Wealth and Employment

A blog about business and economics.
July 17 2012 9:17 AM

Wealth and Employment

Tyler Cowen, not for the first time, intones "we are not as wealthy as we thought we were" as an explanation for joblessness in the United States.

It is both true that we are not as wealthy as we thought we were and that there's a lot of joblessness in the United States, but I struggle to grasp a model in which the former causes the latter. Imagine a reverse situation. A town full of working-class people sees its unemployment rate suddenly shoot up from 11 percent to 27 percent. Concurrently, it turns out that the town's residents were much wealthier than they thought they were—each one of them actually had a check for $1 million sitting in their pockets. We might say it's pretty clear what's happened here. These folks are wealthier than they thought they were so they raised their reserve wage. But then suppose it turns out the checks were fraudulent and they all bounce. The reserve wage should fall and joblessness should decline. That it seems to me is the supply-side story about the relationship between wealth and employment.

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It's certainly not systematically true that richer countries have low unemployment rates—if that were right the United States would have less unemployment than Germany, and Chinese unemployment would be through the roof.

One possible alternative story goes like this. People are targeting a certain level of wealth accumulation. When a negative shock to their stock of wealth occurs, their savings intentions increase to rebuild the stock. This causes the Wicksellian natural rate of interest to fall, and thanks to low precrash inflation it's fallen below zero producing a depression. But that's just a rhetorical twist on the Krugman/Summers demand story not an alternative to it.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.