Mark Thoma — Full Employment Alone Won’t Solve Problem of Stagnating Wages

I fear this trust that market forces will eventually raise wages will lead to disappointment. Inequality has been increasing for over three decades, and during that time we have been at or near full employment many times. Yet, wages over this time period have been flat. As noted by the Economic Policy Institute, “Since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth.” The idea that market forces alone will increase wages sufficiently to offset increasing inequality is not supported by the evidence from these years. There’s more to the story than market forces.…

Until workers recover the bargaining power they lost with the decline of unions and the rise of globalization, it’s hard to imagine a reversal of the forces pushing us toward stagnating wages and ever higher inequality. It’s not market forces alone that are determining the split of income between those at the top of the income distribution and those below, it’s also the institutions that determine who holds the cards in negotiations over wages. Presently workers are not faring well.

To me, what we are seeing is reminiscent of the “Just Price Doctrine” popularized by St. Thomas Aquinas in the Middle Ages. According to this view, “The just wage meant that rate of remuneration which was required to enable the worker to live decently in the station of life in which he was placed; and thus, if one may so express it, such a wage, representing reasonable decency, was made a first charge on industry.”…

Solving the problem of lack of bargaining power that puts workers at the mercy of the “decency” of those they negotiate with is not easy. The ability of traditional unions to negotiate over wages has been undercut by globalization, technology, and the threat of offshoring, though unions – to the extent they still exist – do retain some value as a source of political power.

But one thing is clear. So long as we continue to believe that market forces and the attainment of full employment will solve the problem of stagnating wages and rising inequality, so long as we fail to recognize that workers need a level playing field when bargaining over wages, inequality will continue to be a problem.

Especially when one of the chief "contradiction of capitalism" is asymmetry of capital/profit share and labor/wage share. See Michal Kalecki, "Political Aspects of Full Employment".

"The rent is too damn high."

Distributional issues will be difficult if not impossible to address effectively without reference to economic rent and rent-seeking, and how the ability to extract rent arises from power and class. This undercuts the mainstream rationale of distribution based on marginal productivity and just deserts, which is why it is marginalized as "Marxist" and off the table for discussion in mainstream economics. So far heterodox economists other than Marxists and Marxians have been reticent to pick it up. However, it is a principle reason behind market "imperfection" being endemic and market failure being recurrent, something that mainstream economists have not be able to address successfully without taking rent into account.

The Fiscal Times
Full Employment Alone Won’t Solve Problem of Stagnating Wages
Mark Thoma | Professor of Economics, University of Oregon

Don Quijones — Sir James Goldsmith, An Unlikely Defender of the Common Man

“The economy is there to serve the fundamental needs of society, which are prosperity, stability and contentment… If you have a situation whereby the economy grows but you create poverty and unemployment and you destabilise society, you’re in trouble."

The above quote comes from the least likely of sources: the late Sir James Goldsmith, one of the wealthiest and most influential business magnates of the late 20th century. The year was 1994, the occasion an interview with Charlie Rose on the potential impact of the soon-to-be-signed General Agreement on Tariffs and Trade(GATT).

Goldsmith laid out in simple terms the dangers of what he saw as unfettered globalisation, warning of the perils of NAFTA, GATT and the merging of sovereign European nations into the EU. He predicted that the only possible beneficiaries of unbridled global free trade would be the major multinational corporations who would have free rein to roam the globe in pursuit of the cheapest labor:

Raging Bull-shitSir James Goldsmith, An Unlikely Defender of the Common Man
Don Quijones

These ‘free trade’ ideologues are economically incompetent. They do not know that the justification for free trade is based on the principle of comparative advantage, which means that a country specializes in those economic activities in which it performs best and trades for those goods that other countries do best. Instead, the ideologues think that free trade means the freedom of capital to seek absolute advantage abroad in lowest factor cost. In other words, the free trade incompetents have never read David Ricardo, who formalized the case for free trade.”

Noah Smith — R vs. g

In his new book, Thomas Piketty argues that R, the rate of return on capital (which is different than the safe interest rate "r") is greater than g, the rate of economic growth, and that this fact can be expected to continue into the indefinite future, resulting in an ever-rising capital share of income and an ever-falling labor share. The big question is whether R really will be greater than g into the foreseeable future.

It occurs to me that this is just the "robots vs. globalization" argument all over again....

These explanations aren't mutually exclusive, of course. But in terms of policy, if the "rise of the robots" is the biggest factor, we need to think about all kinds of difficult policy decisions and welfare arguments. But if globalization is the main reason for R>g over the last 4 decades, then all we can do - and all we should do - is wait for the big wave to end.

Why either-or and not both-and? Seems to me that both factors are operative. The result of technological innovation has been greater distributed leisure and we can expect that to continue as long as workers maintain bargaining power.

However, it is going to be along time before the global labor glut has been overcome considering the situation in most of the world. During this time — the foreseeable future — workers in emerging countries can look forward to improving job opportunities and rising wages, while workers in already developed countries can look forward to few job opportunities, job opportunities of generally lower quality, and lower pay.

In addition the rate of growth in the developed world is lagging and promises to lag for the foreseeable future, while the rate of growth in the developing world is forging ahead. However, global ownership is dominated by investors from developed countries and so the rate of capital accumulation in the developed countries can be projected to greatly exceed the growth rate.

Noahpinion
R vs. g

Noah Smith | Assistant Professor of Finance, Stony Brook University