[yummyfajitas]

First of all, your selective quote deeply misrepresents Keynesian economics. I suggest you go educate yourself in more detail on the theory.

Or do you think the 2009-2010 spike to 14% unemployment rate for Michigan was all due to people deciding to stay unemployed while holding out for higher paying work?

Nominal wages have increased during the recession. If employees were willing to take a pay cut to become employed, that shouldn't have happened.

http://research.stlouisfed.org/fred2/series/ECIWAG

http://research.stlouisfed.org/fred2/series/ECICOM

I'm not actually a Keynesian myself - I tend to subscribe to recalculation theories for this particular recession, though I definitely believe sticky nominal wages definitely play a role. But I appeal to Keynesian theories in this discussion since many union supporters tend to profess support for Keynesian economics (while oddly supporting institutions which create wage stickiness).

An employer in that situation can abuse their monopoly power, and take advantage that the switching costs for the employee to get another job are so high.

Your theory yields no reason an employee can't do the same thing. Replacing a worker also involves transaction costs, and rather high ones (look at the price of a recruiter).

Once a person is hired, there are switching costs on both sides. You have yet to demonstrate any structural difference between them.

[dalke]

My understanding is altogether biased towards the personal and emotional. I am influenced by the ideas behind "Gross National Happiness" and similar harder-to-quantify measures. I've read first person accounts of people during the Great Depression. (Eg, Studs Turkel's "Hard Times"). There were no jobs for some people. Any analysis which says "Unemployment is .. a mismatch between employee's desired wages and market wages" must be wrong, or at least simplified, because it assumes either that there is a market for jobs, or that the market wages are enough for basic survival.

For "basic survival" I mean "under our cultural expectations." I don't want the US to be 80% Hoovervilles, even if that does get us to near full employment. That's the extreme conclusion, but is it not fully justified by that simplified analysis?

I am quite of the view that we should first decide what we want to get from our economy, and adjust the market rules to improve the changes of reaching that goal and to minimize the changes of catastrophe.

My observation is that people want security, expressed monetarily as reduced personal or family risk. Sticky wages reduce risk. Health insurance reduces risk. Protection from capricious management decisions reduces risk. Higher wages reduce risk by being able to build up a larger savings, though in practice few do that so this isn't all that secure. I believe the risk issue here is analogous to the Gamblers Ruin, in that people with low income and low savings are more at risk to statistical fluctuations which can expose them to greatly reduced living conditions.

Then, as a moral question, how do we use Keynesian economics (or any other economics model) to reduce the risk? We can have legal systems to review contract violations, we can have wage freezes (both up and down), we can have increased worker protections, etc.

Okay, so the Keynesian model says that this increases unemployment. So what? One response is that we shouldn't have these restraints on the market. Another response is that we have increased government support, to minimize the sharp edges of being unemployed. A third is that we look to the churches, or other NGOs, to provide the social safety net, and a fourth is to look toward unions or unemployment insurance. A fifth says to look towards extended families and friends.

The Keynesian model says nothing about the morality of the choice. It only suggests the likely consequences.

"Your theory yields no reason an employee can't do the same thing."

I didn't say they couldn't. I was elaborating on why an employee couldn't easily quit and move to another job. Stories abound about people using their employment position to get special perks. I got basement parking for one job, with the management cars, rather than parking with the rest of the employees in the lot 3 blocks away because I complained and because I wasn't trivially replaceable. Then again, I complained because management decided to move the company to a place further from where I lived, and I had no part in that decision. So it's a complicated issue.

But my theory says that I have less power over the company than they have over me, because I am closer to living out of my car, should my personal decision to quit prove disastrous, than the company is in going bankrupt because they decided to fire me.

[yummyfajitas]

Any analysis which says "Unemployment is .. a mismatch between employee's desired wages and market wages" must be wrong, or at least simplified, because it assumes either that there is a market for jobs, or that the market wages are enough for basic survival.

Agreed. As I said, I'm not a Keynesian. I'm glad you agree that monetary and fiscal stimulus will often be ineffective.

If employees want to reduce risk, why would they want sticky wages? Sticky wages increase risk of having your wage cut to $0.

I'm also curious - you acknowledge that given higher wages, employees choose to spend the money on consumer goods rather than mitigating their risk. Why would they do this if risk reduction is their primary goal? It seems as if you are incorrect about what people actually want.

