The effect of a general change in wage rates upon employment and the value of the national income is decidedly uncertain because we are compelled to consider the results not only of a change of costs but also of a change in aggregate demand. While costs will presumably move in the same direction as wage rates, demand may move in the same direction but even further, or less far, or it may shift in the opposite direction.
In order to analyze the effects of a wage change upon demand, we must deal with its effects upon each of demand's four determinants: private investment, the consumption function, government purchases, and net exports. When we proceed along these lines, we find that our uncertainty is compounded. The answer seems to be extremely sensitive to the nature of the response of businessmen, the reactions of buyers, and the behavior of banks. This should not be surprising. The economy, as we have pointed out before, is not a machine. Its responses are the responses of human beings, and if they cannot be forecast or if they can be predicted only when all the circumstances are known, the effect on the economy of any change will be uncertain. [emphasis added]Lorie Tarshis, Modern Economics: An Introduction (Houghton Mifflin, 1967), p. 532-533
The contemporary push for austerity can be viewed as part of the attempt to reduce wages of workers in developed countries in order to increase the competitiveness of these countries in the global marketplace where labor is now fungible. As Tarshis points out, wage cost reduction may involve unforeseen consequences. Uncertainty often comes with surprises.
5 comments:
"austerity can be viewed as part of the attempt to reduce wages of workers in developed countries in order to increase the competitiveness of these countries"
I can't get my fingers on it but there's something about this sentence that bothers me, Tom. Is it the competitiveness of countries that are trying to be improved? Or is it simply that the system of extraction and arbitrage is running out of resources to exploit? Do policy-makers in the US really believe that reducing wages is in our national interest? Greenspan once thought so (practically bragging to Congress about employment volatility) but has famously recanted his world view.
I just can't see how this policy outcome has a positive end for any economy.
Joe, the idea is that increased exports due to more competitive pricing resulting from lower costs (wages are the largest cost to firms) will be beneficial overall even though NAD may dip in the US. Multinationals are now positioning themselves for the long run, where growth will be predominantly coming from emerging markets for the foreseeable future. US workers are caught in that squeeze.
Our policy-makers believe that the problem with America is that its workers cost more than Chinese workers.
It seems clear to me that in a world where 2/3 of the population live literally hand to mouth, workers somewhere will always be available for exploitation. Or am I just naive?
How do policy makers rationalize the demand side of that equation? Are they seeing the demand in emerging economies replacing demand in developed nations? Is there enough difference between prices and labor costs in the developing nations to exploit this?
Seems like a Faustian bargain to me.
Joe, it beats me how they think. It seems they think that investment creates demand rather than the other way around. The world is awash with capacity and starving for effective demand.
Henry Ford got this. I don't know what is so hard for them to.
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