Category Archives: Labor Economics

Hayek on Labor Mobility

If in the short run labour is, as we have assumed, highly specific to its particular employment, the unemployment caused by the decline in investment activity will disappear only when investment of the kind in question becomes once again profitable — or in the long run when labour has been gradually transferred to other industries.

— Friedrich Hayek,Profits, Interest, and Investment (Clifton: Augustus M. Kelley Publishers, 1939), p. 35.

Since I have brought up Profits, Interest, and Investment up as a “must read” for anybody who wants to judge Hayekian capital theory, it only makes sense for me to discuss it here.  This includes things which it does not quite sell me on.  Like any major piece of Hayek’s on capital theory, this 1939 monograph is complicated and difficult to understand on a first reading.  But, some of it seems disjointed and unsupported — since I have not read it yet, I am not sure that The Pure Theory of Capital improves on some of this.  Or, maybe I just misunderstand parts of Hayek’s argument.

The above quote encapsulates a theme which Hayek heavily relies on to show how an increase in demand for consumer goods will lead to a fall in employment.  But, I think his argument is woefully incomplete and susceptible to the common criticism of Austrian capital theory: why is there “full employment” when the capital structure is elongating and widening, but unemployment when it is contracting?  Indeed, should there not be just as many mobility problems when workers are being transferred away from lower order to higher order firms?  But, in the first part of this monograph, this is Hayek’s main argument: the specificity of labor.

In fact, assuming perfect mobility of labor, an increase in consumption would just lead to a redistribution of labor.  The graph to the left (p. 27), imperfectly, shows how this would be the case.  An increase in demand for consumer goods may increase demand for less durable or non durable capital goods, or what Hayek here calls ‘Stage II’ goods over ‘Stage III, IV,’ et cetera (area represents demand for higher order goods; here we note a change from ABC to ADE).  The main impediment in Hayek’s story is not a lack of opportunities to employ laborers, but trouble with the specificity of labor and the difficulty of transferring workers to new industries.

Did I miss something?  While I am sure that specific of labor is, to some degree, a problem, why does it not surface during the boom stage?  Is it because booms are gradual and collapses in investment tend to be sudden?  Also, my first question is sort of misleading, because booms are characterized by a stable or growing demand for consumer goods; but, my question would be relevant to someone trying to explain a healthy pattern of growth in a market economy.   A possible answer is that more ‘capitalistic’ forms of production usually hire a greater proportion of machinery, meaning there is a lesser cost of training involved (less employees to train).  Laborers in these industries are more “spread out” over a greater number of firms.

In any case, rather than focusing on consumer versus capital goods, it seems to me that a better approach to understanding the recovery period ought to revolve around the post-boom pricing process, the role of uncertainty, and drops in productivity (including an increase in idle, no longer useful, durable equipment).  In this context, Hayek’s argument has more relevance, since an increase in saving might save the market from a long readjustment from more ‘capitalistic’ to ‘less capitalistic’ forms of production.

In Hayek’s defense, this post is also highly disjointed (and as I write it, I realize that I am not considering parts of his argument — a reason I add “possible answers” and caveats to my “criticism).  My intention here is two-fold: (a) to better understand what Hayek is trying to get across, and (b) to stimulate some discussion.

Rise of the 1-Percent

A few days ago, I finally received my copy of the May/June 2012 issue of Foreign Affairs, which means that I finally read Raghuram Rajan’s much debated about essay, “The True Lessons of the Recession.” As an aside, frankly speaking, I am not sure why many non-Keynesians have put so much effort into defending it.  Sure, Rajan rejects the “deficient aggregate demand argument,” but the alternative he proposes is not much better.  At least Keynesians realize that a lot of the structural issues that Rajan highlights are purely imaginative.  In short, it is a bad defense of the “structural” line of arguments.

The piece does contain some interesting takes on certain phenomena though, and this includes a rationalization of the growing divide between the “1-percent” and the rest of the American labor force.  Briefly, the argument presented is that large firms, especially in the financial industry, began to demand better management as the actions they undertook became more complex (and riskier).  This led to pay increases for new managers and other firm-elites, as more firms competed for their services.  Writes Rajan, “This is not to say that all top salaries are deserved… but most are simply reflections of the value of skills in a competitive world” (p. 73).

