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Why labour markets dont clear

Why labour markets don't clear

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Roger Farmer has a blogpost in which he shows that labour markets don’t clear. Specifically, employment varies with the business cycle, whereas the labour force participation rate and hours worked only show long-term secular trends. During cyclical downturns, therefore, we must conclude that there is more labour available than there are jobs.

New Keynesians say that the reason for this is sticky wages. If only nominal wages could fall enough,the market would clear and there would be no cyclical increase in unemployment. Therefore there should be labour market deregulation so that wages can flex with the business cycle. Roger Farmer questions this: he argues that the market simply does not clear at any wage.

I disagree. I think the market does clear – when wages fall to starvation level. Humans need a minimum income to sustain life, but employers have no responsibility for ensuring that the remuneration of employees meets that minimum subsistence level. Therefore, in an economic downturn, the market-clearing price of labour can fall to below the minimum needed to sustain life.

When wages are at starvation level, hours worked, labour force participation rate and workforce size all decline as people become weak, ill and eventually die – or, if they can, leave for somewhere more prosperous.  Reducing the size of the workforce means that the market will eventually clear and wages start to rise again – for those who have survived.

This is the fundamental flaw in the “sticky wages” argument. In an economic downturn, the labour market cannot clear without incurring unacceptable social costs. Malnutrition, starvation, disease and death are the  consequences of freely falling wages in an economic downturn. The reason why labour markets don’t clear is because we don’t want them to.

It all starts with unemployment benefits. Because we don’t like people to starve in cyclical downturns, governments in developed countries have created financial safety nets for the unemployed. Now, extreme free-market aficionados criticise these for causing unemployment: they believe that if unemployment benefits were cut or eliminated, the unemployed would be forced to find work. And they have a point. When there are unemployment benefits, people will prefer unemployment to accepting work at below benefits level. Unemployment benefits therefore act as a wage floor, preventing wages from falling below subsistence level. The result is that the labour market fails to clear and we have stubborn unemployment. (Though there can of course be stubborn unemployment even without unemployment benefits. It takes a while for enough people to leave or die for the market to clear.) 

Of course, this assumes that people can choose to receive unemployment benefits rather than accept work at very low wages. But this is unpopular with the working people whose taxes pay the unemployment benefits. Working people don’t like seeing the unemployed being (as they see it) paid not to work: it seems unfair that they should work hard for their money while others get “something for nothing”. Some  governments respond to this by introducing some form of workfare, where people “earn” their unemployment benefits by doing some kind of community service or unpaid “work experience”. Others impose sanctions such as loss of benefits for refusing work. And others cut unemployment benefits in an attempt to “make work pay”. The effect of this is to reduce or remove the wage floor. Without other government intervention, sanctions and/or workfare cause wages to fall to the market-clearing price.

But when wages fall below subsistence level there is pressure on government to top them up: hard-working people really don’t like not earning enough to live on. So the next stage of intervention is the introduction of in-work benefits to support wages. These place further downwards pressure on wages, since employers have an incentive to pay below subsistence level knowing that government will top up wages, and employees will accept below-subsistence wages for the same reason.  When unemployment benefits cannot act as a wage floor AND there are in-work benefits topping up wages to subsistence level, the market-clearing price of labour is zero or below (an unpaid internship with no expenses is in effect a negative-wage job).  This may be even lower than the market-clearing price would have been without the combination of in-work benefits with workfare or sanctions for the unemployed.

The tendency of wages to fall when there are in-work benefits and unemployment benefits are stigmatized makes a minimum wage necessary to prevent government becoming the de facto employer of large parts of the workforce. But like any wage floor, this also prevents the labour market clearing.

There is no doubt that a minimum wage distorts the labour market. These charts from the Resolution Foundation show the effect on the UK labour market of the minimum wage introduced in 1997:

Main article image

(the spike at 30 on the 2012 chart is not significant – it is caused by compressing the “tail” into a single point to avoid having to extend the x axis).

