Speaking of income inequality and economists’ lack of practical experience, consider this post by Mark Thoma at Fiscal Times:
I fear this trust that market forces will eventually raise wages will lead to disappointment. Inequality has been increasing for over three decades, and during that time we have been at or near full employment many times. Yet, wages over this time period have been flat. As noted by the Economic Policy Institute, “Since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth.†The idea that market forces alone will increase wages sufficiently to offset increasing inequality is not supported by the evidence from these years. There’s more to the story than market forces.
I agree that there’s more to the story than labor policy. There’s monetary policy, trade policy, and immigration policy, too, to take into consideration.
Dr. Thoma outlines the market explanation for stagnant wages:
Before getting to “the rest of the story,†what is the market-based explanation for stagnating wages? The most popular explanation involves the forces of supply and demand combined with an assumption, supported by the evidence, that wages are downwardly rigid, i.e. wages rise much easier than they fall.
When a recession hits and the demand for labor falls significantly, there is substantial downward pressure on wages. But when wages are downwardly rigid, they stay constant instead of falling. When this happens, an improving economy will not cause wages to increase until the forces pushing wages downward are overcome.
As Mary Daly and Bart Hobijn say in a recent Economic Letter for the San Francisco Fed, “Despite considerable improvement in the labor market, growth in wages continues to be disappointing. One reason is that many firms were unable to reduce wages during the recession, and they must now work off a stockpile of pent-up wage cuts.â€
Essentially, the demand for labor must increase relative to supply until the “pent-up wage cuts†are overcome. But demand is growing slowly, and the supply of labor is increasing as discouraged workers return to the labor force with improving economic conditions, so increases in wages could still be some time away.
and provides his own prescription:
Solving the problem of lack of bargaining power that puts workers at the mercy of the “decency†of those they negotiate with is not easy. The ability of traditional unions to negotiate over wages has been undercut by globalization, technology, and the threat of offshoring, though unions – to the extent they still exist – do retain some value as a source of political power.
What he fails to address is how have unions functioned to increase wages? I would submit that unions have been most effective in tight labor markets and have mostly been able to increase wages by imposing barriers to entry and creating an artificially tighter labor market.
In other words, would a revitalized organized labor increase wages or would it further reduce employment? I don’t believe you can maintain a slack labor market and increase wages at the same time.
To those who believe that unions operate some other way, I suggest you look at the experience of the UAW over the period of the last 30 years.
I suggest you look at the growth in wages and income from WWII to the 70s. Unions were strong then; ergo they are essential for wage growth. I don’t think this is true. And for the record, someone like Piketty points to those years as an aberration in capitalism’s record. But this pipe-dream is far more humane than the failed idea that what we need are markets (real markets, mind you–nothing that the political/financial elite can get their hands on). Why unions will never sell to any of our new-age pseudo-populists is because the parity that lives in this nostalgia does not fit into the resentment-driven fantasy that exists in markets. By the seventies, even the mainstream unions didn’t believe in parity and egalitarianism, if that meant accepting women, blacks, long-haired hippies, etc as the equals of real workers.
From what I’ve seen unions prioritized two things – compensation and seniority. So when the various budget crunches came, unions accepted fewer employees (layoffs were based on seniority) rather than reduce compensation.
The market, and capitalism, are working just fine. Those who deny this either fail to see, or don’t like the result of: consumer desire for less expensive goods and services >> consumer professed sympathy for higher wages.
If wages are downwardly rigid then, and Kalecki and Keynes argued with their individual theories of effective demand, there is no labor market and therefore no market solution.
We then get policy recommendations like removing welfare support in the hope of making society look more like textbook economic models on the grounds that doong so will generate more business efficiency (defined as lower production cost) while ignorong increased household efficiency (lower spending power). Profits and growing concentration of income for a relative handful will continue but social outcomes will worsen.
We’ll be going round like this ten years from now.
I apologize for typos, my fingers are too big for touchscreen.
Or does it just mean that prices in the labor market aren’t perfectly elastic?
I think it means that given social resistance to falling wages a model labor market, in which supply and demand functions equilibrate to bring employment and output to full, isn’t a reality even though many economists continue to pretend otherwise.
I also think that businesses in general resist downward pressure on wages so as not to damage morale and productivity of their employees.