Wednesday, September 1, 2010

Momentum in Employment

Kling discusses what it means that there is momentum in payroll statistics (if they were higher than usual last period, they're likely higher now as well). In doing so, he provides the following depiction and example:
The story I would tell is that there are clusters of firms that interact with one another. In an expanding cluster, growth of one firm leads to growth in others. In the 1920's, as more people were employed in building automobiles, there were bound to be more people employed at gas stations. In a contracting cluster, declines in some firms lead to declines in others. As you get fewer horse-and-buggy drivers, you get fewer horse trainers, fewer horseshoe makers, and fewer manure sweepers.
I would expect to see momentum in these sorts of clusters. Not every firm gets the expansionary or contractionary signal at once. The signals take a while to propagate.
For example, in a classic inventory cycle, cars might pile up on dealer lots. The car manufacturers have layoffs and cut production, and this leads to an inventory pile-up at the plants that manufacture spark plugs, so they have layoffs and cut production, and this leads to an inventory pile-up at the companies that supply the materials to make spark plugs, and so on.
The thing that confuses me (and commenter Daniel Kuehn) is that this seems to support New Keynesian emphasis on price and wage stickiness rather than refute it as Kling claims. Kuehn's closing comment is also well worth repeating:
4. I do like how at the end you acknowledge the variety of theories that this jives with. One of my biggest beefs with macroeconomics is that it acts like all these "thoeries" are at war with each other. In reality, they all describe various processes that are operating to a certain extent. The question isn't "which is right?". They all capture an important element of the economy. The question is "what mix of these processes is influencing the economy right now?"

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