Casey Mulligan Unloads the Kitchen Sink

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Wednesday, 17 August 2011 05:20

Casey Mulligan has been putting on a one-economist show in his NYT blog, arguing week and after week that the downturn is really a supply story and has little or nothing to do with the plunge in demand created by the collapse of the housing bubble. This week he sums up his evidence.

Most of it has to do with the fact that even in the downturn employers will hire better qualified workers over less qualified workers and lower paid workers over higher paid workers. He infers from this fact that if all workers were better qualified and/or lower paid that we would not have an unemployment problem.

This is more than a bit of a bizarre argument since it is producing evidence that does not in any way contradict anything argued by Keynes or his followers. Does anyone believe that employers stop caring about workers' qualifications in a downturn? Or, alternatively, that they stop caring about wages?

Keynes' point is that changes that could increase any individual's chance of employment (e.g. improved education or accepting lower wages) would not necessarily lead to lower unemployment in general. In other words, if all workers could instantly get a college education then the main result would be that we would have more unemployed college grads.

This story would seem to be supported by two basic facts about the downturn. First, huge numbers of people who had the skills and desire to work before the collapse of the housing bubble, now do not have jobs. It seems difficult to explain the sudden loss of millions of jobs as a supply side phenomenon. The other basic fact is that unemployment has risen across the board in every major skills grouping and geographical location. This is very hard to explain as a supply side story.

I can't imagine that any Keynesian would have thought that skills don't matter for an individual's employability nor that the wages they expect affects their likelihood of finding a job. So the evidence that Mulligan finds along these lines hardly seems much of refutation of Keynes.