The extremely smart but never conventional Robert Hall thinks that we are now in a high-unemployment equilibrium: something has greatly degraded the quality of the labor-market job-matching process by making firms unwilling to invest in finding the right hire for the job:
Robert Hall: The Routes into and Out of the Zero Lower Bound:
To the extent that high unemployment is an equilibrium, the stability of inflation in the presence of persistent high unemployment is less of a mystery. The tradition of regarding high unemployment as a disequilibrium that gradually rectifies itself by price-wage adjustment may rest on a misunderstanding of the mechanism of high unemployment.
Could that something be… slack aggregate demand? Hall dismisses that possibility, but I don't see why. After all, slack aggregate demand plays the major role in firms' current relative unwillingness to invest, doesn't it? Why can't it play the major role in firms' current relative unwillingness to hire?
Paul Krugman reads Bob Hall and writes:
Unnatural Models of the Labor Market: The first half of the paper is a discussion of the problem of aggregate demand in terms of the Wicksellian natural interest rate--the rate consistent with full employment--and the impossibility of reaching that rate right now because of the zero lower bound. It’s the same framework I’ve been using all along.
The second half, however, is an attempt to explain why excess supply of labor hasn’t led to deflation… [using] a search model of equilibrium unemployment. The idea is that something--Hall points to higher risk premia, although those have come down a lot since 2009--is makings firms unwilling to invest in new hires, in effect degrading the process that matches workers to jobs and hence raises equilibrium unemployment. At least I think that’s what is going on. Brad DeLong also links to Roger Farmer, presumably because he thinks Farmer, in his attack on the concept of the natural rate of unemployment, is making a fundamentally similar argument…. So, do I buy this? No, or at least not yet….
First, they may be explaining a puzzle that isn’t there. Hall talks as if it were clear that there is no relationship between economic slack and inflation and/or wage changes. But… after the great disinflation of the early 80s, after which public expectations of inflation more or less stabilized…. It looks… about as good as, or even better than, the Phillips curves people were looking at back in the early 60s. Are we sure we have a problem here?
Second, Hall lays a lot of stress on risk premia as sources of shocks, in effect, to aggregate supply — rising risk premia deterring hiring, so that workers have to spend more time searching. But risk premia, at least as measured by spreads on risky corporate bonds, are way down. Where’s my full employment?… Finally, sheer nominal stickiness / money illusion doesn’t seem to play any role in the Hall/Farmer formulation. Yet we now have overwhelming evidence of the presence of such stickiness…