Tuesday, January 13, 2009

Keep wages high to increase misery

As unemployment in Australia looks ominously set to soar the mindless are at it again endorsing preservation of real wages in the face of the most serious threat to employment Australia has faced since the Whitlam and Keating years. The reason they claim – keeping wages high will stimulate aggregate demand and the role of wages as a cost of production is exaggerated. It is also, they claim, socially just. Employers can deal with reduced demand for their output by means other than shedding labour – for example by investing in skills. Of course if this argument is valid then why not increase wages when the demand for labour falls – this will really get unemployment increasing at a time of falling Labor demand! Indeed that is the ‘strategy’ (to stretch a term) of the ACTU that I have recently discussed.

Of course, the reason this is so daft is that firms employ workers in terms of the value of their additional contribution to output the workers generate so that when this value falls employment will fall. The extra demand from higher incomes will only reflect extra spending from the diminished pool of those who hang onto jobs. Not from that pathetic lot forced to join the dole queues whose diminished incomes are paid for by transfers from those lucky enough to retain their jobs.

The notion that keeping wages high is 'socially just' is economic illiteracy. It is behind the nonsensical notion that whatever happens the real wage should only ever remain fixed or increase. A social wage can be sometimes preserved by means of government transfers but, in market economies - all economies other than North Korea and Cuba - privately paid wage signals determine employment decisions. The notion that wages themselves should reflect what dreaming lefties believe are appropriate living standards essentially denies the existence of labour markets.

16 comments:

Slim said...

I trust you'll be forgoing your next increment, or even suggesting a salary cut to your employer, for the good of the country and the economy, of course? ;-)

hc said...

Slim,

Implicit in your remark is the idea that there is some just level of wages that needs to be maintained regardless of circumstances. That is wrong. Wages are a price that is driven out of labour markets. Returns to workers can only be sensibly altered through taxes and transfers not by altering market wages.

The university labour market is weak but, for sure, if shaving 5% off my salary would keep academics from joining the dole queue then I'd be happy to do so. Its also rational overall - if they join the dole queue I've still got to subsidise their transfers from my taxes and society then gets no output from them.

It is always better to charge market clearing wages (perhaps supplemented by transfers) than to have a lot of unemployed people sitting around drawing dole checks.

BTW Slim have you ever been unemployed? Do you have any idea what a disaster it is for someone who has worked most of their life to suddenly be out of a job and depending on the dole.

jc said...

good to see you're getting out of those festive season blues Harry, as I was really worried about you. Great post, but if I was to level any criticism it would be that there wasn't enough envective against these economic trogs and dinosaurs that promote horrid economics.

Slim: Here's a job for you. If you can prove that market optimum in the labor market is reached by maintaining higher wages in the economy when we're heading into a recession then you ought to be nominated for the next prize in economics.

You have your own blog, so get to work and prove it.

jc said...

oops invective.

Slim said...

Yes I have been unemployed back in 1997. When I finally got a contract job in training 8 months later for $35K my family income actually went backwards by about $6K from being on the dole with healthcare card, family allowance, etc.

Sadly, a situation that hasn't changed with the succession of governments.

I'll grant you Harry and JC the elegance of market determined wages. Sounds great, logical and sensible. Good in theory, harder in practice, and as I said before, it's usually promoted by people receiving well above the social wage, and in a time of totally disproportionate executive remuneration, there is an underlying hypocrisy. As the cost of living rapidly increases we expect the worst off to just make do until times 'get better'. Of course, as times get better, for some of us, that is still not good enough. Just one more beach house and then we'll help the less fortunate! My daughter needs a beemer to get to uni.

The dole is not a pleasant way to survive, but neither are US style market clearing wages of $5 an hour.

We have a wage determining system that has served the nation comparatively well over many decades. We don't have a free market for wages, and after the last election and the general mal-odour associated with unregulated free market experiments at the moment, we are unlikely to see one any time soon.

I suggest that electorate has spoken on that one and would rather endure the pain of higher unemployment than an overall lowering of wages. After all, we all want to get ahead, and if it's at someone else's expense, well that's life. Isn't that the market creed - the highest ethical good is to look after number one?

Just as well we're salary earners, eh Harry?

conrad said...

"Wages are a price that is driven out of labour markets"

What about government monosponies like teaching (which include many of the unionized sectors) which have driven wages so low over time, including in the boom times, that there are already reasonable consequences? Of course these guys are not going to settle for no pay rise -- they wern't given what they deserved in the boom times, so you can hardly argue they should stop pushing at other times.

jc said...

I'll grant you Harry and JC the elegance of market determined wages. Sounds great, logical and sensible. Good in theory, harder in practice, and as I said before, it's usually promoted by people receiving well above the social wage, and in a time of totally disproportionate executive remuneration, there is an underlying hypocrisy.
So, if you think another economic model is superior, please detail it. Please define what exactly is a social wage? And please describe last time you paid more for something than it was worth compared to others that were offering a similar product. Have you ever? Why not? That’s what you are suggesting people should do especially when profitability is down to recession levels.






As the cost of living rapidly increases we expect the worst off to just make do until times 'get better'. Of course, as times get better, for some of us, that is still not good enough. Just one more beach house and then we'll help the less fortunate! My daughter needs a beemer to get to uni.
Well, tell the central bank to stop causing inflation. That’s hardly the problem of the firm hiring people, is it?


The dole is not a pleasant way to survive, but neither are US style market clearing wages of $5 an hour.

Very few people other than beginners and difficult cases were on a $7
minimum in the US. But of course ignore the 11 million illegals in the US that has the effect of pushing down real wages for the unskilled.


