Tuesday, April 4, 2017

Chris Dillow — Wages & productivity


Is Verdoorn's law really a "law"? In physics a law is not only formal but must also be so well-confirmed that it's probability is accepted as approaching one as a limit. Is this the case with "laws" of economics. If not, why are they called "laws"?

Stumbling and Mumbling
Wages & productivity
Chris Dillow | Investors Chronicle

6 comments:

Neil Wilson said...

It's interesting watching the psychological barriers at work in these pieces.

IF you make labour expensive you alter the capital labour ratio and make it more cost effective to replace people with machinery. So you get rid of the hand car wash and replace it with a full automatic machine. You get rid of foreign imported baristas and start getting your coffee from a machine.

The jobs are lost - permanently. That is the task of the private sector - to innovate, automate and eliminate jobs because people are expensive and not very efficient compared to a machine.

So you then have to find something else for the people to do to fill their time. Often the private sector pulls those people in at the next higher level of automation, and then the process repeats - as it is doing with IT workers being outsourced to India and ultimately replaced with deep learning AI neural nets for the boring stuff.

This is the virtuous cycle that drives productivity forward. You have to have enough spending to create the demand, and expensive scarce labour to make the machines worthwhile.

To make labour scarce in a modern economy, the public sector has to take it away at the living wage. The alternative is to starve people to death or finish them off with the diseases of poverty - which is apparently the approach adopted in Greece.

Tom Hickey said...

The alternative is to starve people to death or finish them off with the diseases of poverty - which is apparently the approach adopted in Greece.

Increasingly in the US, too. Deportation of illegal immigrants, incarceration of minorities, and increased morality rate of low wage white workers.

Tom Hickey said...

Oh, did I forget to mention rising homelessness, which is also tantamount to a death sentence.

Ralph Musgrave said...

Not sure about Neil's claim that "If you make labour expensive you alter the capital labour ratio and make it more cost effective to replace people with machinery."

I suspect that if you raise absolutely everyone's wages by X% (including the "wage" of entrepreneurs), then ultimately the cost of machinery rises by X%.

Coincidentally Worthwhile Canadian Initiative has just published an article on this (by Nick Rowe):

http://worthwhile.typepad.com/worthwhile_canadian_initi/2017/04/wages-and-innovation.html

Neil Wilson said...

"I suspect that if you raise absolutely everyone's wages by X% (including the "wage" of entrepreneurs), then ultimately the cost of machinery rises by X%. "

That depends whether you see everything in the aggregate. If you see things disaggregated then you realise that any firm that increases output at current prices will outcompete and eliminate a firm that maintains output and puts prices up. ]

As usual Nick Rowe talks in terms of mathematics, not reality. He hasn't a clue how business actually works.

AXEC / E.K-H said...

Economics and the high art of kicking the can down the road
Comment on Chris Dillow on ‘Wages & Productivity’

Chris Dillow asks: “Would higher wages boost economic growth?” And he answers: “They might, if the marginal propensity to spend out of wages is higher than that out of profits. However, Ben Chu suggests a different mechanism ― that higher wages might stimulate growth via the supply-side rather than demand-side.”

Note first of all that there is NO such thing as spending out of profits, there is only spending out of distributed profits. Profit and distributed profit are quite different things but economists have not realized this in the past 200+ years. Anyway, this does not matter much because the ambition of economists is NOT to solve problems but to kick them down the road and ultimately to burr them in the swamp where it is deepest.

Swampification is what Popper called an immunizing stratagem. Accordingly, Chris Dillow throws in a host of additional issues (capital-labor substitution, investment, retraining, business expansion, fiscal stimulus, Verdoorn’s law, uncertainty, management quality, fear of competition, credit constraints, the Phillips curve, weak profits, etc) and ends with this climax: “The question is: is capitalism cooperative or conflictual?” Needless to emphasize that neither this nor any other question is answered.

Nobody, except economists, can take this clueless and inconclusive blather seriously.

So, here without much ado the elementary version of the correct (objective, systemic, macrofounded) employment equation:*
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, the public sector, and the trade balance.

Item (i) and (ii) cover Keynes’s familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the opposite of what standard economics teaches.

The systemic employment equation contains nothing but measurable variables and is therefore readily testable. As always in science, a test decides the matter.

The simple answer of the correct employment equation to the simple question “Would higher wages boost economic growth?” is unambiguously YES.

Egmont Kakarot-Handtke

* For details see cross-references Employment
http://axecorg.blogspot.de/2015/08/employmentphillips-curve-cross.html