Rigid Productivity

Why do neoclassical economists oftentimes blame only two factors on unemployment:  (i) wage rigidity or (ii) a rise in the disutility of labor?  What year are we in, 1936?  Alternatively, others might blame it on “skills mismatch,” citing evidence that individuals with “lesser” education are increasingly being out-competed by those with advanced degrees.  There’s not much respect for the sacred position labor occupies in the division of labor: that of the scarcest resource — think about it, productivity’s natural limit is the availability of labor.  Few economists look at the more complex causal factor: inadequate productivity.

Elaborating on why lack of education might not play as big a role in unemployment as some suggest, imagine the labor market from a Hayekian perspective.  There is a total supply of labor with heterogeneous skills.  The labor supply is drawn from by firms looking to achieve some rate of income, but there is an ambiguous degree of inflexibility in the ability to mix labor and capital.  Two simple alternative ways of looking at this problem include having to demand capital goods that are complimentary to labor or training labor to become complimentary to a given stock of capital goods.  In reality, both may occur, as well as other methods of mixing the two.  What this means, though, is that entrepreneurs have certain expectations and understandings given the available stock of capital, labor, and the expectations they hold on the future state of demand (relative to their output).  This suggests that the structure of production will have to, in part, be shaped around the specificity of labor.  Otherwise, we would see a permanent historical trend of discoordination between entrepreneurs and the supply of labor.

Neither do I think falling back on the increasing complexity of of the economy, including the growing intricacy of the products being manufactured and the services being offered, is very useful.  The easiest reason to avoid doing this is that universities and public higher education don’t really teach the relevant knowledge (although, community colleges have tended to offer “blue collar” courses and there are, obviously, trade schools).  Additionally, the potential outputs that can be produced are essentially limitless — bounded only by human creativity and the means of production —, and so even despite a scarcity of high intellectuals there are plenty of products that can be produced with any given skill level of workers.

What about the empirical fact that “low education” workers are being gradually replaced by “higher education” workers (I quote those terms, because a level of education is relative to what exactly your occupation is — a plumber is better educated at plumbing than an economist or psychologist is)?  When interpreted correctly, these trends support my argument, not the education one.  There’s fewer jobs available, and firms are opting to hire those with greater general skills.  In some sense, this also supports Tyler Cowen’s “great stagnation” thesis, which in some respects goes hand in hand with the “inadequate productivity” I’m referring to.

It might help to see more sense in the productivity argument if we first explore why it might not be rigid wages which are causing high unemployment.  The fact is that wages are not so much flexible or non-rigid, but that there are no “forces” operating to push them down to a level that would allow for “full employment.”  There is a growing amount of literature that supports the empirical case that many firms prefer to maintain high wages and shed excess labor during a cyclical fluctuation (see Kuehn [2011], pp. 448–450, for a short survey).  The clear conclusion one should derive from this is that entrepreneurs expect greater productivity from fewer higher paid workers than from more lower paid workers.  In other words, given stagnant productivity there can exist what we can tentatively and illustratively call an “underemployment equilibrium.”

What is holding back productivity?  For starters, a moribund banking sector with excessive levels of unproductive debt.  The unemployment problem is necessarily tied to the state of the rest of the economy.  These are all complimentary factors and a general economic recovery will entail a recovery in all these different sectors — this should serve to question the validity of the idea of a “jobless recovery.”  Taking whatever steps necessary to jolt the economy back to life would be sufficient to increase employment, with the additional caveat that since the early 1970s we’ve seen “growth” with falling relative wages and growing income inequality — different economists have different explanations, but most would agree that some sort of reforms are necessary (regulatory on one side and “freer” markets on the other; I think both would agree with something I recently read in Steve Keen’s Debunking Economics, which is along the lines that the “banking class” has caused the re-distribution of income towards them away from both the capitalists and wage workers).

Without a doubt, a productive, growing economy would shape production — whether of manufactured goods or non-manufacturing services — around a given supply of labor and capital, gradually shaping it to meet certain needs.  There’s no reason to suppose that there is a permanent divide between our economy’s need and the education of any given individual.1  Of course, there will always be a need for a specific skill — our world is one beset by the elementary element of scarcity —, but this shouldn’t be seen as the cause of our unemployment and inequality woes.


1.  Although, one should not deny that the past decades have seen a rise in the volume of degree holders.  What this has often meant, though, is that people have gained skills that are incongruous with “real world” demand.  As such, we find business degrees working at Kmart, and philosophers having to go to a technical school to attain a different set of skills.  In other words, we have also seen an increase in the volume of malinvestment in human capital.  These people have been able to find jobs in fields usually unrelated to their degree, at the expense of others.  Bluntly put, higher education oftentimes results in a large waste of resources.

4 thoughts on “Rigid Productivity

  1. Blue Aurora

    What would you say is the difference between a “Misesian” explanation and a “Hayekian” explanation of this circumstance? Just curious, Jonathan.

    1. Jonathan Finegold Post author

      It’s a subtle reference to “The Maintenance of Capital,” where Hayek talks about the value of capital and the maintenance of an entrepreneur’s income. Wrt Mises, I haven’t read anything by him that really delves into capital theory as deeply as Hayek.


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