Real Business Cycles...sigh

Casey B. Mulligan makes the case that unemployment is voluntary.

The recent decrease in employment may be due less to employers’ unwillingness to hire more workers and more to workers’ unwillingness to work. ... Suppose, just for the moment, that people were less willing to work, with no change in the demand for their services. This means that employees would have to be more productive because they have to get by with fewer workers.

So, Casey B. Mulligan expounds here that workers are not having the right financial incentives to work at their jobs. Right, because the loss of 500,000+ jobs in November was because people were just, you know, not making enough! Without digging up data from BLS (because I don't feel like it) common sense should prevail here. The unemployment rate was 6.7% last time I checked and people have lost equity in their homes, value in their investments and 401(k)s -- they aren't quitting their jobs to watch Dynasty reruns until something better comes along because the chances of something better coming along are slim, especially in the arena where many of the layoffs and job losses have occurred, in the financial sector.

Anyway, Mulligan seems to imply here that because hours worked are down, this is a choice made by the employee. However, companies often cut back hours, benefits, etc., before they resort to layoffs. I'm glancing through the data on Economagic and it looks like hours worked have dropped off before the unemployment rate did. The data I'm looking at for hours worked isn't great, though, it's not seasonally adjusted and it's divvied up into Male and Female categories but no overall category.

Mulligan sums up his argument:

... we learn a lot about today’s recession from the conclusion that labor supply – not labor demand – should be blamed. First of all, it suggests that a fundamental solution to the recession would encourage labor supply (perhaps cutting personal income tax rates, so people can keep more of their wages), rather than tinker with demand.

Honestly, what he's doing here is making arguments based on unsubstantiated claims, models based on cute little graphs from Econ 101, and everyone's favorite theory with no empirical evidence--the Laffer Curve.

So, back to Real Business Cycles. There's an assumption in Real Business Cycle theory that all unemployment is voluntary. In theory, you can make this work: There's plenty of people who choose unemployment if they can't find a job in their field, because they'd rather wait it out than take a job at, say, Burger King. In theory, you can always start your own business in a capitalist society. But the problems with this assumption is that there are sometimes simply more people than available jobs. Or starting your own business is overly burdensome. There exist imperfections in credit markets (you don't say...). So, I shall blame labor demand.

The rest of the theory is basically "make hay while the sun shines." In an RBC world the economy is always doing the best it can, so any government intervention will be neutral at best, harmful at worst. And I don't buy it. The theory and the model fit business cycle facts, but I feel like the model was developed around the data, created to emphasize this nice conservative point of view.

At any rate, I can't hold a candle compared to what one of my favorite economists, Larry Summers, had to say in his epic smackdown of Real Business Cycle Theory. Check it out here: http://www.minneapolisfed.org/research/QR/QR1043.pdf