Posted Friday, Jan. 4, 2013, at 3:31 PM
John Quiggin wrote recently that in his opinion the existence of unemployment is "the central issue of macroeconomics."
It's of course unsurprising but still striking that at a flagship economics conference the papers presented tend to shy away from tackling the real fundamentals. But the existence of unemployment is an important puzzle, and it's important to note that it's not just unemployed people. Downtown San Diego, for example, features a lot of unemployed storefronts these days. It's simple enough to say that this has something to do with the real estate boom of some years ago and its subsequent unwinding, but you ought to be able to feel the tug of the classical intuition that this can't really happen. There should be some non-zero price at which the storefronts lease.
And yet there they stand vacant. And the idea that it's microeconomics all the way down and unemployed storefronts must be caused by bad government regulations standing in the way of the market is even less plausible with regards to these storefronts than with regards to people. After all, this is relatively new construction that we're talking about. Burdensome regulation should stop the buildings from being built in the first place, not induce people to build unleasable structures.
You need an actual theory of the macroeconomy to explain it. And most strikingly to explain the co-movements. It would be one thing if people were sometimes unemployed because there were no available storefronts for them to work in, or if storefronts were sometimes vacant because there were no people around to staff them. Situations like that do arise. But what also arises is situations where people and storefronts simultaneously become unemployed and then the economy seems to shift into a new equilibrium where people and physical capital go idle.