There are two things to note here. First is the obvious spike at the minimum wage itself, which is much larger than we would expect from the truncation of the lower distribution. Second is the flattening of the curve. These two features are related. As the Resolution Foundation explains, the minimum wage has become the “going rate” in many sectors. It is acting as a wage ceiling as well as a wage floor. The Resolution Foundation’s report goes on to examine ways in which a surrogate wage distribution could be created to reduce or eliminate clustering at the minimum wage. Intervention in markets causes distortions which require more intervention…..In the medical profession they call this the “spiral of intervention”. The same thing happens in policymaking.

The spiral of intervention has unfortunate effects. The Resolution Foundation’s second chart is from 2012, which was during a period of poor economic performance for the UK. But it does suggest that the market-clearing price of labour is far below the minimum wage. I suspect that this is now the case even in normal times – and it is because of the distorting effect of the UK’s combination of unemployment-benefits-with-sanctions and in-work benefits.

Wage subsidies in economic downturns are reasonable countercyclical policy, supporting people so that they can live even when the market-clearing price of labour has fallen way below subsistence level. But use of wage subsidies in normal times to support living standards because wages are persistently below socially acceptable levels is a different matter. It is systematic intervention in labour markets for political, social and moral reasons.And it raises serious questions about the nature of “private” enterprise. If labour costs in “private” enterprises have to be heavily subsidised in order to maintain an acceptable level of employment and living standards, to what extent can they really be said to be private?  

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Are we facing the crisis of capitalism? Seems an awful lot like it, given the returns to capital are swamping the returns to labour.

I like your comment about whether you can regard a business with subsidised employees as truly private. I would also extend that question to the state backed finance sector. However if we are in a crisis of capital then state intervention is the only thing that would prevent capitalism being overwhelmed by the mass of employed people not having sufficient means to acquire the goods and services produced with the mass of accumulated capital. It seems analogous to the position that debtor and creditor countries find themselves in, the creditor countries or capital owners cannot accumulate capital indefinitely because there is a limit to the quantity of capital which can usefully exist, which depends on the demand for the products of that capital. Given that capital is accumulated by countries or people that have a surplus of it, it seems that demand must come from debtor countries or non capital owners.

Getting pretty close with John Aziz!

http://www.pieria.co.uk/articles/the_lion_the_horse__mass_unemployment

Check twitter, we're closing on on a convert.

Frances, I only make reasoned arguments.

That's why real economists across ideological spectrum say this:

https://twitter.com/mileskimball/statuses/440880908522885120

John Aziz gets it. I remained convinced there's an assumption about my plan, that you are making, thats not what my plan does.... something that once we find it, will change how you look at it. But you make it hard to do bc you won't go thru the points one by one.

The math is: 30M enter GI (I model 10M currently working, and 20M unemployed now) they cost at maximum $240 per week (it'll be less on average) that's $375B annually.

We currently spend more than $468B in non-medical welfare. The entire $375B comes from that pool.

Full employment historically drives up wages. Choice of job historically drives up worker satisfaction. My plan expects 10M currently low skilled employed (Walmart workers) to quit the real workforce and take GI, to choose to do jobs they like more.

In the Ghetto

This will of course, hurt Walmart (Fortune 1000) share price (oligarchs) as they will be forced to pay more for labor that now stays at home being a blogger, or painting nurseries int he ghetto, or teaching yoga in the ghetto, or running a daycare shop out of their home in ghetto, or hire cheap labor in the ghetto to fix up their home to be a daycare shop in the ghetto, or leave their kid at the daycare shop for $50 a week in the ghetto, and go make cupcakes in the ghetto, at a bakery in the ghetto built by cheap labor in the ghetto.

My point is that ghettos becoming more competitive and productive don't pull down real wages in the real world.

Frances Coppola

Morgan,

1) Your math is wrong because it does not take into account the effects I explained in this article.

2) In this article I haven't discussed the effects of excluding Fortune 1000, but actually this is the weirdest part of your proposal and almost as counterproductive as the work requirement. I will explain why in a separate post.

3) My "preferred policy" is not being discussed. You have a proposal which I am criticising on cost and economic grounds. Attacking what you believe (wrongly, actually) to be "my proposal" does not constitute a defence of yours.