On its own, Rajan’s argument depends on a changing distribution of wages between the “1-percent” and the rest.  Indeed, according to the piece, between 1976 and 2007 the “1-percent” increased their share of national income from 8.9 to almost 25-percent (p. 73).  This means that the rest of American society saw a decrease from 91.1 to 75-percent.  In distributional or proportional terms, someone took a pay cut or someone’s wage did not rise as fast as others’.  Rajan explains some of this by pointing to stagnating marginal productivity of labor.  Unskilled jobs were outsourced overseas and the American labor force never adapted to new demands.  He gives several reasons: “dysfunctional families and communities,” the high costs of education, a lack of “early schooling,” are some (p. 74).  Others are hidden in related arguments he makes, including the credit policies legislated to mask the structural problems (pp., 75–77).

I am sure that others’ knowledge on the topic far surpasses mine, but Rajan’s explanation does not strike me as being complete.  One of the major factors I disagree with is the “lack of education” argument.  Much of this thesis can be convincingly disputed just by looking at immigration into the United States.

Take for instance Saskia Sassen’s “America’s Immigration Problem” (World Policy Journal 6, 4 [1989]), which shows that a large influx of immigrant labor was made possibly largely because of outsourcing and the growing service sector, which increased the number of low-skill jobs available (many of which attracted skilled and educated immigrant labor).  Sassen actually explains the bifurcation in income as a result of the gradual decrease in the marginal productivity of labor caused by the change in the nature of the market (whereas Rajan seems to think that Americans simply have not trained themselves to take advantage of the well-paying jobs available). (The big problem I have with Sassen’s explanation is that an increase in supporting capital, that is in machinery and technology, should increase the marginal productivity of labor — otherwise, we would have seen a similar bifurcation of income throughout the past two or three hundred years, and this clearly has not been the case.)

Another relevant piece is Wayne Cornelius’ “The Structural Embeddedness of Demand for Mexican Immigrant Labor: New Evidence from California” (published in Marcelo M. Suárez-Orosco (ed.), Crossings [Cambridge: Harvard, 1998]).  In some ways, Cornelius’ research echoes that of Sassen’s.  Immigrants tend to fill low-paying occupational vacancies in the labor market.  He notes, though, that “natives” tend to opt for higher-paying jobs, arguing that immigrant labor is actually complimentary.  (This supports the notion that much of the growing divide has burdened mostly immigrant generations.)  What is important, though, is recognizing that much of this work deals with using “high-tech” technology meant to increase productivity.

Surely, the factors of “inadequate early schooling”, “dysfunctional families and communities,” and a lack of relevant higher education are far more acute in countries like Mexico than in the United States.  Many Mexican communities have seen their own structural readjustments, in the face of an expanding division of labor and inadequate local job creation — entire communities have simply been displaced.  Consider, for instance, the example of the Colonia Ecological Productiva and the growing informal sectors of Mexico’s urban districts.  The point is that these countries suffer from social problems which are much, much worse than the United States’.  Yet, their workers are seemingly able to man the jobs Rajan claims Americans cannot.

It is difficult to dismiss the stagnating (or falling, even) marginal productivity of labor argument altogether, though.  It could be that the growing subsidization of education, especially through guaranteed and low-interest student loan programs, have increased the propensity to gain skills which are not highly valued on the market.  Essentially, subsidies make it cheaper for students to pursue an education and they can earn degrees which may not be all that relevant in the division of labor.  This may stall the growth of certain industries that could use employees with alternative skills — not necessarily of the “intellectual” strand.  This could also explain the growing unemployment of younger generations.

I admit that I have been rambling a bit.  My original intention was to post a series of questions, but I could not help myself from thinking a little bit on the topic.  My major question is: can much of this wage phenomenon be explained by cheap credit policies during the past 20–30?  I do not mean this in the sense Rajan uses credit policy as an explanation (as a political veiling of the growing structural issues).  Rather, could an increase in credit — much of it distributed to the financial sector first — explain changes in the distribution of money?  Could this explain the nominal bifurcation of income?  Rather than actually decreasing nominal wages, could it just be that a greater portion of new monies was distributed to the “1-percent” rather than the “99-percent?”  A more loaded way of saying it would be that inflation has benefited the wealthy more than the middle- and lower-class.

