DeLong on "Out of Work" (Vedder and Gallaway)

Economics Economics Questions
1

I just finished reading DeLong’s papers on “Out of work”.
I don’t find any critique of his critique of “Out of Work”.

http://www.j-bradford-delong.net/econ_articles/reviews/vedder.html

High real wages (relative to productivity) cannot possibly be part of a general explanation for high unemployment because real wages are more often than not low when unemployment is high.

Real wages are high or low relative to the productive potential of the average worker, so Vedder and Gallaway divide real wages by a measure of productivity. Unfortunately, they divide real wages not by potential productivity–not by what output per hour would have been if factories had been running at normal levels of operation–but by actual productivity.

The post-WWII years when unemployment was the highest were not the years in which adjusted real wages were the highest. The post-WWII years when unemployment was the lowest were not the years in which adjusted real wages were the lowest.

http://www.j-bradford-delong.net/econ_articles/reviews/vedder2.html

First, Vedder and Gallaway’s measures of real wages are, simply, wrong. Because the composition of employment by education and experience varies over the business cycle, the average wage paid to employed workers has a different pattern of variation than the wage that firm managers care about. This is important. They ignore it.

Second, Vedder and Gallaway wrongly scale their measures of real wages by actual, not potential productivity. Thus they move shifts in productivity that are the result of changes in unemployment over from the “effect” to the “cause” side of the ledger. This is important. This is how they generate false statistical confirmations of their theories.

Third, a methodological point: There is a large body of work on how to measure the cyclicality of wages, and on whether fluctuations in actual productivity over the business cycle are cause or consequence of the cycle.

I always believe that high unemployment during a recession is due to sticky nominal wages. Prices plummet: if nominal wages don’t fall, unemployment will thus increase. Productivity must decrease during a recession (malinvestment, readjustment of the production structure, etc…), and real wages must follow this downward trend.
So, where is the problem with Vedder/Gallaway ?

2

I would hazard a guess that DeLong is not realising(or if he’s being dishonest, purposefully not conveying) how nonsensical the “potential productivity” construction he’s positing is. All prices, including factor prices are affected by the consitution of consumer demand, entreprenurial expectations and scarcity at a particular time. Since the guy probably can’t accept intersectoral imbalances being the manifestation of a recession(as conveyed by Say I believe), to him if we could just get back to putting all the guys back in work in a firm if this could increase production of bread loaves from 10 to 64 and maximise average productivity per labourer all would be good and dandy. Yet such a perspective, especially when aggregated would fail to take into account the disaster this would produce, especially if productivty increased in many sectors unadjusted to true consumer preferences(including time preference) to only produce goods that would be priced at practically waste paper value by consumers.