You don't seem to be able to respond to my criticisms with reasoned argument. Instead, you resort to patronising remarks like "Now, Frances, I realize you don't have a background in debate" and "I understand you might not be used to my kiddie pool free economy". For that reason, this conversation is now at an end. I will not respond to any more comments from you here.

Your analysis is:

1. becomes too expensive.

a) I show math. You show nothing. What besides math convinces you I don't spend any new money?

2. Drives down wages. I respond:

a) By requiring welfare recipients to work for one another, to take a job in their immediate area, reduces wages / prices only in those areas (this is a well known effect called PPP).
b) By not allowing Fortune 1000 to participate increases wages that must be paid by Fortune 1000.

3. Your preferred policy is GI without work. I respond:

a) this means the poor get to consume less bc less is produced.
b) you plan is not politically passable.

Now Frances, I realize you don't have a background in debate, but the way argument basically works is that you have to specifically respond to specific policy ideas, and use theory when confronted with theory.

So you'd say on 1A: "Morgan in the US more than 30M (that's my estimation) will sign up for this" and you'd say who and why. You'll run into 2B, which says only families and SMB owners get to hire these people, so pls be super clear on why small businesses in poor areas are suddenly going to crush Fortune 1000 businesses in upper middle class market.

Real economists across political spectrum realize my plan differs from your historical claims.

As a personal note, it seems like you look at these 30M as capable productive competent labor who have a chance in hell to compete with anyone near the top half of the labor market.

I look at then as worth MAYBE 3-4% of of new productive capacity, BUT I ensure that most of their productive labor is consumed by THEM. It's a rank amateur labor market, a free market kiddie pool, that lets the creative class play around on $12K a year.

I want to to give the most entrepreneurial minorities in poor areas a true labor advantage.

I'm basically taking welfare and craigslist and turning it into AirBnB.

Like AirBnB, there's no chance of it mutating into a massive thing that ends professional hotels, right?

It DOES make it harder for hotels to grow, but who cares?

It doesn't drive down wages at hotels.

So I understand that you might not be used to a my "kiddie pool free market economy" for the least productive, it's a new concept in Economic history.

But your most GENERAL argument is that letting incompetent people have the welfare check we ALREADY GIVE THEM, but only if they do some kind of work for each other... leads to price and wage deflation in the real economy...

well you're either way to impressed with the unemployed and assume they will be real competitors for real jobs being done in ghetto already, or you think far more people want to have a fun job for only $12K a year.

I frankly, can't see your logic, and I try as hard as I can to read your thinking charitably.

Please just answer the points 1A, 2A, etc. It makes it easy to find where we disagree.

Frances Coppola

Morgan,

Shouting at me in capitals and asserting that "your plan is better" is not a credible argument, I'm afraid. I don't have to prove anything. The burden of proof lies with you, not me. So far you haven't provided coherent argument or evidence that your plan is different.

"Spreehamland" - lol. It's Speenhamland. But I have not mentioned it in this context at all, as it is not relevant to your proposal. You still confuse Speenhamland with the roundsman system - which IS relevant and you would do well to research it. If you did, you might come closer to understanding why I say your proposal is fiscally unsound. At present you demonstrate complete lack of comprehension.

Frances,

No Frances they LIKE AND APPROVE my plan. And it isn't from authority, I'm arguing that my plan has pragmatic credibility because cuts across ideological lines from socialist, liberal, libertarian, conservative - which should impress you.

Next, my plan COSTS NO MORE MONEY. I lay out all the math here:

https://medium.com/labor-related/1d068ac5a205

Which means your complaint of "but if the going rate for "fun jobs" - and most other jobs too - is almost zero (as it would be under your proposal), then this will quickly become fiscally unsustainable," THEREFORE MEANS NOTHNG.

if you want it to mean something, you have to back it up with math and logic, not just say "fiscally unsustainable" - which is a joke, bc you want to give everyone free money not to work.

I'm different from 800 years of academic noise for same reason Ebay, Uber, and Amazon are different from the 1800's. You realize you are arguing Spreehamland against the Internet right?

