Robert Waldmann gives us what I think of as the textbook version.
With high unemployment and low expected inflation, many wage changes will be zero & stuck at the lower bound. higher constant not accelerating inflation relaxes this lower bound (which is that nominal wage changes can’t be negative). This causes higher employment (and lower real wages).
Pointer from Mark Thoma.
A week ago, I pointed out that the Alan Krueger version of the Phillips Curve tells the opposite story: real wages rise with employment.
Of course, as Waldmann points out, there are multiple labor markets. One can conceive of real wages rising on average but falling in other labor markets, with the latter generating the increase in employment.
I continue to say that in economics, we do not produce falsification. Instead, all of our theories must contend with empirical anomalies. We have to use judgment to decide when the anomalies are numerous enough and serious enough to warrant doing without the theory. I have reached that point with Keynesian macro.
However, I do believe that thinking in terms of multiple labor markets is going to put you ahead of the game relative to those who think in terms of homogeneous workers in the national GDP factory.
Question / suggestion for you- are you familiar with the concepts of “replacement level” and “value over replacement” that grew out of baseball statheads and has spread to thinking about other sports? (basic primers in case you aren’t: http://www.fangraphs.com/library/misc/war/ http://www.baseball-reference.com/about/war_explained.shtml )
In major league baseball, it’s now well established that value-above-replacement (wins above replacement in its usual statistical form) is the standard basis for free agent contracts. This basis is implicit rather than explicit, but it is now widespread for free agent contracts to be evaluated in terms of $ per WAR (really, $ per expected WAR). The point is, there is an actual, real, specific labor market that operates on that principle. There are a lot of caveats involved (the contract structure is collectively bargained and there are extremely high barriers to entry for new firms), but that’s the bottom line.
I would love to see a real labor economist attempt to analyze a more typical labor market from a value-over-replacement framework, and moreso to see what happens in a theoretical model with multiple labor markets operating on that principle with a common pool of potential labor.
This is very interesting to read after reading the Bio/engineer post.
Do you think that you are speaking as an engineer in this particular scenario? I read it that way, but i may be making inferences you did not intend. I’d like to recalibrate and take that lesson forward when reading posts of others.