But my theory says that I have less power over the company than they have over me, because I am closer to living out of my car, should my personal decision to quit prove disastrous, than the company is in going bankrupt because they decided to fire me.

This is true, but irrelevant. To determine "market power" in any model I've seen, the correct comparison is dollar amounts on both sides.

Also, your point about transaction costs does show that there is wiggle room (for both employees and employers) on wages/benefits. That's a far cry from monopsony or anything even remotely close. Perhaps you can clarify your position - how large (in $) do you think transaction costs of changing jobs actually is?

[dalke]

> I'm glad you agree that monetary and fiscal stimulus will often be ineffective.

I never said that. Obviously a stimulus of $100 will be ineffective, but you can draw no conclusion about "often" (or "rarely") from what I wrote.

> Sticky wages increase risk of having your wage cut to $0.

Based on the research I did yesterday, and described in http://news.ycombinator.com/item?id=4963624 , "In a baseline New Keynesian model, labor market frictions render real wage rigidity potentially irrelevant for the dynamics of inflation." and "The mechanism emphasized by Hall (2005) and Shimer (2005) that helps the search and matching model fit the facts, appears to have a neutralizing effect in sticky price models."

The search and matching model is the one I hand-waved here. Inflation isn't the same as unemployment, so this quote isn't directly transferable. But it seems that wage stickiness or lack thereof doesn't have as much effect on the economy. Instead, it increases the volatility of hiring and job creation costs.

I referenced the paper of Krausea and Lubikb, http://www.tau.ac.il/~yashiv/kl_jme2007.pdf . It includes a term for what I've been saying is a cultural morality to have sticky wages. "We employ a version of Hall’s (2005) notion of a wage norm to introduce real wage rigidity. A wage norm may arise from social convention that constrains wage adjustment for existing and newly hired workers."

> employees choose to spend the money on consumer goods rather than mitigating their risk

Because people don't make fully rational economic decisions. You might as well ask why so many people smoke, even with the knowledge of how it affects their health, or ask why I've stopped exercising despite knowing its positive benefits. Why did the banks make so many subprime mortgages? Why did so many people agree to them even with high chances of not being able to pay?

If you want, I think you can model things like "I really wanted a new computer" as a random external event akin to an unexpected medical problem or broken plumbing, and bring the analysis back into the rational hypothesis.

> To determine "market power" in any model I've seen, ...

Really? The Krausea and Lubikb paper says "The parameters describing the household are standard. We choose a coefficient of relative risk aversion σ = 2." A constant relative risk aversion implies a decreasing absolute risk aversion, so the more money one has the more willing one is to take risks.

This makes it sound like many economic models - or at least those based on the search and matching model - include risk taking as part of the analysis. Can you square my observation with your statement? Perhaps it's because their model isn't used to determine market power per se?

> your point about transaction costs does show that there is wiggle room

I'm afraid I've lost the point of this thread. I say that employment can be viewed as a monopoly, and more importantly, that an employer can abuse those monopoly powers. And yes, an employee, and especially a union of employees, can be viewed as a monopoly and also abuse its monopoly powers.

You do not believe this is the correct analysis, and you believe that the various economic models back you up.

Do these quotes help show that economist have considered my hand-waving models in much more depth?

- There are search-and-matching frictions in every sector and firms post vacancies in order to attract workers. The cost of posting vacancies and the matching process generate hiring costs. Moreover, search-and-matching frictions generate bilateral monopoly power between a worker and his firm, as a result of which they engage in wage bargaining. -- http://restud.oxfordjournals.org/content/77/3/1100.full

- A specific class of models argues that wage rigidity might arise in the context of risk- averse workers and risk-neutral firms. In a seminal contribution, Thomas and Worrall (1988) develop a model with self-enforcing wage contracts whereby risk-neutral firms provide insurance to risk-averse workers. In their model agents cannot commit, but contacts are nevertheless self-enforcing due to an extreme reputation assumption, ac- cording to which an agent who reneges on a contract is forced to trade on the spot market forever after. Efficient contracts are contained in a certain interval and when- ever the wage leaves this interval, the agents update the wage by the smallest possible change that puts the wage back into the interval (i.e., on the bounds of the interval). Rudanko (2009) embeds this kind of model into an equilibrium model of directed search with aggregate shocks. In her model a constant wage emerges if both agents can fully commit, in which case the risk-neutral firms provide insurance to risk averse workers through optimal long-term wage contracting. In contrast to Hall (2005), her micro- founded model of perfect wage rigidity does not lead to a substantial increase in the cyclical volatility of unemployment. -- http://www.econ.upf.edu/eng/graduates/gpem/jm/pdf/paper/Pape...