First and foremost, Minimum Wage doesn't drive the price of what the top 20% who earn 80% of income make. Second, my plan is not a Basic Income, to all citizens, it is a wage subsidy for the unemployed to work for their neighbors.

My plan doesn't touch "most other jobs too" - the poor and unemployed mostly live amongst each other. My plan only requires them to work in their own neighborhoods. DO YOU GET THIS YET? HOW MANY TIMES CAN I SAY IT? People in wealthy neighborhoods in Austin, Texas and the west side of Canton Ohio, do not get to make the people in poor areas come work for them. Whatever the ghetto of London is called, the poor there only have to WORK THERE.

My local fancy grocery store cannot hire the poor for $1 per hour:

1. Whole Foods is Fortune 1000.
2. The poor do not live next door to it.
3. If ghettos find themselves able to use GI/CYB to have a Farmer's market with fresh cheap organic fruit and vegetables that are now priced so low that the rich drive into poor neighborhoods to shop there - GREAT!!!
4. But what really happens is this: the poor suddenly find they can open up Farmers markets and fancy coffee shops in poor neighborhoods and sell coffee for $1 a cup (to people earning $17K a year on GI) - just selling to one another. The poor get yoga and yogurt shops, and cheap classes and camps for their kids. The things that upper middle class can afford in their neighborhood, the poor can now afford too.
5. Only families and SMB owners can even hire from the system. This is again part of my plan, its good because it weakens Fortune 1000, and helps shrink power to smaller local areas.

Look, let's ask John Aziz if he agrees with you.

You are talking about a bunch of things that I have hacked away. It's not clever tech, it's clever system hacking.

I simply built a better mousetrap and that is why it wins support across the spectrum.

Frances Coppola

SJ Benson,

Lovely comment, and I agree with much of what you say.

Interestingly, when government and social order collapse, the only options left to people are often what we would describe as "criminal" - prostitution, drug dealing, extortion of various kinds. Russia after the collapse of the Soviet Union springs to mind.

Frances Coppola

Morgan,

I really don't care who has "understood your plan". Argumentum ad verecundiam is not an answer to my criticisms. You still haven't come up with a coherent argument as to why what I describe does not apply to your plan when it has applied to every other attempt to force people to work in the last eight hundred years. Why should "this time be different"?

Frances, Sumner, Kimball, Farmer, Konczal, Freddie deBoer and a host of others have understood my plan and consider your complaints about my plan incorrect.

1. IT DOESN"T COST ANY MORE MONEY. I use numbers and math. You don't get to say becomes unsustainable, unless you ANSWER my math. So, until you get out a pencil and a napkin and look at current welfare spending and see where the GI comes from, consider your point beat.

2. This isn't really about creating any NEW spending program, it is about making CURRENT welfare recipients wake up everyday and go to work for ONE ANOTHER. Imagine that my plan was even more stringent and REQUIRED that welfare recipients work in a job that is 80% consumed by people in bottom half of economy. This would be hard to do, my plan is an approximation of that plan, a way of creating what economists call Purchasing Power Parity in poor areas, literally by drawing tight circles around the labor and not making them work outside the area to get their GI.

3. Please reread 1 and 2 again. You think you are talking about a some new spending, a new bigger broader safety net. I'm not, my plan is a NICE KIND WAY of saying, current couch sitters must work, and I don't mean just couch sitters, I mean here a lever for 14 year kids to become full time working members of society to learn EARLY how to deliver what other people want to buy.

Look Frances, the reason that socialists like Konczal and deBoer, and liberals like Farmer and Kimball, and libertarians like Sumner and myself all LIKE GI/CYB is that we're not persona ideologues, we're not arguing to feel good about our own personalities. To make others like us feel good. We're not talking heads.

The research on liberal and conservative morality, and on political ideology shows clearly that being right left is as deeply engrained via genetics and deep formative early experience as being gay straight.

You don't like that 50% of the population views fairness thru the lens of "make sure no one cheats"

I and the others above, simply don't care what your half wants or what the other half wants.