We have a wage determining system that has served the nation comparatively well over many decades. We don't have a free market for wages, and after the last election and the general mal-odour associated with unregulated free market experiments at the moment, we are unlikely to see one any time soon.

Of course, the ALP simply lied about the advantages of a free labor market therefore making certain that the unemployment pool rises while the wages for their union bosses rises or stays the same. So fuck the unemployed says the ALP.

I suggest that electorate has spoken on that one and would rather endure the pain of higher unemployment than an overall lowering of wages. After all, we all want to get ahead, and if it's at someone else's expense, well that's life. Isn't that the market creed - the highest ethical good is to look after number one?

You mean like the unions look after their own and then make sure laws are there to protect them at the cost of everyone else. Great philosophy.


Interesting when lefties don’t have an economic argument they steer towards incoherence…. Just like you.

Slim said...

jc - my alternative wages model is the one we have. Free-market fundamentalism is so unattractive at the moment. I've never bought it, and I ain't about to start now at your behest. The argument that if the all those lefties, bleeding hearts, greenies, blablabla had just let us get on with implementing our free-market vision we'd all be living in economic paradise eating strawberries and cream is pathetic. The dream is over.

We don't have a deregulated wages system and we aren't going to get one in the foreseeable future. Blame whomever you like for that fact, but it is so, and the last election confirmed it, making sure it's political poison for a good time to come.

Get over it.

jc said...

Well slim, it's like this. Yes the free market model has taken a bit of a back seat at the moment and yes the left's policies around the world (and here) are taking centre stage to some degree.

However what you or other idiot lefties can't do is leglislate away economic laws. It's never happend and never will happen.

So you can leglislate for all the economic restrictive laws you want in terms of the labor market, but there is one simple economic law that will refuse to get legislated out of existence.

That's if you impose laws that rise the price of labor above it's marginal product you will end up with unemployment. No matter what you do to stop that, that is what is going to happen.

So no amount of telling me that Rudd the dudd was voted in and that's what people want. What people want or at least what they voted for was for a bunch of economic clowns like swan and rudd.

So yes, we will have a much higher level of unemployment when it's all said and done.

So no matter how you try to cover your inchonerence and ridiculous comments it won't go away like you would like it to.

so next time you accuse people of being AGW denialists spare a thought for the idiots on the left that can't understand basic economic laws and will deny them until the centrelink cheque comes home.

Slim said...

Ah - the old laws of economics again. Not ideas, concepts, theories, working hypotheses - no, laws. Are they the laws that economists use to fully explain why their last model failed? Are they carved immutably in stone somewhere? Were they handed down by revelation or were they present at the Big Bang? Give us a break.

Yes, and I've already suggested that most voters are prepared to accept unemployment as a cost for higher wages (after all - it's mostly other people, not me).

As for accusing people of being AGW denialists? Which people - just name one! Jennifer Marohasy and her band of merry wo/men? They're self-proclaimed for chrissakes. LOL.

jc said...

so raise wages 30% a week through laws, Slim. If laws don't matter that shouldn't matter.

jc said...

interesting theories, Slim. interesting theories that simply add up to a brand of denialism that the left supports.

That's why i keep saying that leftism is simply a brand of denialism and incoherence. You're exhibit A

Slim said...

No-one's calling for 30% wage increases, but many decent hard-working folks think it's reasonable to keep treading water with inflation when they see how well the financial class is doing. I prefer conciliation and arbitration based on law.

So what exactly is IT that Rightists 'get' and Leftists are in denial about? That Rightists know everything and Leftists are morons? I admire your certainty.

Left and Right are basically differing world-views - we're all human and sentient as far as I'm concerned. It is the duality of human nature. We can either beat each other up with it or try to communicate, negotiate, cooperate and compromise in order to get along peacefully. Martin Buber puts it down to I-Thou and I-It.

I'm right and your wrong we declare! Whatever.

jc said...

No-one's calling for 30% wage increases, but many decent hard-working folks think it's reasonable to keep treading water with inflation when they see how well the financial class is doing.

What inflation, it’s fallen off a cliff. What the hell are you talking about?

I prefer conciliation and arbitration based on law.

Well, frankly I am not surprised as setting wages in a court seems about as sensible as taking your green grocer to court for price discovery.

So what exactly is IT that Rightists 'get' and Leftists are in denial about? That Rightists know everything and Leftists are morons? I admire your certainty.

Lefties don’t understand economics and the way the world works. It’s basically that simple, Slim as you yourself have shown with your incoherent understanding of labor economics.

Left and Right are basically differing world-views - we're all human and sentient as far as I'm concerned. It is the duality of human nature. We can either beat each other up with it or try to communicate, negotiate, cooperate and compromise in order to get along peacefully. Martin Buber puts it down to I-Thou and I-It.

Debate all you want, but if you place restrictions on the labor market that carry wage levels over and above the clearing rate you’ll end up with unemployment. Yes, you’er right the electorate voted for this, which to my mind says several things..
The electorate is either gullible or greedy and those that impose restrictions on the labor market causing unemployment should fully compensate those that are unable to get a job as a result of these restrictions. I’m not talking about the pittance, which is the dole, but they should be fully compensated for loss of income to the full extent.

It also tells me that democracy, which is as you’ve shown the tyranny of the majority, should be replaced with a limited constitutional republic where no one can vote for a bunch of trogs that will legislate those laws on their behalf to screw people over.

I'm right and your wrong we declare! Whatever.

I am…. and you are wrong.

Slim said...

Rightists understand economics? That's rich!

There may be no inflation, but the cost of things keeps rising - health insurance, car rego, energy, water, food.

jc said...

No, not all rightists understand economics as Bush proved in his second term.

However the free market right does understand economics pretty well.