"The formula implies that the labor market is efficient when there are as many unemployed workers as vacant jobs (u = v); "
Seems totally arbitrary. "Efficiency" in the labor market would mean maximizing the value of labor shifting from lower wage to higher wage jobs (including from out of the LF to in the LF) at as low (search and time) cost as possible. I can imagine that u and v might be arguments in the maximization criterion, but doubt very much that the criterion IS u = v.
The notion of efficiency that we use is productive efficiency: we are maximizing the amount of production given the amount of labor available—which requires minimizing the amount to labor devoted to recruiting and jobseeking.
It is true that the result that efficiency occurs at u = v requires some assumptions. But these assumptions are accurate in the United States. We have a companion paper in which we derive a more general efficiency criterion when the assumptions do not hold: https://pascalmichaillat.org/9/. The more general formula involves not only u and v but also the social cost of unemployment, labor cost of recruiting, and elasticity of the Beveridge curve.
"One of the mandates of monetary policy is to maintain the economy at full employment—so to maintain unemployment at its efficient rate."
I think a better way of thinking about the Fed's Congressional mandate is that the Fed should maintain a res income-maximizing rate of inflation. Labor market efficiency would conceptually enter by affecting what inflation rate maximizes real income.
BTW, I agree with you that the Fed should be (since December) feeling out a lower EFFR.
The Federal Reserve Reform Act of 1977 says that it is the responsibility of the Federal Reserve “to promote effectively the goals of maximum employment, stable prices”. See https://fraser.stlouisfed.org/title/federal-reserve-reform-act-1977-1040. So clearly the Fed has an employment mandate, which we interpret as keeping unemployment at its efficient level.
I agree as well and it has been secularly ignored. But in the end only one variable can be maximized and I think my version, real income maximizing inflation rate is the better optimand. It certainly implies a high "weight" on employment of labor even if unemployment is not the ONLY thing that can push income away from its maximum.
BTW, for Substack purposes an example of a situation in which too hot employment is inefficient would help ground the u=v result. I think you will agree that "too hot" employment except as an acompaniament of over-target inflation seem counterintuitive.
Interesting looking course. I'd encourage you to think about tweaking it so not (implicitly) to depend on a one good, one input ("labor") model. It a multi-good, multi-input model, slack, u and v all become vectors not scalar variables.
Thank you for the recommendation. In the future, or in a more advanced course, it would be good to be able to generalize the material to have many goods and many sectors. But students are not used to thinking about slack or using models with slack. So the first step is to teach that material, even if it might seem quite basic.
It IS more complicated, but ultimately I think it makes a difference in policy when the macroeconomic shock is sectoral, can create the need for adjustment in relative prices besides just labor goods. I'd love to see someone whose PhD and modeling skills are not vintage '71 :) examine that.
"The formula implies that the labor market is efficient when there are as many unemployed workers as vacant jobs (u = v); "
Seems totally arbitrary. "Efficiency" in the labor market would mean maximizing the value of labor shifting from lower wage to higher wage jobs (including from out of the LF to in the LF) at as low (search and time) cost as possible. I can imagine that u and v might be arguments in the maximization criterion, but doubt very much that the criterion IS u = v.
This result is derived in this paper: https://pascalmichaillat.org/13/
The notion of efficiency that we use is productive efficiency: we are maximizing the amount of production given the amount of labor available—which requires minimizing the amount to labor devoted to recruiting and jobseeking.
It is true that the result that efficiency occurs at u = v requires some assumptions. But these assumptions are accurate in the United States. We have a companion paper in which we derive a more general efficiency criterion when the assumptions do not hold: https://pascalmichaillat.org/9/. The more general formula involves not only u and v but also the social cost of unemployment, labor cost of recruiting, and elasticity of the Beveridge curve.
Put it down to seems too neat plus decades of central banking that paid little attention at all to unemployment rather than real disagreement.:)
"One of the mandates of monetary policy is to maintain the economy at full employment—so to maintain unemployment at its efficient rate."
I think a better way of thinking about the Fed's Congressional mandate is that the Fed should maintain a res income-maximizing rate of inflation. Labor market efficiency would conceptually enter by affecting what inflation rate maximizes real income.
BTW, I agree with you that the Fed should be (since December) feeling out a lower EFFR.
The Federal Reserve Reform Act of 1977 says that it is the responsibility of the Federal Reserve “to promote effectively the goals of maximum employment, stable prices”. See https://fraser.stlouisfed.org/title/federal-reserve-reform-act-1977-1040. So clearly the Fed has an employment mandate, which we interpret as keeping unemployment at its efficient level.
I agree as well and it has been secularly ignored. But in the end only one variable can be maximized and I think my version, real income maximizing inflation rate is the better optimand. It certainly implies a high "weight" on employment of labor even if unemployment is not the ONLY thing that can push income away from its maximum.
BTW, for Substack purposes an example of a situation in which too hot employment is inefficient would help ground the u=v result. I think you will agree that "too hot" employment except as an acompaniament of over-target inflation seem counterintuitive.
Interesting looking course. I'd encourage you to think about tweaking it so not (implicitly) to depend on a one good, one input ("labor") model. It a multi-good, multi-input model, slack, u and v all become vectors not scalar variables.
Thank you for the recommendation. In the future, or in a more advanced course, it would be good to be able to generalize the material to have many goods and many sectors. But students are not used to thinking about slack or using models with slack. So the first step is to teach that material, even if it might seem quite basic.
It IS more complicated, but ultimately I think it makes a difference in policy when the macroeconomic shock is sectoral, can create the need for adjustment in relative prices besides just labor goods. I'd love to see someone whose PhD and modeling skills are not vintage '71 :) examine that.
Obviously I'd be delighted if you could pick some holes in the alternative view of policy that I am trying to develop, most recently in the regretfully named "Framework for Monetary policy 2.https://thomaslhutcheson.substack.com/p/framework-for-monetary-policy-2?r=8ylpe&utm_campaign=post&utm_medium=web
I will have a look. Thank you for sharing!