My plan is a left / right compromise where ANYONE who says 'I want to work" gets treated better than they have ever been treated. It ENDS poverty for anyone who says they want to work. Anyone who doesn't say it? GETS NOTHING.

This is a proto-Marxian / Keynesian / Benevolent Authoritarian position towards the poor. It's not Ayn Rand. it's not Gold buggery. I'm simply a better technocrat than others you have met.

If you want me to point everyone towards your argument here I will, but you are piling a bunch of generic academic econ on "work requirement" vs a GI.

I am remaking the CURRENT welfare system, using CURRENT welfare dollars, to better ends than the CURRENT technocrats have done, and I'm calling it Guaranteed Income / Choose Your Boss.

In debate terms, I'm stealing the wind from your sails, by accomplishing 80% of your personal choice freedom of a workless GI, but keeping the the 50% of the conservative population happy as well.

Whatever your preferred plan is, my costs less. So you can't argue costs.

Whatever your preferred plan is, my increases production and consumption amongst the poor, so you can't argue mine isn't politically passable.

I am not a labor economist, and it has been a long time since I was in school, so I am sure my knowledge of labor economics is outdated. It does however strike me that many, if not most cases in labor markets are not particularly competitive, at least on the employer side. Typically, employers set the wages/salary, maybe with some wiggle room, and employees are largely wage/salary takers. So there is lop-sided market power in many labor markets. This would, according to economic logic, mean an equilibrium wage could occur, but there is a good chance it will be lower than in the case if market power was equal on both sides.

Having grown up in a family with a business, and having had my own business, as well as having spoken with various business people over the years, it seems to me in a practical sense, employers hire people in order to make money off of them. We would expect this. But there is a huge difference in the thinking about labor across different firms. Some firms want to treat their employees well, and want to see them making as much money as possible, because they want the employees to stay. Turnover is very costly, especially in some situations. Other firms are totally impersonal--it is all about the money, but they aren't out to cheat their employees. Still other firms are out to make as much money as they possibly can off employees, and everybody else, for that matter. While economists think crummy companies like these will go out of business because of unethical behavior, that is more often than not, not the case. My husband worked for a company that survives basically because they screw their sales people out of commissions, which is the only basis on which they are paid. Even though the sales jobs involve skilled work, there are enough people looking for work that this company can lie about the sales volume, and it takes long enough for the new staff to figure out what is going on that the company gets cheap labor for 6 months to a year before the people eventually move on. What they are doing may very well be illegal, but former employees are not in a situation to complain, or at least they tend not to see it that way. So the company keeps ripping employees off.

There are employers that, if they could find a way to charge people to work for them, would do it. And if people feel they are getting something out of the situation, like experience, contacts, a title that makes them look good, people will put up with it.

The market isn't just lop-sided with respect to market power, it is lop-sided with respect to the limits on compensation. Employers won't pay more than they get back out of employees, at least after they realize what they are paying for, and it generally doesn't take them very long to realize it. But there is almost no bottom because some employers, if given a chance will rip workers off.

And work is costly for workers. There are clothing, commuting and other costs. In cities, it can be very expensive just to get to work. Childcare in the US is even more expensive. It is not rational to expect people to pay more out than they take in, yet that seems to be what the free-marketers think can happen.

In the end, people do have other choices. They may not be desirable, but realistically, if you can't get a job that enables you to take care of your family, you will figure something out. Sadly, for many that could mean depending on charity--many, many people turn to their churches and food pantries. It might even mean committing criminal acts like robbery. When pushed to the wall, people will do what they have to survive, and even if you risk jail, at least you have three squares and a bed.

My point is that so much of what I have learned in economic theory in the past about the labor market, and what I hear free-marketers saying now, is so far out of touch with reality, it is mind-boggling. Workers need protections, which can include a minimum wage, because otherwise many will be taken advantage of due to the market power employers have, and due to the greed and cruelty of many (not all, luckily!) employers. These same factors could keep a labor market from reaching an equilibrium, because if given the chance, some employers would pay wages so low that laborers would be worse off taking the job. In cases like these, workers could be forced to leave the labor market by engaging in criminal behavior, depending on charity, or other means.