Also, how much does an increased propensity to not work factor in?  Is this even a major trend (or a trend at all)?  What I am talking about is an increase in the unemployment rate for younger workers, manifested in behaviors such as living with parents for longer amounts of time.  How many more people are living on the fruits earned by others?  This suggests that a smaller pool of income is being distributed amongst a larger group of people, but it does not have to do necessarily with falling nominal wage rates.

Finally, what conclusive/comprehensive studies of wage rates of the American labor force have been conducted?  Or, do people have other, better explanations of growing inequality between these two major income-earning groups?

Edit: There are studies of wage rates and income inequality in the United States.  I have seen a number of them.  I am asking which ones people find the most convincing.

Evidence of Underemployment

One of the most serious — and ironic — consequences of the feminization of the new proletariat has been to increase the pool of new laborers and thus contribute to male unemployment.

— Saskia Sassen, “America’s Immigration ‘Problem,'” World Policy Journal 6, no. 4 (1989).

Sassen, here, is talking about the cause of immigration into the United States from countries which experience direct investment from the United States (with the purpose, ironically, of developing these nations and mitigating future immigration).  So, the above-quoted problem is one which besets undeveloped nations, which should technically have a lot of room for development (and, thus, should be able to soak up unemployment).

The issue, I think, is with restrictions (whether they be direct or indirect, policy or ‘natural’) on the employment of capital to increase the marginal productivity of labor of the marginal (unemployed) worker.

Related to an earlier post of mine (where, admittedly, I made a huge, obvious mistake with a supply and demand graph), this is what I mean when I say that wages are not everything, and that in depressed economy (where investment has fallen) falling wages alone cannot return an economy to “full employment” (where all those willing and able to work find employment).

Wages Aren’t Everything

[See correction on the bottom.]

This is a random thought of mine.  Since this has most likely been covered somewhere, by someone (Keynes?), what I am really looking forward to is someone showing me what I am missing.

The common claim is that if wages are flexible, they will fall to a wage rate that will clear the labor market (no unemployment).  Within the context of a recession/depression, it seems to me that the concept of “unemployment” has lost any valuable meaning, if what we mean by it is a cleared labor market.  If, however, we define (unnatural) unemployment by those who are willing and able to work, but not demanded, then it seems to be that even falling wages cannot recuperate full employment.

Let me try to illustrate my argument with a simple supply and demand graph first,









We see a leftward shift in aggregate demand, which is supposed to represent a fall in nominal demand for labor (i.e. a fall in the number of dollars being bid towards labor).  With perfect price flexibility, we see a fall in wages to a new equilibrium point — labor markets clear.  At this new equilibrium point, though, we see a reduction in the quantity of labor employed.

Usually, supply and demand graphs are interpreted to display how much a(n) firm/industry/economy will supply at a given price, and/or how much a(n) individual/firm/industry/economy will demand at a given price.  So, for instance, if the equilibrium price is PE, a firm will not supply more of that product than is demanded.

If you use a supply and demand graph to show the labor market, then this interpretation is a bad one.  You have a supply of labor that exists before the fall in aggregate demand.  This supply of labor does not shrink when aggregate demand falls — the number of people willing and able to provide their labor remains the same (or, may even grow, if new laborers are willing and able to enter the market).  If we assume full employment at the original level of demand, then the bracket (on the above graph) showing the change in the quantity of labor employed represents the number of unemployed in a depressed market.

Now, here is a graph showing the relationship between the marginal product of labor and the marginal costs of labor employment,










The red dotted line represents the wage rate in a competitive market, where the marginal product of labor is equal to the marginal costs of employment.  Why will firms not offer a lower wage?  Because the costs of employment are greater than benefits of employing that extra unit of labor.

During a depression, you have a certain number of workers who are now unemployed (see that supply and demand graph).  These workers are able and willing to work, but firms are not looking to buy extra units of labor.  Why?  Because the costs of employing that labor are higher than the benefits.

