The full paper was published in Real-World Economic Review in 2018:  http://www.paecon.net/PAEReview/issue83/Joffe83.pdf

This paper is an example of the presentation of a narrative that seeks to describe the major causal processes involved in the relevant phenomena. It does not seek to construct a model on that basis, which is a separate task. Some of the concepts involved, especially that the firm takes decisions in the light of its economic environment, are so obvious as to seem banal – which relates to the wider issue that much evidence-based economics turns out to be already known, but (a) not codified, and (b) ignored in favour of some other account. The most important section of the paper in relation to the explanation of persistent non-frictional unemployment is reproduced here, after the Abstract.

The key point, which is not emphasised enough in the paper, is that most existing accounts and theories of unemployment (etc) focus on tactical (“production”) issues, i.e. they refer to a situation with an existing system of production that continues to exist. They tend to neglect what I call the “strategic” dimension, in which the production system is subjected to transformation – which is the hallmark of the modern economy.

Abstract

This paper investigates the source of jobs in the modern economy, excluding the state, non-profit and financial sectors. The approach is centered on the firm and its profitability, and in particular, proposes a real investment led economy perspective. Rather than assuming that productive systems already exist, as is frequently done, it examines how they are established and renewed, and also how they may cease to exist. Investment is seen as the strategic decision process that establishes the number and type of jobs for the medium term, and their approximate wage level. Thus, at the time of the job creation decision, it is not clear who the potential workers are – and particularly when technological change and off-shoring are involved, even what population they will be drawn from. Investment often involves a business plan: a joint decision about the product, location, technology, scale of production, etc, as well as employment. In addition, tactical decisions are taken during the course of production. Both types of decision take account of the economic environment, and involve Knightian uncertainty. Unemployment exists when fewer jobs are created than there are people who would like to fill them, because there are too few investment opportunities that are perceived as being potentially profitable. In the investment decision, the whole package needs to be coherent, and offering lower wages may not be enough to make an investment idea potentially profitable. This explains why non-frictional unemployment can occur, and persist, especially when perceived investment opportunities are few. It involves asymmetry: a shortage of workers is reflected in an increase in the wage level, whereas a shortage of jobs is manifest in terms of unemployment – quantity not price. The real investment led economy perspective is also able to account for employment changes in six major types of scenario: a new company, major technological change, relocation, plant closure, regional decline and a major depression. Existing theories struggle to explain these phenomena. In addition, this perspective naturally addresses several puzzles in standard labor economics.

Two key paragraphs

If the economic environment includes a tight labor market with high wages, this could be a deterrent to investment, for some firms at least. The converse is not necessarily true, because even with low wages, potentially profitable investments may be limited. The combination of available firm-based resources, including managerial talent and available technology, with the potential demand for the product may not add up to an investment that promises to pay off, even with low wages. The adjustment process is thus asymmetric. (It is also slow, because investments are infrequent, and designed to last for a long time.) The asymmetry means that labor scarcity is typically manifest as a rise in wage level, whereas labor abundance remains a matter of quantity rather than price.

The corollary is that some unemployed workers are likely to be unemployed because no additional investments are seen as possible even with lower wage levels, and even if potential workers would be willing to accept lower wages. As a result, in the aggregate, there are too few jobs to go around.