![]() Given modest errors of measurement, of the magnitudes observed,and a moderate proportion of workers changing union status, also of the magnitudes observed, measurement error biases downward estimated effects of unions by substantial amounts. There are three major findings:1) The difference between the cross-section and longitudinal estimates is attributable in large part to random error in the measurement of who changes union status. It develops numerical examples, statistical models, and econometric estimates which indicate that measurement error is a major problem in longitudinal data sets, so that longitudinal analyses do not provide the research panacea for determining the effects of unionism (or other economic forces) some have suggested. Macroeconomics has to find a way to navigate these tensions without sacrificing parsimony to explanatory power, and vice versa.This paper examines how measurement error biases longitudinal estimates of union effects. Social phenomena still should be explicable in terms of the choices of individual decision-makers and their institutional environment. We cannot abandon the economic way of thinking when doing macroeconomics. Various schools of thought have all contributed to this project, many of them productively, but none of them definitively. It simultaneously has to do two things: rest on a secure foundation of individual decision-making (microfoundations) while also being open to the possibility that millions of actors’ aggregated choices may result in much richer patterns of complexity than are evident from any particular choice or group of choices. An argument can be made that macroeconomists, including monetary and financial economists, missed the signs of the 2007-8 financial crisis in part because they lost sight of the difference between their models and reality they mistook the map for the territory. But lost in transition was an appreciation for what motivated keeping macroeconomics as a distinct field in the first place: the idea that the whole is more complex than the sum of its parts, and so reducing the whole to the sum of its parts is also wrongheaded. The rise of representative-agent modeling and the accompanying microfoundations revolution put macroeconomics, exemplified by the now-infamous dynamic stochastic general equilibrium (DSGE) models, back on sound microeconomic footing. But it took more than three painful decades following the end of World War II for macroeconomics to leave behind its dark age.īut now it seems that macroeconomics has veered too far in the opposite direction. ![]() ( New Classical economics) eventually showed this conception of macroeconomics was essentially flawed. Milton Friedman ( monetarism) and Robert Lucas Jr. This viewpoint, because it eschewed the complexities of individual decision-making and how those decisions mapped onto economy-wide outcomes, fell into the trap of thinking the observed relationships between aggregates were stable and predictable thus, macroeconomic stabilization policy to tame the business cycle should be straightforward. ![]() ![]() In the heyday of hydraulic Keynesianism, macroeconomics held that there existed relatively simple relationships between statistical aggregates such as national income, consumption spending, and government spending. Problems come in, however, when the method of study for the economy as a whole looks radically different from that used for its parts. ![]() So it makes sense to suppose the whole of the economy is more than the simple sum of its parts. “Cells are invisible with the naked eye Alex is made up of cells therefore Alex is invisible to the naked eye” is clearly bad logic. If we want to avoid the fallacy of composition, we must recognize that a whole may exhibit properties that are not present in its parts. What is the difference between microeconomics and macroeconomics? A typical textbook would say something like this: “Microeconomics is the study of how firms and households make decisions macroeconomics is the study of the economy as a whole.” There is a good reason for this bifurcation. ![]()
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