Does this not fly in the face of the Austrian claim that in a free market everyone will find employment?  Yes and no.  Like I said, I think that this disproves the notion that perfect wage flexibility will end all involuntary unemployment.  The derivation of the marginal product of labor is based on “everything else being equal.” Austrians are not counting on everything else being equal.  Since wants are essentially limitless (as long as people are acting), then there is always opportunity for employment.  But, capital and labor are complimentary, and thus for there to be a greater quantity of people employed there must be an increase in the quantity of employed capital — i.e. an increase in marginal productivity.

What this tells me is, that in the study of depressions the most important factor is not necessarily labor, but capital.


As Patch comments below, the supply and demand graph does not adequately show what I’m trying to say, mostly because my supply and demand graph is wrong.  This is what it should really look like,


The supply of labor is constant.  I added the graph to the right to show my mistake.  The new wage would be the point where aggregate demand intersects with the existing supply of labor (you don’t see an intersection? that’s why that graph was a bad one).

So I have to change the way I present underemployment.  Like I write in response to patch, the surplus of labor would be a product of a shrinking base of employed capital (i.e. liquidating firms).  This is, more or less, in line with the Austrian business cycle theory, since malinvestment would do this to you.  I will have to work on this over the weekend.

Gender Gap Data

Steven Horwitz makes a good case for the idea that gender discrimination says less about wage inequalities between men and women than some people are lead to believe.  In his written follow-up (defense) of his claims in the video Horwitz re-states the argument (emphasis original), ” [T]here are a lot reasons and pretty good evidence to suggest that when we control for human capital, compensating differentials and the like, most of the gender wage gap disappears.”

As Nancy Carter’s and Christine Silva’s piece in the The Washington Post reminds us (as does Horwitz), though, gender discrimination still exists and it still negatively effects women at the workplace.  The authors write,

Women who initiated such conversations and changed jobs post MBA experienced slower compensation growth than the women who stayed put. For men, on the other hand, it paid off to change jobs and negotiate for higher salaries—they earned more than men who stayed did. And we saw that as both men’s and women’s careers progress, the gender gap in level and pay gets even wider.

What I think discussion should focus on is,

  1. How alertness, discussion, research, and education can positively influence wage inequality (and, not just between men and women, but any discrimination on a basis other than capability),
  2. How, if these problems are valued as such by individuals in a society, the market process can find solutions, or even has a tendency to discouraging discrimination.

I think the latter approach (and, I think that (1) is integrated in (2)) is the most significant, since nobody wants to hear about how well the market does now.  People recognize a problem and they want a solution.  A real defense of markets is one which shows how the market process is superior to alternative forms of dealing with the issue of workplace inequality.

To preempt arguments along the lines of “individuals have the right to discriminate as they wish,” I agree that this is true.  This does not mean that workplace inequality is not an issue which many people value as a problem, which means that whatever rights an individual may have to discrimination does not counter the fact that there is a social movement away from discrimination.  Nor does the alleged right of discrimination say anything about what is fair (right) and what is not (wrong) — we can disagree on morality, but at the end of the day you are not going to persuade someone who seriously considers discrimination a problem that it is not.

Economics of Power

I am reading Rory Dicker’s A History of U.S. Feminism, which gives short, to-the-point historical coverage of the feminist movement between roughly the mid-19th century into the present day (the book was published in 2008).  I am currently finishing the second (of four) chapters, which covers the “first wave” of feminism — that which stemmed off from the abolitionist movement and came into its own after the end of the American Civil War.  Dicker gives off a lot of vibes that a capitalist — such as myself — quickly recoil at; the way she makes mention of the relationship between womens’ rights and the general idea of “liberty for all” comes off as explicitly anti-capitalist.

There are many things to disagree with in anything that attacks capitalism for what it is: a social organization that oftentimes creates voluntary power structures (e.g. that between manager and associate employee, between professor and student, et cetera).  There are many things to disagree with in anything that attacks capitalism for what it is not: a ruthless method of profiteering that sacrifices society for the “bottom line.”  In short, a lot of the negative attention placed on the capitalist system by feminists — no matter how legitimate the core of their movement may be — is unwarranted and should be considered as such.  I wonder, though, if upon further inspection a staunch defender of capitalism may be more flexible in analyzing some of these “anti-capitalist” claims.  That is, if some of the unwarranted arguments that feminists, and anti-capitalists in general, make are not unwarranted after all. Continue reading

Fundamentals of Scarcity

Over this past week, the name George Reisman and the title of his treatise, Capitalism,has been thrown around quite a bit on this blog.  Reisman is a brilliant man, even if I may not agree with everything he has to say about economics, and Capitalism is the colossal written manifestation of his brilliance.