The description model of Rudanko sounds like your statement - that wage rigidity leads to increased unemployment during recessions - isn't necessarily true.

Quoting from her site at https://sites.google.com/site/leenarudanko/ : In this paper I develop a tractable extension of a Mortensen-Pissarides style matching model that allows for risk averse workers with limited ability to smooth consumption. I show that this leads to a form of equilibrium wage rigidity. This rigidity arises because the inability of workers to smooth their consumption across unemployment and employment spells changes how unemployed workers value wage offers, and hence also the offers that employers find profitable to make.

Aren't these quotes in opposition to what you've been describing, and more in line with the ideas I've described here?

That's not saying that the model is right, or that I'm right, only that there are economic models which agree with my views, so my views are not outright rejected by economic theory, while you think they are.

[yummyfajitas]

I only saw this comment today, after you referred to it in another one. Yesterday was Christmas, after all.

I'm afraid I've lost the point of this thread. I say that employment can be viewed as a monopoly, and more importantly, that an employer can abuse those monopoly powers.

The standard model says this is correct within the transaction cost interval. I agree with this model, which is why I asked you: "how large (in $) do you think transaction costs of changing jobs actually is?"

I.e., if the transaction costs are $3k, monopsony/monopoly models might explain why someone's wage is $51k vs $53k, but they don't explain why it is $50k vs $25k.

I disagreed that your examples of Hostess/etc were related to this model, since the price changes there were far larger than any reasonable transaction cost I could think of.

Near as I can tell, Rudanko isn't doing anything different from this.

Also, you were correct that I should have said risk-adjusted dollar costs should be used to determine market power. Note, however, that risk-adjusted dollars are not the same thing as P(bankruptcy), which you seem to be using.

To conclude, I think your parameter choices are wildly off (e.g., to make your ideas work, I think you need transaction costs proportional to wages). I strongly recommend actually writing down your models (with numbers and math) to clarify your views.

[dalke]

"how large (in $) do you think transaction costs of changing jobs actually is?"

I am unable to calculate that, nor provide a good estimate. People do strange things for love. Does it always make economic sense? No.

What is the transaction cost of forcing your kids to leave school and boy/girlfriends if the job change requires moving? What is the transaction cost of asking your husband to quit his job and leave the church where he's been a deacon for the last 10 years? I once talked with someone who loves the sea, and couldn't think of leaving away from it. What's the transaction cost, were she your wife, to move her to a better paying job in Oklahoma? Does that include the costs of divorce, should she find that she loves the sea more than you?

What is the economic cost of being considered a "failure" and a "quitter", or "not a team player" by your neighbors and ex-coworkers? Of being disowned by your family for switching from Jehovah's Witness to Southern Baptist? Of being the sole outspoken atheist in a small Bible Belt town?

These can be estimated, certainly, but those estimates feel like post hoc parameter fitting. "If person X won't switch to another job which pays $3k more, then the price on staying is worth at least $3k." With enough parameters you can fit anything.

Can you tell how the various economic models include these factors into the cost model? How do they estimate these various costs I've outlined?

Going into semi-obscure New Mexico history, in the 1950s the 82-year-old John Prather was offered $200,000 for his mule ranch in southern NM, so that White Sands Missile Range could be expanded. The price was well above the going rate for the land, but he was the last hold-out. He was one of the last of the US pioneers to the American West, and he wasn't going to leave. Period. He would rather die in a gunfight than move.

Americans liked the romantic idea of one of the last pioneers still living the old ways, which put pressure on the Army and the police to not force the issue. They gave up, and Prather stayed there until he died.

What would you say is the transaction cost for him to move? Obviously staying there was worth more than $200,000 to him. Was it $5,000,000? Was there any amount of sum which would have gotten him to move? If no such number exists, then can you even use an economic model for this event?

BTW, in our other thread I asked this of you: do monopolies (or cartels, for that matter) ever abuse their monopoly (or oligopoly) powers? If so, do you use moral guidelines to determine what constitutes abuse?