Awhile back, I submitted the following comment to pen-l. Except for one
short note by Paul Phillips, there was no pen-l comment. Notably, both Bob
Pollin and Gil Skillman did not reply, even though my comments could easily
have been off-base.
This pushes me to ask some questions: is it a mistake for me to submit
messages to pen-l that examine the ins-and-outs of economic theory? is
economic theory an inappropriate discussion topic on pen-l? are we to
restrict ourselves to discussing these issues with our neoclassical
colleagues, except at rare economics conferences? (Given the ASSA/AEA
downsizing of URPE panels, this seems less and less of an outlet for
intellectual or theoretical discussion.) Or is theoretical discussion of
economics only to be submitted to economics journals?
I really like the short discussions we on pen-l have about "biomass,"
Pinochet, etc. along with Dave Richardson's posting of the news from the US
Labor Department and Louis Proyect's and others' postings of articles from
the mainstream media. After all, a wide coverage of a large number of
different topics is part of political economics.
But are political economists to leave economic theory to the neoclassicals?
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Bob Pollin wrote: >> Without having done careful research on this
particular factor, four things seem most pertinent for understanding why
minimum wages do not correlate inversely--or at least not in a
straightforward way--with changes in employment. Thinking about a simple
labor market with a downward sloping demand curve and upward sloping supply
curve, these things are:
>>1. Rightward shift in the demand curve, depending on macro factors, which
in my less than rigorous study of this, seems to swamp the minimum wage
effect. Indeed, one could say that the rise in minimum wages almost always
follows business cycle upswings with a lag.<<
Gil Skillman comments: > Possibly true but beside the point, since if the
neoclassicals are right about the _ceteris paribus_ effects of minimum
wage, they could legitimately argue that employment would be *even higher*
if the minimum wage weren't raised. Conversely, are you suggesting that a
living wage policy should only be implemented in times of strong upswings,
to ensure that any specific disemployment effect would be "swamped" by
macro effects? Doubtful.<<
I think what Bob is talking about is that the effective demand curve for
less-skilled labor is price inelastic, so that even if a higher minimum
wage hurts employment, it would raise wages even more (to a greater
percent). The rise in the overall wage bill would then boost consumer
spending, which would shift the labor-demand curve to the right. (The
"sales constraint" on labor demand would become less binding, so that the
technologically-determined marginal product curve would become more
relevant.) This raises employment, cancelling out the initial fall in
employment.
(BTW, all of this is standard neoclassical economics, though most
microeconomists never studied macroeconomics and so don't know about
sales-constrained (or quantity-constrained) markets and simply assume that
what Clower calls "notional" demand curves apply (i.e, that Say's Law rules).)
This demand-side effect seems weaker when we talk about a living wage
initiative, because such an initiative (unlike the minimum wage) covers a
relatively small fragment of the labor force. But perhaps a living wage
initiative could start a domino effect, raising the wages of all folks at
the bottom of the wage hierarchy. In that case, it is more like the minimum
wage, which affects the entire economy or at least a big area such as
Pennsylvania or New Jersey. The living wage initative might also have this
effect if it isn't the _only_ initiative that we push for. For example, we
might push for unionization of the janitors and maids... Enough such
initiatives and the effects could be general. (Obviously, I am not calling
for Bob to do all this himself. He's doing enough for one person.)
>> 2. Efficiency wage effects, in particular, declines in turnover and
absenteeism, which by raising productivity, allow us to move up the supply
curve without hiring more people. <<
>Doesn't help this argument. First,if profit-seeking employers cared about
these effects, minimum wages would be beside the point, since they would
willingly raise the wage above existing minimums now. But apparently they
don't, so increased minimums will still increase effective labor costs at
the margin and reduce employment.... <
I think Gil's point shows the problems with the efficiency wage hypothesis
(EWH) as usually interpreted. I think that hypothesis has some insights to
offer, but it's inadequate if it's the only deviation from the received
neoclassical wisdom that we bring in. It's a mistake to engage in
micro-reductionism, trying to explain all of the many deviations of the
real-world "labor market" from the Walrasian utopia using the EWH (and it's
even worse if you follow Bowles/Gintis to use only the shirking
(principle/agent) version of the EWH, ignoring all the other effects of
high wages).
