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Yes, Jim Medoff Moved the Needle

Andy Harless writes:

Employment, Interest, and Money: James Medoff, Stagflation, the Phillips Curve, and the Greenspan Boom: James Medoff, my thesis advisor in graduate school and later my collaborator and business associate, died on Saturday, September 15 after a long struggle with multiple sclerosis.  In the field, he was probably best known for his work on labor market institutions, and particularly for his work with Richard Freeman on the impact of unionization. But… I was a student of macroeconomics… I was intrigued by a paper he had written with Katharine Abraham entitled “Unemployment, Unsatisfied Demand for Labor, and Compensation Growth, 1956-1980.”… [T]he Medoff-Abraham paper… said was that there was not nearly as much “stag” in the stagflation as we thought.  The labor market, it suggested, had been booming during much of the 1970’s despite the appearance of high unemployment.  The implication was that the unemployment of the 1970’s was largely “structural”… once you realized that, the accompanying inflation shouldn’t surprise you.

When I took James’ graduate course in 1989, this idea was particularly important, because the situation was beginning to reverse itself…. By 1994, this decline was well underway, and our data were suggesting that the US economy could support considerably lower unemployment rates without sparking inflation. James was invited to the Fed’s meeting of academic consultants that year to make the case for lower unemployment…. James was the only one saying that it was OK to keep interest rates low and let the unemployment rate fall further…. But over the next few years, something unusual happened.  The unemployment rate kept coming down, and the inflation kept not happening, and now it was Alan Greenspan himself… who was insisting (against some substantial resistance) that it was OK to keep interest rates low and let the unemployment rate continue falling.

Did James Medoff ultimately influence monetary policy, and was he therefore partly responsible for the boom of the late 1990’s?…

My view is that yes, Jim Medoff (and others) did move the needle in the 1990s by pointing out that a host of other labor market indicators showed more labor-market slack and hence more potential headroom for aggregate demand expansion than did the unemployment rate.