Economists have got lots of P-data and Q-data, and we pay a lot of attention to it. I think we don't have much L-data, except anecdotal, and we don't pay much attention to the hard L-data we do have.
P-data is data on the prices at which goods are traded. Q-data is data on the quantities of goods traded. We've got it, and we use it. And it's good we've got it and we are right to use it. P-data and Q-data are important. But they are not the only data that are important.
What do I mean by L-data? I'm going to come at that slowly.
When we go into a recession, many things become easier to buy and harder to sell. And when we go into a boom, those same things become easier to sell and harder to buy. A recession has lots of buyers' markets and a boom has lots of sellers' markets. That's what I mean by L-data. There's something more going on than what is captured in the P-data and Q-data. There's something more going on than the P-data and Q-data that tell us all we need to know about perfectly competitive markets for perfectly liquid goods with perfectly flexible prices. And that something more is crucial to the way I think about the business cycle.
I think that the economists who broadly share my view about the business cycle also broadly agree with me about the L-data. I think that the economists who broadly disagree with my view about the business cycle focus too much on only the P-data and Q-data. If I'm right about that, it means that the role of the L-data in shaping economists' views is more important than we recognise.
It's not easy to formalise L-data. How precisely would we define and measure a buyers' market and a sellers' market? Yet, at some intuitive level, we understand those terms. Just because a concept is fuzzy or hard to measure doesn't make it meaningless. Right now, the labour market, for most types of labour, is more of a buyers' market than it normally is. Most people would agree with that statement, even if we would have difficulty agreeing on a precise definition.
The L in L-data stands for liquidity. Not the best word, but the best I could do. Some goods are more liquid than others. Liquidity varies over time. Liquidity is normally taken to mean the ease of buying and selling a good. So far so good. But we really need to distinguish the ease of buying from the ease of selling. They aren't the same. And they vary inversely over the busines cycle. From the buyer's perspective, labour is very liquid in a recession, when unemployment is high, and illiquid in a boom, when there's a labour shortage. From the seller's perspective, it's just the opposite.
I think that prices and wages are sticky. And I think that sticky prices and wages are important in understanding the business cyle. Those two things go together. The main reason I think that prices and wages are sticky is not just that they look sticky, but because if I assume that prices and wages are sticky i can make sense of the fact that we get buyers' markets for goods and labour in a recession, and sellers' markets for goods and labour in a boom. If aggregate demand falls, either prices and wages fall, or we get buyers' markets for goods and labour, or we get a bit of both. If aggregate demand rises, either prices and wages rise, or we get sellers' markets for goods and labour, or we get a bit of both. And we generally get a bit of both, in both recessions and booms, though the proportions vary from market to market. And because of imperfect competition, with sellers usually having market power to set prices on average above competitive equilibrium, buyers' markets are normally more common, on average over the business cycle, than sellers' markets.
My whole macroeconomic perspective, from sticky prices and wages to imperfect competition, is heavily informed by my views on L-data.
But so much L-data is impressionistic, or anecdotal. We learn about it from walking around; we read about it in the news; we don't get it from Statistics Canada. That's not a criticism of Statistics Canada. But it is a problem.
What hard L-data do we have?
It's tempting to interpret the unemployment rate as L-data. But it is really Q-data. I want to say that high unemployment rates indicate that it is easy to buy labour and hard to sell labour, but they are not the same thing. It might be structural unemployment, which means some labour markets are buyers' markets and other labour markets are sellers' markets. Or it might be picky workers. I can't tell just by looking at the Q-data.
The same goes for vacancy data. I am strongly tempted to interpret it as L-data, because a large number of vacancies strongly suggests to me that firms are finding it difficult to hire labour. But others might interpret it differently.
That NFIB survey asking small US businesses what is their most important problem gives us some L-data, I think. I would interpret that data as saying that US firms are finding it harder than normal to sell output, and easier than normal to hire good quality labour. So both the output and labour markets are buyers' markets. So that means the US is in a standard recession caused by deficient aggregate demand.
The Bank of Canada's Business Outlook Survey has some L-data. For example, the question: "Does your firm face any shortages of labour that restrict your ability to meet demand?" presumably measures how easy it is to buy labour and the extent to which firms believe the labour market is a buyers' or sellers' market. And "How would you rate the current ability of your firm to meet an unexpected increase in demand?" presumably has some relation to how easy it would be for the firm to buy the necessary inputs.
I wonder what other sources of L-data exist?
Do econometricians use the L-data that does exist?
What other L-data might it be a good idea to collect?