ome observations perfectly at home in economics textbooks can be so beastly in practice that nobody is willing to mention them.
Ignoring the facts, though, leads to bad policies, and with the U.S. unemployment rate at a stubborn 9.6 percent, we donít need more of those.
So here comes the leap into ice-cold water: The biggest problem with the labor market right now is that wages are too high. As Washington again turns to government spending as a cure for unemployment, some against-the-grain thinking is in order.
Economics teaches that full employment would be reached if wages adjust downward, to a level that better reflects current circumstances. At lower wages, employers would desire more workers. Labor markets generate persistent unemployment only if wages are sticky, failing to fall as demand declines.
A number of reasons help explain why wages donít and wonít drop, beginning with federal and state minimum-wage laws.
Second, because union contracts generally cover multiple years, adjusting wages in response to economic circumstances would require a return to the bargaining table, which rarely happens.
Third, the natural reluctance of workers to accept lower pay is amplified by how their wage helps define their identity. A $60,000-a-year office worker might have an extra-hard time coming to terms with becoming a $40,000-a-year worker.
Finally, workers and jobs might be mismatched, either geographically or occupationally. Workers might be needed in places they donít want to move to, or canít afford to live.