Ultimately, it is feasible that markets could breakdown enough that chaos ensues, or even a separate, underground economy develops. A recent episode of the series "VICE" on HBO showed an underground economy in Rio de Janiero that basically lives off the trash of the main economy. It happens in other poor countries as well. I think it could happen in the US, and frankly, probably does in some areas.

I think economists (and I am one) have become so out of touch with their models that assume things that are not based in reality (even though it is possible to learn how people really behave), that they can't even use common sense sometimes, especially the free-marketers. Perhaps even worse, economists do not want to acknowledge that we live is a complex world, where society, laws, institutions, and morality really do matter. Economics is a component of our world, but it is not, and should not be, what the world is made of.

I hope this makes sense. Sorry for the length.

Frances Coppola

Morgan,

In this piece I am specifically discussing the perverse incentives caused by wage subsidies when there is compulsion to work and no minimum wage. It is not a targeted takedown of your proposal, but it does address one aspect of your proposal that I consider seriously flawed, namely the work requirement.

I have explained in considerable detail here how a work requirement and a wage subsidy with no minimum wage results in wages being bid down to nearly zero, and I have shown how wage subsidies cause depression of wages even for higher-skilled people (that is what the second Resolution Foundation chart shows). Your comments don't in any way indicate that you have even understood the points I am making, let alone worked out how your proposal would avoid the pitfalls I describe.

You can talk about "fun jobs" until you are blue in the face, Morgan, but if the going rate for "fun jobs" - and most other jobs too - is almost zero (as it would be under your proposal), then this will quickly become fiscally unsustainable. Your proposal assumes that people will somehow set aside their rational inclination to get something for nothing. Why on earth do you think so many "fun jobs" are unpaid now? What makes you think people will pay people to do "fun jobs" in the future that they won't pay for now? I tell you, they WON'T pay for them. They will pay just enough to to be able to claim that the job is "paid", so the worker can claim benefits. If there is no minimum wage, then that amount is one cent.

My "mental model" is not "topping up". My mental model is that your guaranteed income would replace wages (except for one cent). Substantial parts of the workforce would be living on benefits, paying no tax and working for virtually nothing.

When are you going to address the serious concerns that I have raised about the economics of your proposal?

Then it is a terrible takedown.

I listed two specific responses to your complaint, you have you deal with them directly, or you are wrong. It doesn't seem you actually understand what my plan does.

There is a massive difference between your mental model of topping up vs. what my plan does: provide a Guaranteed Income as long as you do some kind of work.

In your mental model, you are "almost" RIGHT. The govt. says go find work, and whatever you earn, we'll get you to $7 per hour. So all kind of current employers can reduce their wages, and you take the current jobs and now work for $5 or $4 of whatever and get the top up to get you to $7.

I say you are "almost" right, bc even in your model, you are missing what I'm going to call the "Frances Leisure Principle" - this is the ALSO CORRECT idea once people have means of their own they can be choosey in the KIND of work they choose to do. Sure they might sit on couch, but you ALSO hope that they wan't and they will do something like go learn to sing at the pub etc.

BUT, here's your mistake, or rather here's where you haven't been clear about your mental model: say in your framework, the bad "top up" model.... I register online to get GI, and say I only want to make $40 per week bc I want to sing at pubs, bc I will get another $240 from the govt. in your top up.

When you describe the compression of the labor wage under wage subsidy, I don't think you allow for this type of singer in the pub reality.

BECAUSE THAT IS WHAT TEN MILLION PEOPLE WILL BE ABLE TO DO IN YOUR TOP UP MODEL.

I think it's bc you have an unstated status quo framing about job centers in the UK, as you've mentioned before, that are based on a minimum wage model, meaning the jobs on offer are not assuming "just pay me $40 a week" fun jobs.

BIG QUESTION: So to make sure we are talking apples to apples, does your current mental framework have job centers in the UK offering workers tens of millions of $40 per week "fun jobs?"

I really doubt it does, bc in my reading about UK labor market, and in my knowledge of the US job centers, there is no such model. INSTEAD, the current system is mindful of the MINIMUM WAGE.

