Tyler Cowen starts it off by pointing out that the highest unemployment rates are in low-wage, low-education areas where we've been hearing for years that wages have been stagnant or falling. Cowen asks: "Doesn't that mean...um...their wages aren't so sticky downwards? And thus Keynesian economics is not the final story?"
Now, if the market operates as the simple model suggests that it should (and I'm not saying that it does in practice), then the Q1 minus Q2 workers are (1.) not employed, and (2.) will not accept employment at the new wage level. The problem is, the Current Population Survey (where we get our unemployment rates) doesn't tell them what the new wage level is (because the CPS staff doesn't know that!), they don't ask if they've been offered a job at that wage level and what there response was, etc. etc. They ask if they're employed or not, if they're looking for work, and if they are ready, willing, and able to work. That's all. The people sitting between Q1 and Q2 might be holding out for jobs at the old wage, not knowing that there's a new wage that economic theory says they should be refusing! Simple theory acts like the labor market is an auction. It's not - it's a search process. Some people may give up the search if someone told them what the new equilibrium wage was, but since they don't know that they keep searching. Or some people may work at the equilibrium wage if they knew they weren't going to find a better one. In the table above, there is no unemployment, but that doesn't mean people between Q1 and Q2 won't register as unemployed in the Currrent Population Survey! In other words, no unemployment as it is theoretically defined and lot's of unemployment in the CPS numbers can very easily coexist! The only thing the simple model tells us that we can reliably empirically verify is that even if there is no unemployment as economic theory defines unemployment, there will be less people with jobs. There comes a point where it doesn't matter if there is no unemployment according to theory - there is joblessness in actuality that we don't want (nor, I might add, that we are powerless to do something about).