of magnitude as the deterioration for the labor force as a whole. Yet Tyler claims that it is different.
So what's going on here with Tyler? The link to "pretty clear evidence" is to Casey Mulligan. Experience, I think, teaches us that it is as unwise to trust Casey Mulligan's interpretation on any issue of theory or data as it is to get involved in a land war in Asia. I see no anomaly in the labor market experience of the elderly: the housing downturn has made many of the elderly poorer and thus unretired, but the unretired elderly are having as much harder a time finding jobs than normal as the general population is.
There is s deeper analytical issue. Four years ago I would have said that there is substantial mean reversion in the employment-to-population ratio: I would have confidently said, based on post-WWII data, that if you put the U.S. economy in a position in which the employment-to-population ratio is away from its current natural rate, then even with aggregate demand policy in neutral the economy will close about 2/5 of the gap back to the natural employment-to-population ratio in a year. That prediction that I would have made four years ago has been falsified.
The old Hayekian line was that if you ever got yourself in a situation where the employment-to-population ratio was not rapidly mean-reverting to its natural rate it was because nasty unions were fixing nominal wages and keeping the unemployed from bidding nominal wages down, and if only you smashed unions nominal wages would become flexible again and the labor market would work again. Well, we have smashed our unions, but we do not have a mean-reverting employment-to-population ratio. Tyler, however, believes that all this proves is that we have not been right-wing enough: some additional--unspecified--government intervention in markets in addition to union-smashing is needed to restore nominal wage flexibility is the road to macroeconomic utopia.
The old Keynesian line was that nominal wage flexibility--and the union-smashing recommended by Hayekians--was a side issue. In an economy with nominal debt contracts downward-flexible nominal wages were likely to produce deeper depressions as the economy was subjected to much stronger downward shocks from the deflation, debt, and bankruptcy cattle prod. Wage inertia was thus a blessing--albeit a poorly-understood blessing--rather than a curse.
I think that everybody open-minded and nuanced is finding themselves moving rapidly toward the old Keynesian position under the pressure of events and data right now.