The real world of the "labor market" not only involves the EWH, but a lot
more (frictions, monopsony, bilateral monopoly, monopoly rents to share,
sales constraint, etc. etc.) These "imperfections" interact with each other
and reinforce each other, so that post Keynesians like Jamie Galbraith
reject the whole idea of describing the buying and selling of labor-power
as being like a standardly-defined market. Perhaps we should use the
Foley-type story of universal bilateral monopoly instead. (BTW, one
well-known result of either monopsony or bilateral monopoly is that a
minimum wage hike can increase employment.)
One theory that the EWH is confused with is that of labor-market dualism.
That theory (cf. Rick Edwards' CONTESTED TERRAIN, Andrew Friedman's
INDUSTRY AND LABOUR: CLASS STRUGGLES AT WORK AND MONOPOLY CAPITALISM, and a
lot of books by other authors) rejects the idea of
technologically-determined labor-demand even in the absense of sales
constraints and gets us beyond the simple emphasis on bargaining power that
results from a Foley-type theory.
In this view, the wage relation is not simply a matter of a deal between an
individual boss and an individual worker, where the former has to motivate
the latter (the principle/agent problem). Work is a collective process, so
the relationships amongst workers (in teams, chains, etc.) have to be
organized and managed. That's where Marglin's "divide and rule" (and
similar strategies) comes in. (The principle/agent theory assumes that the
workers are already divided, so that they act as atomized individuals as
reflected in the behavior of a "representative employee." BTW,
sophisticated neoclassicals are rejecting the whole idea of representative
agent models.)
Obviously, technology plays a role, but the demand for labor-power depends
on management strategies. Here's where the basic idea of dualism comes in:
there's more than one way for management to skin the cat (motivate labor to
produce a surplus product for the owners), so there are "equiprofitable"
managment techniques. It is this positing of multiple equilibria that makes
the dualism theory very different from the EWH.
On the one hand, there's the "primary labor market" strategy, in which
management provides labor with a wage premium, on-the-job training,
benefits, pensions, more interesting work, the possibility of job
advancement and security, etc. (It's _not_ just a wage premium, unlike in
the usual EWH, but a panoply of benefits.) This paternalism "pays for
itself" (analogous to EWH logic) by encouraging worker loyalty, morale,
etc. Sometimes it pays to have a labor aristocracy on hand, with management
and labor temporarily united against the world.
On the other hand, there's the "secondary labor market" strategy, in which
management pays rock-bottom wages, no benefits, no pensions, for boring
work in dead-end jobs. Workers are motivated by the fear of dismissal and
if they don't like it, they can leave, to be replaced by similar desperate
workers. High turnover, piece-work, and bullying supervisors are central
here, with the employees having absolutely no responsibility or autonomy.
A skilled machinist once summarized this theory to me as saying that there
are two types of jobs, those that treat you as an asset and those that
treat you like an asshole for being around. Of course, "dualism" simply
defines the poles, whereas reality includes lots of cases in between the
poles. But the poles help us understand reality.
In my understanding of dualism, primary labor-market relationships are a
bit like the boss treating "his" workers as something to invest in. This
means that it's more likely if the bosses can be assured of being able to
realize profits from the investment A stable economic environment, and a
monopoly or quasi-monopoly position help. Having monopoly profits makes
paying for a wage premium, etc. easier.
I think Jamie Galbraith's CREATED UNEQUAL has a lot to say on these matters
(even though his descriptions of labor-power markets and especially of
management strategies are pretty sketchy). His econometrics shows that high
and relatively stable aggregate demand and a high real minimum wage helps
narrow the gaps between high-wage and low-wage earners. We can also point
to the monopoly positions that a lot of companies had (like in airlines
and trucking) as allowing this kind of wage compression until those
positions went away.
I would also stress that unions have often been able to _force_ management
to follow more of a primary-labor-market strategy. They in effect pushed
management from one equilibrium to another.
The minimum wage can have this kind of effect. So could a living wage
initiative, if it was widespread enough or had a domino effect. If the
contractors who sell stuff to the city government that has the living wage
initiative have a certain amount of tenure (guarantees of repeated sales),
that can allow them to benefit from investing in their workers. So the
living wage law could push them to shift from a secondary strategy to a
primary strategy.
I don't think it's possible for _all_ workers (in the world) to have
primary market jobs (though I won't explain why here). However, the fact
that more workers had such jobs in the past than they do now suggests that
we could do a whole lot better than we are now.
