26 May, 2008

Macroeconomics and the Labor Market

Yglesias on the labor market:

Young people looking for summer jobs this year are set to face some of the worst labor market conditions in a while. There's a lot of stickiness in the labor market, so during a downturn firms don't necessarily cut back as much as they would if real life were a frictionless plane (instead, you just like nominal wages stay flat as real wages decline). But many slightly unorthodox corners of the labor market -- the summer jobs segment among them -- don't have these kind of features and it's easy enough to just avoid hiring as many part time temporary workers as you did the year before.
Well, this is not quite right. It's not that the quantity of labor is sticky, it's that the price of labor is sticky. It's very hard to lower nominal wages for a variety of reasons. So when a downturn happens and demand drops for every product in the economy, wages should fall as well. But wages don't fall because of stickiness and so the decreased demand causes firms to lay off many more workers than otherwise would be. This is certainly true of the primary labor market; it's why unemployment rises during a recession. In fact, if wages (and other prices) weren't sticky at all, recessions would automatically correct themselves. But this also explains why the market for summer jobs gets hit even harder.

1 comment:

Elliot said...

Tell me about it. Pretty soon you will need a MA just to work for the summer at a restaurant.