Sunday, October 2, 2011

Choking down Mankiw (and every other intro textbook)

One of my pet peeves is the idea that a surplus in the labor market and unemployment are the same thing.

It's just not. The definition of "unemployment" varies across societies, but it is usually some variant of "not working but in the market for work". That's not a labor surplus. If a labor surplus exists, it is a subset of the unemployed, but it's not the definition of unemployment. There can be unemployment in a labor market that's in equilibrium.

Anyway - the point of my title is that the macro class I'm TAing is using Mankiw, I'm planning a lesson for my review session right now on the chapter on unemployment, and Mankiw defines unemployment as a labor surplus in that chapter. I have to choke it down because I can't contradict the textbook, have them fail a test, and then have them tell the professor that I taught them something different.

Oh well. Still - this is a really bad habit of textbooks.


  1. Can you flesh out the difference as you see you it bit more.

    "There can be unemployment in a labor market that's in equilibrium."

    My understanding is that they are never at equilibrium though.

    Anyway, I always find this sort of thing to be true with any subject; the more you learn the more complex things get. Ex. we tend to think of the France of Louis XIV as being absolutist, and even tyrannical, but it fell far of the mark in its ability to be absolutist* and much of that way of thinking is based on Anglo-Dutch propaganda. After all, both the Dutch and the English had their own minority populations of religious adherents that they liked to freak on and persecute (namely Catholics).

    Enjoy the math.

    *Indeed, the very institutions it created to do so often undermined this by investing power in people who did not want to give up their perceived prerogatives, and since the crowd depended on them for taxes ... in other words, the crown became dependent on its creatures.

  2. Gary,

    I think Daniel's point is that you can be voluntarily unemployed, but this doesn't count as a labor surplus, because at the time you are not selling your labor. A labor surplus is where you are unemployed, but selling your labor (and nobody is buying).

    If we are to theoretically accept a market in equilibrium, there can be an equilibrium between demand for and supply of labor but still be those who are technically jobless, but not looking to sell their labor.

    That's why he says that a labor surplus is a subset of unemployment (natural + involuntary).

  3. To be "unemployed" is to be in the labor market and not employed.

    In a supply and demand model this means every point on the supply curve (i.e. - labor on the market) that is to the right of the "quantity employed" point.

    Now, of course not all of this translates over to the simply supply and demand model perfectly. For a million dollars an hour, a lot of people currently out of the labor force would enter the labor force. These people are usually considered on the upper right hand end of the supply curve. In other words - there is no sense of extensive labor force participation decision making in the supply and demand model. It's just not made for understanding choices about participating in the labor market vs. not participating in the labor market.

    I recognize that. But certainly if we think about someone to the immediate upper-right of labor market equilibrium, on the supply curve, it makes sense to think about them as "in the labor market". Such a person would be unemployed by any definition of "unemployed" that anybody uses.

    But if you define unemployment in an intro text as labor surplus, you completely miss them.

  4. Another way of putting it is this. Right now we have around 9% unemployment.

    Do we have a labor market that has cleared or not right now? How do you know?

    I see no reason to believe that the wage rate is above equilibrium right now. I don't know any obvious reasons why it would be so I have a hard time believing that it is.

    All I see that I don't have a hard time believing is that the employment level is a lot lower than it typically is and a lot of people want to sell their labor that can't. That suggests to me that the equilibrium point has moved considerably to the left - but I have no convincing evidence to think that it has anything to do with a wage rate above the equilibrium wage rate.

    I'm guessing - if we had the supply and demand model of the current labor market in front of us - it would essentially be in equilibrium and labor demand would have shifted dramatically to the left. I don't have any evidence to assume anything other than that.

  5. DK wrote:

    n a supply and demand model this means every point on the supply curve (i.e. - labor on the market) that is to the right of the "quantity employed" point.

    Whoa! At first I was giving you the benefit of the doubt, but now I think you are just wrong. That's not what it means to be "in the labor market." If you are a unit of labor that isn't being supplied, then BY DEFINITION that means you aren't on the market.

    Maybe I'm misunderstanding you. Let me ask this: Are you saying we can have zero surplus labor--i.e. wage rate where supply curve crosses demand curve--but still a bunch of unemployed people? If that's what you're saying, then I think you are just using an odd definition and we can let all the textbook authors off the hook.

    But maybe I'm misunderstanding you. Can you draw a graph? (Seriously.)

  6. re: "Let me ask this: Are you saying we can have zero surplus labor--i.e. wage rate where supply curve crosses demand curve--but still a bunch of unemployed people?"

    That is exactly what I'm saying. That's how we define the unemployed. That's what the data is collected on.

    Now, as I said in a standard S&D model the story isn't entirely clear because some of the points to the right of the equilibrium may not be in the market at any given time. What you really need is something like a search model. But even aside from that point - a market can be in equilibrium (supply meets demand) and there still be a lot of unemployed persons.

    Of course that's true. Just think about how "unemployment" is defined.

  7. I write more about it here:

  8. Right Daniel, I didn't understand your post back then either. :)

    We agree on what "unemployment" means, but I think we're disagreeing on what it means to be in the labor market or what "quantity supplied" means.

    Let's say the supply curve is S=P to keep it simple. At a price of $100, 100 units are supplied. But if the price were $150, then 150 units would be supplied.

    I am saying that in a conventional diagram, with the price at $100, that the 50 units that are NOT in the quantity supplied, are not on the market. It would be incorrect to refer to them as unemployed or idle units, just as it is incorrect to say that my retired parents are currently unemployed.

    Now if wage rates went way up, and my dad could earn $10,000 for a week of consulting, then he probably would come back into the labor market. But right now, he chooses to golf. So he's not in the labor market, meaning he's not part of the unemployed.

  9. Hey Daniel, for some reason I can't find your email address. I wanted to email you about this class. Is it an intro or intermediate class?

  10. This comment has been removed by the author.

  11. Hi Daniel,

    I hope you will email me where precisely you think I commit this error. I agree with you that surplus labor is only one cause of unemployment, and I believe students will take that message away from my text. Indeed, my chapter on unemployment (Chapter 28 of the full book) starts by talking about job search before it gets to surplus labor. It also refers to cyclical unemployment, to be covered in a future chapter.


  12. Wow - welcome to the blog!

    It's a pedagogy thing - I wouldn't go as far even as to call it an "error".

    I'm using your instructor's edition as a TA. I'm thinking of Fig. 4 on page 207 of that.

    I really would have couched this better if I thought you'd ever look at this blog!! And it's a common explanation of it which I think works fine for intro classes.

    My concern with this orientation towards unemployment is that it gets people thinking that all they need to do to explain unemployment is explain high wages. I'll try to email you more detailed thoughts.

  13. Holy smokes... A WILD MANKIW APPEARS! :D
    (Pokemon reference, for those are econ geeks, but not game geeks.)

  14. I have no idea what Daniel is talking about.

    But a good teacher should tell his or her student that this chapter, like so may other chapters, is balderdash.

    On utility-maximizing grounds, the supply curve for labor cannot be expected to be upward sloping for its entire length.

    Economists showed decades ago that one is not entitled to draw a downward-sloping demand curve for labor. I refer to, for example, Garegnani's 1970 Review of Economic Studies article. (I'm actually published on this topic.) And then there's Keynes' point about effective demand.

    I realize mainstream economists are trained to be unable to describe the full range of views of economists. Mankiw is a propagandist, and he really should not be taken seriously.


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