Balderdash In Teaching Of Labor Economics

Borjas (2016) seems to be a standard textbook in labor economics. It has the usual obsolete idea that labor markets would clear, as shown by supply and demand, under ideal conditions. Unemployment is to be explained by deviations from these ideal conditions. Why would a professor in such a backwoods place like Harvard be expected to know about results in capital theory from two-thirds of a century ago?

The last chapter, chapter 12, is on unemployment. It concludes with this summary:

• Although the unemployment rate in the United States drifted upward between 1960 and 1990, the economic expansion of the 1990s reduced the unemployment rates substantially.
• Even a well-functioning competitive economy experiences frictional unemployment because some workers will unavoidably be 'in between' jobs. Structural unemployment arises when there is an imbalance between the supply of workers and the demand for workers.
• The steady-state rate of unemployment depends on the transition probabilities among employment, unemployment, and the nonmarket sector.
• Although most spells of unemployment do not last very long, most weeks of unemployment can be attributed to workers who are in very long spells.
• The asking wage makes the worker indifferent between continuing his search activities and accepting the job offer at hand. An increase in the benefits from search raises the asking wage and lengthens the duration of the unemployment spell; an increase in search costs reduces the asking wage and shortens the duration of the unemployment spell.
• Unemployment insurance lengthens the duration of unemployment spells and increases the probability that workers are laid off temporarily.
• The intertemporal substitution hypothesis argues that the huge shifts in labor supply observed over the business cycle may be the result of workers reallocating their time so as to purchase leisure when it is cheap (that is, during recessions).
• The sectoral shifts hypothesis argues that structural unemployment arises because the skills of workers cannot be easily transferred across sectors. The skills of workers laid off from declining industries have to be retooled before they can find jobs in growing industries.
• Efficiency wages arise when it is difficult to monitor workers' output. The above-market efficiency wage generates involuntary unemployment.
• Implicit contract theory argues that workers prefer employment contracts under which incomes are relatively stable over the business cycle, even if such contracts imply reductions in hours of work during recessions.
• A downward-sloping Phillips curve can exist only in the short run. In the long run, there is no trade-off between inflation and unemployment.
• The combination of high unemployment insurance benefits, employment protection restrictions, and wage rigidity probably accounts for the high levels of unemployment observed in Europe in the 1980s and 1990s.

Borjas does note that the claim about European unemployment seems to be empirically untrue in that European institutions did not change much, and yet unemployment became lower. I suppose Borjas feels obligated to present theories of imperfections and rigidities that keep wages above the supposed market-clearing wage. Note some of these blame workers, who prefer leisure, would otherwise take advantage of information asymmetries by shirking, or obtain unemployment benefits. The science regerettably shows why we need to beat up on workers.

But, of course, this is pure ideology. Borjas teaches the obsolete theory that wages and employment would be successfully modeled in the long run by the intersection of well-behaved supply and demand curves. He probably does not know better.

Reference

George J. Borjas. 2016. Labor Economics. Seventh edition. McGraw Hill.