Here's the estimable Joseph Stiglitz, not saying aggregate demand in Vanity Fair:
The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. ... There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization... (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.This sounds reasonable, but is it? Nick Rowe doesn't think so. Let's leave aside globalization for another post -- as Stieglitz says, it's less important anyway. It's certainly true that manufacturing employment has fallen steeply, even while the US -- despite what you sometimes here -- continues to produce plenty of manufactured goods. But does it make sense to say that the rise in manufacturing productivity be responsible for mass unemployment in the country as a whole?
There's certainly an argument in principle for the existence of technological unemployment, caused by rapid productivity growth. Lance Taylor has a good discussion in chapter 5 of his superb new book Maynard's Revenge (and a more technical version in Reconstructing Macroeconomics.) The idea is that with the real wage fixed, an increase in labor productivity will have two effects. First, it reduces the amount of labor required to produce a given level of output, and second, it redistributes income from labor to capital. Insofar as the marginal propensity to consume out of profit income is lower than the marginal propensity to consume out of wage income, this redistribution tends to reduce consumption demand. But insofar as investment demand is driven by profitability, it tends to increase investment demand. There's no a priori reason to think that one of these effects is stronger than the other. If the former is stronger -- if demand is wage-led -- then yes, productivity increases will tend to lower demand. But if the latter is stronger -- if demand is profit-led -- then productivity increases will tend to raise demand, though perhaps not by enough to offset the reduced labor input required for a given level of output. For what it's worth, Taylor thinks the US economy has profit-led demand, but not necessarily enough so to avoid a Luddite outcome.
Taylor is a structuralist. (The label I think I'm going to start wearing myself.) You would be unlikely to find this story in the mainstream because technological unemployment is impossible if wages equal the marginal product of labor, and because it requires that output to be normally, and not just exceptionally, demand-constrained.
It's a good story but I have trouble seeing it having much to do with the current situation. Because, where's the productivity acceleration? Underlying hourly labor productivity growth just keeps bumping along at 2 percent and change a year. Over the whole postwar period, it averages 2.3 percent. Over the past twenty years, 2.2 percent. Over the past decade, 2.3 percent. Where's the technological revolution?
Just do the math. If underlying productivity rises at 2 percent a year, and demand constraints cause output to stay flat for four years , then we would expect employment to fall by 8 percent. In other words, lack of demand explains the whole fall in employment.  There's no need to bring in structural shifts or anything else happening on the supply side. A fall in demand, plus a stable rate of productivity increase, gets you exactly what we've seen.
It's important to understand why demand fell, but from a policy standpoint, no actually it isn't. As the saying goes, you don't refill a flat tire through the hole. The important point is that we don't need to know anything about the composition of output to understand why unemployment is so high, because the relationship between the level of output and employment is no different than it's always been.
But isn't it true that since the end of the recession we've seen a recovery in output but no recovery in employment? Yes, it is. So doesn't that suggest there's something different happening in the labor market this time? No, it doesn't. Here's why.
There's a well-established empirical relationship in macroeconomics called Okun's law, which says that, roughly, a one percentage point change in output relative to potential changes employment by one a third to a half a percentage point. There are two straightforward reasons for this: first, a significant fraction of employment is overhead labor, which firms need an equal amount of whether their current production levels are high or low. And second, if hiring and training employees is costly, firms will be reluctant to lay off workers in the face of declines in output that are believe to be temporary. For both these reasons (and directly contrary to the predictions of a "sticky wages" theory of recessions) employment invariably falls by less than output in recessions. Let's look at some pictures.
These graphs show the quarter by quarter annualized change in output (vertical axis) and employment (horizontal axis) over recent US business cycles. The diagonal line is the regression line for the postwar period as a whole; as you would expect, it passes through zero employment growth around two percent output growth, corresponding to the long-run rate of labor productivity growth.
|1980 and 1981 recessions|
What you see is that in every case, there's the same clockwise motion. The initial phase of the recession (1960:2 to 1961:1, 1969:1 to 1970:4, etc.) is below the line, meaning growth has fallen more than employment. This is the period when firms are reducing output but not reducing employment proportionately. Then there's a vertical upward movement at the left, when growth is accelerating and employment is not; this is the period when, because of their excess staffing at the bottom of the recession, firms are able to increase output without much new hiring. Finally there's a movement toward the right as labor hoards are exhausted and overhead employment starts to increase, which brings the economy back to the long-term relationship between employment and output.  As the figures show, this cycle is found in every recession; it's the inevitable outcome when an economy experiences negative demand shocks and employment is costly to adjust. (It's a bit harder to see in the 1980-1981 graph because of the double-dip recession of 1980-1981; the first cycle is only halfway finished in 1981:2 when the second cycle begins.)
There's nothing exceptional, in these pictures, about the most recent recession. Indeed, the accumulated deviations to the right of the long-term trend (i.e., higher employment than one would expect based on output) are somewhat greater than the accumulated deviations to the left of it. Nothing exceptional, that is, except how big it is, and how far it lies to the lower-left. In terms of the labor market, in other words, the Great Recession was qualitatively no different from other postwar recessions; it was just much deeper.
I understand the intellectual temptation to look for a more interesting story. And of course there are obviously structural explanations for why demand fell so far in 2007, and why conventional remedies have been relatively ineffective in boosting it. (Tho I suspect those explanations have more to do with the absence of major technological change, than an excess of it.) But if you want to know the proximate reason why unemployment is so high today, there's a recession on still looks like a sufficiently good working hypothesis.
 Real GDP is currently less than 0.1 percent above its level at the end of 2007.
 Actually employment is down by only about 5 percent, suggesting that if anything we need a structural story for why it hasn't fallen more. But there's no real mystery here, productivity growth is not really independent of demand conditions and always decelerates in recessions.
 Changes in hours worked per employee are also part of the story, in both downturn and recovery.