Once a negative shock hits the economy, labor must adjust. Workers must look for new jobs, they must move to new areas, and sometimes they must change their wage expectations. Recall from Chapter 30 how search—looking for a new job—is one reason for unemployment. A negative shock to the economy, by remixing opportunities, induces more search and thus causes more search-related unemployment. Labor adjustment costs are the costs of shifting workers from declining sectors of the economy to growing sectors.

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Labor adjustments to shocks are not always rational in the narrowly economic sense of that term. If an automobile worker is laid off the General Motors assembly line and he loses his formerly unionized job, he may not be able to find the same wage elsewhere. Currently, the less unionized automakers in the United States pay a lower wage than GM does per hour. Some automobile workers without a high school degree may make up to $100,000 per year. It may take a while for that person, if thrown out of work, to admit that he must settle for a lower wage. In the meantime, he is looking for a job and perhaps even rejecting offers that are as good as he will ever find.

The high cost of reversing job decisions can lead to unemployment, just as the costs of reversing investment can cause investors to wait. Again, consider the closure of a Detroit automobile plant and the fate of the former workers. These workers face at least three options: They can wait for the plant to reopen, they can seek another job in Detroit, or they can move to a more prosperous part of the country. Which course of action is best?

It’s not always easy to say which choice is best, yet the choice involves a costly-to-reverse decision. Once the house is sold and the belongings are packed and moved to Houston, it is costly to go back to Detroit. The unemployed autoworker, rather than moving to Houston, might wait for a while to see what happens, even if he knows the probability of finding a job in Houston is higher than in Detroit. Or if that person opens up a pet shop, it will be difficult to shift back into automobile manufacture. So, when faced with these uncertainties, many workers simply will bide their time until the future is clearer. Maybe they’ll do some part-time or casual work (or maybe they’ll put a new deck on the house), but they probably won’t be employed at full productivity. The result is ongoing unemployment, or at least underemployment, and again the initial negative real shock is magnified.

In sum, changes to the world require people to adjust their jobs and their careers. People can’t always make those adjustments right away, and in the mean time output and employment will be lower than normal.