David Ruccio — Dual economies and the vanishing middle-class

Both Peter Temin and I are concerned about the vanishing middle-class and the desperate plight of most American workers. We even use similar statistics, such as the growing gap between productivity and workers’ wages and the share of income captured by the top 1 percent.

And, as it turns out, both of us have invoked Arthur Lewis’s “dual economy” model to make sense of that growing gap. However, we present very different interpretations of the Lewis model and how it might help to shed light on what is wrong in the U.S. economy—with, of course, radically different policy implications.

It is ironic that both Temin and I have turned to the Lewis model, which was originally intended to make sense of “dual economies” in the Third World, in which peasant workers trapped by “disguised unemployment” and receiving a “subsistence” wage (equal to the average product of labor) in the “backward,” noncapitalist rural/agricultural sector could be induced via a higher “industrial” wage rate (equal to the marginal product of labor) to move to the “modern,” capitalist urban/manufacturing sector, which would absorb them as long as capital accumulation increased the demand for labor.

That’s clearly not what we’re talking about today, certainly not in the United States and other advanced economies where agriculture employs a tiny fraction of the work force—and where much of agriculture, like the manufacturing and service sectors, is organized along capitalist lines. But Lewis, like Adam Smith before him, did worry about the parasitical role of the landlord class and the way it might serve, via increasing rents, to drag down the rest of the economy—much as today we refer to finance and the above-normal profits captured by oligopolies....

So, our returning to Lewis may not be so far-fetched. But there the similarity ends. 

Occasional Links & Commentary
Dual economies and the vanishing middle-class
David F. Ruccio | Professor of Economics, University of Notre Dame

David F. Ruccio — Corporate taxes and workers’ wages

The logic may be correct in the model that is used to argue that the way to raise worker's wages is to lower corporate taxes and taxes on capital, but the model is not representational of the real world in which capital and labor operate and interact.

Occasional Links & Commentary
Corporate taxes and workers’ wages
David F. Ruccio | Professor of Economics, University of Notre Dame

Ramanan — J. W. Mason And Alan Greenspan On Monetary Policy

Links.

The Case of Concerted Action
J. W. Mason And Alan Greenspan On Monetary Policy

V. Ramanan

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

Chris Dillow — The Wage Problem

My chart shows wage and profit shares since quarterly data began in 1955.It shows that the wage share - the proportion of national income going to the many - is now around its post-2000 average. Polly's right to say that the wage share fell "long before the crash". But it did so between 1975 and 1997. It's the profit share that is unusually low by recent standards, not the wage share [in the UK]....

The most obvious solution is the wage crisis isn't to shift the share of incomes - I share Hopi's scepticism about micro-interventions - but simply to increase the demand for labour through macroeconomic policy. Sadly, though, with monetary policy of dubious efficacy, looser fiscal policy ruled out - because it just is, all right? - and jobs guarantees used to harass the jobless rather than to provide an employer of last resort, such policies probably won't be equal to the scale of the task.

Stumbling and Mumbling
The Wage Problem

Chris Dillow | Investors Chronicle (UK)

C.P. Chandrasekhar and Jayati Ghosh — Do wage shares have to fall with globalisation?

So the conclusion must be that — while globalisation certainly unleashes forces that reduce labour’s relative power and tends to reduce labour shares of national income — this outcome is not inevitable. It can be countered by progressive economic policies that work actively to shift both the growth strategy and current public fiscal policies in favour of workers (including both wage workers and the self-employed). In a world in which economic inequalities are becoming a matter of increasing political concern, this lesson is absolutely critical.

The Hindu — Business Line
Do wage shares have to fall with globalisation?
C.P. Chandrasekhar, Professor of Economics, Jawaharlal Nehru University, New Delhi and Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi
(h/t Yves Smith at Naked Captialism)

See also
Naked Capitalism
C.P. Chandrasekhar and Jayati Ghosh: The Great Jobs Disaster
C.P. Chandrasekhar, Professor of Economics, Jawaharlal Nehru University, New Delhi and Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi

Harold Meyerson — A tax deal only the ultra-rich could love

Why inequality is increasing. Hint: in the battle between the wage share v. the profit share, the profit share is winning hands down, and tax policy is on the side of the profit share, too.

The Washington Post | Opinion
A tax deal only the ultra-rich could love
Harold Meyerson | Opinion Writer

Meyerson confuses financial investment, which is household saving, with firm (real) investment, which is firm spending on capital goods and inventory. Residential real estate construction is also counted as non-financial investment.

The compensation-productivity gap: a visual essay Susan Fleck, John Glaser, and Shawn Sprague

More revealing charts.

The compensation-productivity gap: a visual essay
by Susan Fleck, John Glaser, and Shawn Sprague
Monthly Labor Review, BLS, January 2011
(h/t rsj at Windyanabasis, The jig is up)