Amongst other things, Reisman discusses unemployment and human labor, concluding that the last thing anyone ought to worry about is employing those seeking to sell their labor.  Writes Reisman,

Man’s limitless need for wealth, combined with the respective natures of desires and goods, is responsible for the fact that the desire to consume always far outstrips the ability to produce.  Desires are mental phenomena, based on thoughts and concepts.  Goods are physical phenomena, requiring for their existence the performance of human labor.  For all practical purposes, the referents of concepts are limitless; and to desire, one need do hardly more than imagine.  But goods are always specific concretes, and each must be produced, requiring labor and effort.  In essence, our desires outstrip our ability to produce by virtue of the limitless range of the mental in comparison with the physical and thus by virtue of the fact that the range of our imaginations is always incomparably greater than the power of our arms. (p. 54)

Given the fact that there is no dearth of what can be potentially produced, given the existence of the required factors of production — the existence of which is also predicated from the availability of human labor —, we must conclude that mass unemployment stems from the artificial interventions of the state which put a halt to the possible productive processes of the market.

This also suggests that employment for employment’s sake should not be an end sought by economic policy, because employment is a necessary precondition of productivity.  Employment is a means to an end.  The task of setting ends should be given back to the individual, because the accomplishment of these ends will invariably require the input of human labor.  No less, the availability of human labor decides the general level of productivity of society, or the division of labor — the more labor available, the more productive society can be.


Surplus Value or “Imperfect Competition”?

On Saturday, Paul Krugman* (“Things Were Supposed To Be Quiet About“) brought up a good point regarding growing income inequality between employees and employers.  Free market economists like to argue that growing income inequality does not matter, because productive growth means that all wages have grown overtime.  I agree with Krugman that this is not a point that overrides the growing income gap.  I probably disagree with Krugman, though, in deciding what exactly has caused growing income inequality (markets vs. interventionism) — I think, either way, there has not been a good empirical study on the origins of the expanding income gap.

I like to blame this phenomena on certain interventions that have guaranteed income to profit earners (vs. wage earners).  I admit that there is insufficient empirical evidence to make a good case for this explanation (which is a historical subject), but I think the same is true the other way around (existing studies seem to be incredibly superficial, because there is just so much data [both directly and indirectly related] to analyze).

Another drawback to my non-empirically supported perspective is that, in a way, it stands on a lot of “market fundamentalism.” I do not believe that markets naturally lead to a growing income gap, because competition for labor should push wages up, not the other way around (except when there is mass unemployment, but this is a special case).  I just do not recognize a market force that could possibly, in general, push wages down.  The income gap should be closing, not the other way around.  There will always be a gap, but the size of the different gaps should lessen.

I wonder, though, whether interventions that have made competition more difficult in certain industries has contributed to the “income gap” problem — it could even distort how we perceive the “income gap” problem.  For instance, if government shuts out competition and certain entrepreneurs earn greater profits because of this, you have a smaller percentage of people earning from the same pool of income (profits).

I think Krugman’s graph supports my idea,

I am not sure if these figures are adjusted for inflation, but if they are it seems strange that both median family income and total income can rise, but with an increasing income gap.  Instead, it could be plausible that there are less people earning profits from a similarly sized pool of income (aggregate consumption demand).

Makes sense, or no?

*  I comment a lot on stuff Krugman writes, which can pretty usual for an Austrian blog.  I hope nobody interprets this as the usual Krugman bashing.  I disagree a lot with Krugman, but I tend to comment a lot on what he writes because he writes a lot of genuinely good stuff.

Structural Pains

Tyler Cowen provides the following graph,

Cowen shows that job growth for the unimpaired sectors has almost returned to pre-crisis levels, suggesting that our unemployment problem resides squarely of those who used to work in the structurally impaired sectors.

I might be asking a stupid question, but is this information supposed to tell us information that we do not already know?