> I'm glad you agree that monetary and fiscal stimulus will often be ineffective.
I never said that. Obviously a stimulus of $100 will be ineffective, but you can draw no conclusion about "often" (or "rarely") from what I wrote.
> Sticky wages increase risk of having your wage cut to $0.
Based on the research I did yesterday, and described in http://news.ycombinator.com/item?id=4963624 , "In a baseline New Keynesian model, labor market frictions render real wage rigidity potentially irrelevant for the dynamics of inflation." and "The mechanism emphasized by Hall (2005) and Shimer (2005) that helps the search and matching model fit the facts, appears to have a neutralizing effect in sticky price models."
The search and matching model is the one I hand-waved here. Inflation isn't the same as unemployment, so this quote isn't directly transferable. But it seems that wage stickiness or lack thereof doesn't have as much effect on the economy. Instead, it increases the volatility of hiring and job creation costs.
I referenced the paper of Krausea and Lubikb, http://www.tau.ac.il/~yashiv/kl_jme2007.pdf . It includes a term for what I've been saying is a cultural morality to have sticky wages. "We employ a version of Hall’s (2005) notion of a wage norm to introduce real wage rigidity. A wage norm may arise from social convention that constrains wage adjustment for existing and newly hired workers."
> employees choose to spend the money on consumer goods rather than mitigating their risk
Because people don't make fully rational economic decisions. You might as well ask why so many people smoke, even with the knowledge of how it affects their health, or ask why I've stopped exercising despite knowing its positive benefits. Why did the banks make so many subprime mortgages? Why did so many people agree to them even with high chances of not being able to pay?
If you want, I think you can model things like "I really wanted a new computer" as a random external event akin to an unexpected medical problem or broken plumbing, and bring the analysis back into the rational hypothesis.
> To determine "market power" in any model I've seen, ...
Really? The Krausea and Lubikb paper says "The parameters describing the household are standard. We choose a coefficient of relative risk aversion σ = 2." A constant relative risk aversion implies a decreasing absolute risk aversion, so the more money one has the more willing one is to take risks.
This makes it sound like many economic models - or at least those based on the search and matching model - include risk taking as part of the analysis. Can you square my observation with your statement? Perhaps it's because their model isn't used to determine market power per se?
> your point about transaction costs does show that there is wiggle room
I'm afraid I've lost the point of this thread. I say that employment can be viewed as a monopoly, and more importantly, that an employer can abuse those monopoly powers. And yes, an employee, and especially a union of employees, can be viewed as a monopoly and also abuse its monopoly powers.
You do not believe this is the correct analysis, and you believe that the various economic models back you up.
Do these quotes help show that economist have considered my hand-waving models in much more depth?
- There are search-and-matching frictions in every sector and firms post vacancies in order to attract workers. The cost of posting vacancies and the matching process generate hiring costs. Moreover, search-and-matching frictions generate bilateral monopoly power between a worker and his firm, as a result of which they engage in wage bargaining. -- http://restud.oxfordjournals.org/content/77/3/1100.full
- A specific class of models argues that wage rigidity might arise in the context of risk- averse workers and risk-neutral firms. In a seminal contribution, Thomas and Worrall (1988) develop a model with self-enforcing wage contracts whereby risk-neutral firms provide insurance to risk-averse workers. In their model agents cannot commit, but contacts are nevertheless self-enforcing due to an extreme reputation assumption, ac- cording to which an agent who reneges on a contract is forced to trade on the spot market forever after. Efficient contracts are contained in a certain interval and when- ever the wage leaves this interval, the agents update the wage by the smallest possible change that puts the wage back into the interval (i.e., on the bounds of the interval). Rudanko (2009) embeds this kind of model into an equilibrium model of directed search with aggregate shocks. In her model a constant wage emerges if both agents can fully commit, in which case the risk-neutral firms provide insurance to risk averse workers through optimal long-term wage contracting. In contrast to Hall (2005), her micro- founded model of perfect wage rigidity does not lead to a substantial increase in the cyclical volatility of unemployment. -- http://www.econ.upf.edu/eng/graduates/gpem/jm/pdf/paper/Pape...
The description model of Rudanko sounds like your statement - that wage rigidity leads to increased unemployment during recessions - isn't necessarily true.
Quoting from her site at https://sites.google.com/site/leenarudanko/ : In this paper I develop a tractable extension of a Mortensen-Pissarides style matching model that allows for risk averse workers with limited ability to smooth consumption. I show that this leads to a form of equilibrium wage rigidity. This rigidity arises because the inability of workers to smooth their consumption across unemployment and employment spells changes how unemployed workers value wage offers, and hence also the offers that employers find profitable to make.
Aren't these quotes in opposition to what you've been describing, and more in line with the ideas I've described here?
That's not saying that the model is right, or that I'm right, only that there are economic models which agree with my views, so my views are not outright rejected by economic theory, while you think they are.