As I understand it in UK, even apprentices earn $5 per hour.

I will also get into the incredible importance of the geo-location rule in my plan, as well as the only families and SMB owners bit...

But first and foremost, let's make sure your mental framework of the top up plan allows for ten million $40 per week fun jobs.

When I say ten million people will be able to do fun jobs, I'm using the US population, and I don't mean ten million will CHOOSE fun jobs, I mean there will be 10M fun jobs offered, and many will not be filled, bc many people will choose to work for more than $40 per week, bc my plan isn't a "top up to $7 plan" - if people offer you more money for less fun work, you get to keep 50% of it. ([please see my pay schedule)

https://medium.com/labor-related/1d068ac5a205

Frances Coppola

Morgan,

This IS a take down of your plan. Or rather, of one crucial part of it - the work requirement. When you drop the work requirement, you will be getting somewhere. Until then, your plan - like every other attempt in the last eight hundred years to compel people to work - simply means that employers will pay virtually nothing for labour and large parts of the workforce will live on benefits. It's fiscally unsustainable.

Frances, you are getting closer!

"The reason why labour markets don’t clear is because we don’t want them to."

It is BECAUSE we want them to clear that we will adopt GI/CYB!

And the REASON we want markets to clear is because it generates more consumption for the poor. ANYONE against GI/CYB is CHOOSING to give the poor LESSS STUFF, less help, less food, less clothes, just less... and that is a fact of physics.

Because someone sitting on couch produces nothing. The same guy working for his poor neighbor in order to receive hi GI, delivers his poor neighbor consumption, the neighbor would not get under any other circumstance.

This is close, but gets to your mistake:

"But when wages fall below subsistence level there is pressure on government to top them up: hard-working people really don’t like not earning enough to live on."

My model isn't about "topping up" from the government.

My model is about looking at the resources on the ground AS THEY ARE.

Imagine system with no GI, no welfare, the workers will be forced to take jobs that PAY THEM THE MOST, bc they need to eat. The KIND of worker will be mostly determined by what the capital wants to pay the "highest price for" - meaning, what we demand from a worker we must pay $10 per hour, will be far different than what we demand of worker being paid $1.

This is the crucial bit you continuously miss...

GI/CYB guarantees anyone who wants to work, enough GI to become choosey.

This fundamentally alters the labor market. Suddenly the creative class is awash is job opportunities to for dream jobs. NOW, major low skill employers like Walmart etc must offer more than they currently do (at least $400 a week).

The other piece is that my plan I think you miss that enforces this choosiness is geo-location; the poor work for each other in their own neighborhoods.

This is why your analysis about wages falling is wrong. Where wages are already very low, the GI will pump the avg wage up, but the PRICES paid, are now super low...

So there is no "topping up" of the jobs that NORMALLY would be done anyway.

You have to grant that my plan deliver almost all of the leisure system you claim would lead to people being productive on their own.

I have more, but I'lll wait for your targeted take down of my plan.

Frances Coppola

Ralph, the answer is an unconditional basic income. If people can safely refuse jobs that don't pay enough, then employers will be forced to pay more. Indeed this is the principal objection to unconditional basic income raised by its opponents. It reduces labour supply and puts upwards pressure on wages, which is inflationary.

The problem is the persistent idea that refusing work must come at a cost. I say "persistent", because we have been trying to force people to work ever since the Black Death. Today's loss of sanctions is mild compared to the penalties enforced in mediaeval times (whipping, branding, ear-boring and imprisonment). And they are no more successful. All they do is depress wages. Forcing people to work depresses wages even when there are no subsidies. But when there are wage subsidies, the insistence that "work must pay" ultimately ensures that work doesn't pay at all.

Frances,

I agree that in-work benefits for a sizeable portion of the workforce will tempt employers into paying artificially low wages in the knowledge that the state makes good with in-work benefits: which I think equates to your “depressed wages” and “corporate rent-seeking”.