(Choice between the two strategies are not totally voluntary. There's a
certain amount of "lock-in through learning" that makes it hard to switch
between strategies once one has been chosen. For example, company
supervisors, might gain a vested interest in preserving a
secondary-labor-market strategy, so that they would resist any change.)
>> 3. There may be some declines in hours worked, if not number of people
hired; but, as I recall, this doesn't come through so clearly in the work
of Card and Kreugar, for example, since the total hours were not measured
that carefully.<<
>Yes, that's my point; see below. But making it requires invoking
quasi-fixed labor costs, as explained below. In a perfectly competitive
world without quasi-fixed costs, given that individual labor supply is
upward-sloping, an increase in the minimum wage leads to an *increase* in
hours per worker and thus a *decrease* in number of workers employed.<
The labor-supply curve may be upwardly sloping for an individual industry
or for an individual firm with monopsonistic power, but overall the
labor-supply curve should be very inelastic, if not vertical, because of
the well-known conflict between the income and substitution effects.
There's some evidence that families have been supplying more paid
labor-hours over the last three decades _because_ of the stagnation of
wages, which implies a "wrongly sloped" (downwardly sloped) labor-power
supply curve.
We should also remember that as one goes down the wage hierarchy, the
worker's control over the exact number of hours he or she works dwindles.
People like me decide how many hours they work, but the worker in the
cannery has to follow the factory whistle. For her, showing up to work
early or leaving early is verboten. Thus, the number of hours worked for
the workers relevant to a discussion of the minimum wage or living wage
initiative is _not_ part of the supply decision. It's part of the
management strategy.
Obviously workers have preferences about how many hours they work, but from
the point of view of workers, the reduction of the working day is a
_collective good_, something that cannot be negotiated about individually.
The only way they can negotiate with management over hours is by uniting,
perhaps in a union, but also in wildcat strikes and the like (sabotage,
lawsuits).
>> 4. Firms absorb the costs, since, in many cases, low-wage labor costs
are a relatively small proportion of total fixed and variable costs (is
this similar to Gil's point?); but then they try to pass on costs by
raising prices, and are partially successful in doing so, especially in the
service sector, which is not competing with imports from low-wage countries.<<
>That doesn't work either. Labor demand curves are still downward sloping
(though less elastic) even if firms have product market price-setting
power, as this point suggests. Other things equal, an increase in the wage
rate would still reduce employment. <
See above for a discussion of how monopoly privilege can allow a completely
different kind of behavior that cannot be summarized by such notions as a
"less elastic demand curve for labor."
Anyway, the absence of competition from the third world does _not_ give the
service sector any kind of monopoly position, since monopoly is a
characteristic of individual firms, not of whole sectors. There's a lot of
competition within the service sector. (This is neoclassical usage, since
Marx talked about the capitalists having a class monopoly on the ownership
of the means of production. That's a completely different kind of monopoly,
irrelevant to this specific argument.)
What the service sector benefits from is not monopoly but rather from being
exempt from having the jobs exported via capital mobility and then having
the products imported back into the country. But the service sector workers
do have to compete with those workers who lost their jobs due to (or
accepted wage cuts to avoid) capital flight and import-competition.
>This brings us to the point of my paper. Suppose we're otherwise in a
neoclassical world (for the sake of argument), but there are quasi-fixed
labor costs, i.e. those which vary with the number of workers hired rather
than with the number of hours worked. Compared to a world without such
costs, the effect of quasi-fixed labor costs is to induce employers to
conserve on number of workers hired and use more hours per worker. However,
*at the margin*, the imposition or increase of a minimum wage increases the
cost of hours relative to the cost of people (that's not obvious, I know,
which is why the paper makes a contribution), leading to a substitution of
people for hours, increasing employment...<
The problem with this is that it is a short-term argument. In the long run,
there are no fixed costs, and thus no quasi-fixed labor costs either. So in
the long run, a simple neoclassical model would say that the number of
people hired would fall due to the minimum wage.
I know that you guys were playing the game of "let's introduce some
non-Walrasian elements ("imperfections") into the standard model" to see if
it presented some arguments against Krugman and the Krugmaniacs, to fit the
Card/Kruger results. But I think this strategy is the wrong one. Piecemeal
reform of the neoclassical model won't do. We need to present a complete
alternative, though some elements of that theory may be critically
appropriated and used carefully as part of the alternative synthesis.
Jim Devine [EMAIL PROTECTED] &
http://clawww.lmu.edu/Faculty/JDevine/jdevine.html
