First of all, the division between micro- and macroeconomic models is essentially arbitrary. It’s not as if the economy itself cares about whether a phenomenon is micro- or macroeconomic. So even though I invoked aggregate demand, this model still seems microeconomic to me. There’s no money—the wages could be in coconuts for all the difference it would make. While what’s happening is economy-wide, that’s not relevant. When we talk about a simple kind of perfectly competitive economy, the slightest change in the cost of producing whatever the output is instantly has economy-wide effects, and yet that is certainly a microeconomic model. There’s no national accounting figures or any individual step in the argument that would make a 19th-century economist look at you funny.
If you don’t buy that then just substitute “the demand of a bunch of firms all fall at the same time” rather than “aggregate demand falls.” Now it’s microeconomics and totally unchanged.
Anyway, there are simpler ways of showing that rational microeconomics can produce high persistent unemployment. You can just ask why you expect the equilibrium level of price and quantity demanded of labor will be just happen to leave us with ~%5 unemployment. Then you might introduce a factor in addition to price and quantity that interferes with the operation of that simpler model. Information is an obvious candidate. Then you might read “The Market for Lemons” by George Akerloff and notice that there’s no reason that kind of model can’t apply to the labor market.
Basically, Joe Stiglitz would be surprised to learn that rational microeconomics doesn’t have models that can explain high persistent unemployment.
There could also be structural things going on in the economy. It’s easy to understand a model of the economy where what workers are capable of doing isn’t what anyone wants them to do, so they can’t get jobs. Their value to the economy might actually be zero, or information and signaling problems might make it impossible for workers to convince employers to hire them at a wage low enough to be worth it.
How can an argument which invokes ‘Aggregate demand’ be a micro-economic model?
First of all, the division between micro- and macroeconomic models is essentially arbitrary. It’s not as if the economy itself cares about whether a phenomenon is micro- or macroeconomic. So even though I invoked aggregate demand, this model still seems microeconomic to me. There’s no money—the wages could be in coconuts for all the difference it would make. While what’s happening is economy-wide, that’s not relevant. When we talk about a simple kind of perfectly competitive economy, the slightest change in the cost of producing whatever the output is instantly has economy-wide effects, and yet that is certainly a microeconomic model. There’s no national accounting figures or any individual step in the argument that would make a 19th-century economist look at you funny.
If you don’t buy that then just substitute “the demand of a bunch of firms all fall at the same time” rather than “aggregate demand falls.” Now it’s microeconomics and totally unchanged.
Anyway, there are simpler ways of showing that rational microeconomics can produce high persistent unemployment. You can just ask why you expect the equilibrium level of price and quantity demanded of labor will be just happen to leave us with ~%5 unemployment. Then you might introduce a factor in addition to price and quantity that interferes with the operation of that simpler model. Information is an obvious candidate. Then you might read “The Market for Lemons” by George Akerloff and notice that there’s no reason that kind of model can’t apply to the labor market.
Basically, Joe Stiglitz would be surprised to learn that rational microeconomics doesn’t have models that can explain high persistent unemployment.
There could also be structural things going on in the economy. It’s easy to understand a model of the economy where what workers are capable of doing isn’t what anyone wants them to do, so they can’t get jobs. Their value to the economy might actually be zero, or information and signaling problems might make it impossible for workers to convince employers to hire them at a wage low enough to be worth it.