Keynesian models do not require irrationality. Unemployment can persist (in the model) even if every agent is completely rational. Hence theoretical macroeconomics really is different from theoretical microeconomics.
Could you elaborate and clarify the first insight? The insight can’t be that people can be unemployed even when people are acting rationally, yet that is the way I read what you wrote.
The insight can’t be that people can be unemployed even when people are acting rationally, yet that is the way I read what you wrote.
The insight is that! Microeconomics says that wages demanded and supplied will adjust to reach full employment. Macroeconomics points out that adjusting wages will change consumption and gdp and change demand, and hence company profits, and hence more jobs will be created, destroyed, or repriced.
Full employment is only possible if both these things balance simultaneously. Usual Keynsian approaches posit some friction or irrationality that prevents them balancing (or at least balancing fast enough). But in some cases, it might just be because there is no convergent simultaneous balancing for both processes.
In that case, even if frictionless and rational, unemployment will persist (probably going through wild gyrations) because there’s no way of getting to zero unemployment, and it wouldn’t be stable even if you reached there. If we’re really unlucky, we could get a strange attractor (http://en.wikipedia.org/wiki/Attractor#Strange_attractor).
Without counterfactuals: assume Mr X is willing to do job Y at wage Z, and has as much skills as Mr A. Then if Mr A has job Y at wages above Z, and Mr X is unemployed, we do not have full employment.
Could you elaborate and clarify the first insight? The insight can’t be that people can be unemployed even when people are acting rationally, yet that is the way I read what you wrote.
The insight is that! Microeconomics says that wages demanded and supplied will adjust to reach full employment. Macroeconomics points out that adjusting wages will change consumption and gdp and change demand, and hence company profits, and hence more jobs will be created, destroyed, or repriced.
Full employment is only possible if both these things balance simultaneously. Usual Keynsian approaches posit some friction or irrationality that prevents them balancing (or at least balancing fast enough). But in some cases, it might just be because there is no convergent simultaneous balancing for both processes.
In that case, even if frictionless and rational, unemployment will persist (probably going through wild gyrations) because there’s no way of getting to zero unemployment, and it wouldn’t be stable even if you reached there. If we’re really unlucky, we could get a strange attractor (http://en.wikipedia.org/wiki/Attractor#Strange_attractor).
Next time you meet Mr. Microeconomics, tell him he’s an idiot. Fortunately for me, I don’t know anyone so stupid.
Everyone is employable! Everyone will be employed! What grown up with an intact brain thinks that?
Full employment meaning that everyone that desires to work at the wages that they would be offered to do so, would indeed be working.
“Would be offered” in what counterfactual universe?
Without counterfactuals: assume Mr X is willing to do job Y at wage Z, and has as much skills as Mr A. Then if Mr A has job Y at wages above Z, and Mr X is unemployed, we do not have full employment.
I expect “Mr. Microeconomics” to glance behind him at “Mr. Straw-man Microeconomics”, to whom I would addressing my gratuitous insult.