But I’m darned if I can think of an ideal solution to that problem. The best I can come up with is to allow a very small portion of the workforce (the marginal section) to be employed at no cost or virtually no cost to the employer. And we already have that in the form of the Work Programme and similar systems – plus there are interns. But the state needs to keep a sharp eye on what use employers make of that labour: e.g. an employee in the latter category certainly shouldn’t stay with the same employer for an extended period (with the exception of apprentices). That’s firstly because the employer may be simply profiting at the expense of the state. Second, if the employee is seriously unproductive in one job, the employee should be shifted to another to see that suits them any better.

As regards the rest of the lower 30% or so of the workforce (who get in-work benefits) I don’t see how you’ll succeed in upping their wage to a level that makes in-work benefits obsolete. The obvious way to do it is a huge increase in the minimum wage. But that would simply drive large numbers of relatively unproductive employees into unemployment.

Put another way, once we decide that the socially acceptable wage is above the free market price for a selection of employees, and deal with that via in-work benefits, that will inevitably tempt employers to exploit the system and pay artificially low wages in the knowledge that the state makes good with in-work benefits.

Or put all that a third way, if we mess with market forces then the market won’t allocate resources efficiently, which means that having the bureaucracy do the allocation becomes necessary. That allocation by the bureaucracy I think is acceptable where labour is allocated to employers for free because market forces have been totally neutered plus we are talking a relatively small number of employees. However as regards the above 30%, market forces are not so seriously neutered, plus if we had the bureaucracy trying to tell 30% of the workforce (Soviet style) what jobs they should do, we’d need an extra million bureaucrats, plus people would resent being told what jobs to do.

Frances Coppola

Ralph,

If we were talking only about supporting the few whose marginal product really is below the subsistence wage, then I would agree. But we are not. We are talking about large parts of the workforce living mainly on in-work benefits. The effect of in-work benefits with stigmatized unemployment is to depress wages, resulting in more people earning below subsistance wages. It has nothing to do with their marginal product and everything to do with corporate rent-seeking. I'm constantly amazed that people don't understand this.

“I disagree. I think the market does clear – when wages fall to starvation level.” Keynes demolished the idea that falling wages reduces unemployment, didn’t he?

If everyone’s wage (including the “wage” of entrepreneurs) falls, all you get is falling prices. Which in turn leads to an increase in the real value of money, which in turn raises the real value of people’s net assets, which induces them to spend more which raises aggregate demand - as Pigou pointed out. That’s the so called “Pigou effect”. But the latter is not a realistic way of dealing with excess unemployment.

“Reducing the size of the workforce means that the market will eventually clear and wages start to rise again…”. But fewer people means less aggregate demand! I’m baffled as to why that’s a solution. Halving Britain’s population would have no effect on the number unemployed as a percentage of the workforce, all else equal.

“But use of wage subsidies in normal times to support living standards because wages are persistently below socially acceptable levels is a different matter.” I don’t agree and for the following reasons, which are complicated.

There is an important distinction here between the market price of the average employee and that of the marginal employee, a distinction which only 0.000001% of the population understands. That is, regardless of whether we are in “normal” or in a recession it remains true that employers expand numbers employed up to the point where the output or marginal product of labour equals the minimum wage / union wage etc. Or if people are prepare to work for near zero wages, then employers will expand numbers employed to the point where the marginal product is near zero (starvation wage).

That phenomenon could be exploited: that is, assuming it is possible to distinguish between marginal and non-marginal employees (which I think it is), we could have a permanent employment subsidy that enabled employers to take on a few extra (i.e. marginal employees) at zero or near zero cost to the employer. The result would be a permanent reduction in unemployment (even in normal times). Put another way, NAIRU would be permanently reduced.

I expanded on the latter point in a paper (URL below). Unfortunately I doubt anyone will ever understand the paper – plus I doubt that human beings will ever understand labour markets.

http://mpra.ub.uni-muenchen.de/19094/

Frances Coppola

Jaap,

Good question. I've written about that here:

http://www.pieria.co.uk/articles/the_wastefulness_of_automation

and more optimistically here:

http://www.pieria.co.uk/articles/the_changing_nature_of_work

Good piece!

Wonder though. How about the case where there's really not enough sensible work to be done? As when robots and machines can do the work much more effectively and cheaply for their owners?

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