An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
It is a tragedy that the left has turned its back on the American Revolution and the ideals of civic republicanism. Here is Benjamin Franklin writing in 1783 on wages:
"....To desire to keep down the rate of wages... is to seek to render the citizens of a state miserable... it is, at most, attempting to enrich a few merchants by impoverishing the body of the nation; it is taking the part of the stronger in that contest, already so unequal, between the man who can pay wages, and him who is under the necessity of receiving them; it is, in one word, to forget, that the object of every political society ought to be the happiness of the largest number.... The low rate of wages, then, is not the real cause of the advantages of commerce between one nation and another; but it is one of the greatest evils of political communities. -- “Reflections on the Augmentation of Wages, Which Will Be Occasioned in Europe by the American Revolution” https://www.google.com/books/edition/Essays_on_religious_and_moral_subjects_a/5CVNAQAAMAAJ?hl=en&gbpv=1&dq=Reflections+on+the+Augmentation+of+Wages,+Which+Will+Be+Occasioned+in+Europe+by+the+American+Revolution&pg=PA435&printsec=frontcover
This has it exactly backwards. Businesses drive wages up, not down:
Marxist exploitation theory places workers at the complete mercy of business, but just as businesses must compete against one another to attract consumer dollars, they must also compete against one another to attract workers. Hence, the idea that workers must accept whatever terms they are offered is a fallacy. Reduced to it logical conclusion, this fallacy means that business would be able to drive the wage rate down to zero. Marx’s theory ignores the market mechanism which actually determines the going wage rate: workers competing for jobs drives wages (and total compensation) down; businesses competing for labor drives wages up. The market wage rate is the point at which these two opposing forces intersect. —Glenn Jacobs
Rising wage indicates inflationary pressure so the Fed jacks up rates to to the point that the increased cost of borrowing makes investment more expensive, reducing firms' profit rate and making housing less affordable by increasing the monthly nut. This is results in economic contraction and rising unemployment that lowers "inflationary pressure" by increasing competition in the labor market. It's called "the business cycle."
Glenn Jacobs, the WWE Wrester that promotes Austrian economics?
This has it backwards also. Reserve army of the unemployed and all that. As research has shown, real wages rose sharply throughout the Great Depression.
Perhaps more significant, and more puzzling, than the behavior of the workweek, was the behavior of the real wage. My paper with Powell showed, for the industry data set used also in this paper, that real wages were typically countercyclical during the prewar period. This countercyclicality is equally apparent if indexes of wage rates: are used instead of average hourly earnings to measure real wages; it seems to have held for the manufacturing sector as a whole (Alan Stockman, 1983) as well as, for individual industries. The tendency of real wages to rise despite high unemployment was especially striking during the major depression cycle (1929—37): real wages rose during the initial downturn (1930—31). They rose sharply again in 1933—34 and 1937, despite unemployment rates of 20.9 percent in 1933, 16.2 percent in 1934, and 9.2 percent in 1937 (according to Darby's correction of Stanley Lebergott's 1964 figures). In contrast, my paper with Powell found some evidence of real wage procyclicality in similar data for the post-war period. —Essays on the Great Depression (Ben Bernanke) (p. 207)
Glenn Jacobs, the WWE Wrester that promotes Austrian economics?
Ad hominem attack.
I take wisdom where I find it, even if said by a follower of Austrian economics, a school of thought that I mostly disagree with.
The point that businesses drive the real wage up is simplistic. It pretends to be a general principle but it only holds in special cases.
The issue is basically labor's wage share versus capital's profit rate. This is the fundamental dialectic in a capitalist economy. A tightening labor market does raise the wage faster than inflation at first, but as full employment is neared labor bargaining power accelerates and firms have to raise prices to sustain the rate of profit at which makes investment profitable.
This analysis is simplistic in an open economy where labor is less expensive to import rather than use locally. Capital flows to where labor is least expensive in terms of production cost and other costs such as shipping from abroad.
In a closed economy the real wage can grow through a competitive labor market without excessive inflationary pressure until full employment. After that, it is no longer merely a matter of labor gaining a larger share relative to capital. At that point labor gains maximum bargaining power.
This begins the wage-price spiral upwards with the inflation rate increasing to the point that the increased cost of borrowing reduces the profit rate to the point at which firms cut back and housing becomes more unaffordable. This is the "ordinary" business cycle.
Generally, the cb steps in near full employment as the labor market tightens, raising wages. The cb jacks rates above the fate of inflation to cool the over-heating economy. Firms lay off workers as investment becomes unprofitable and RE tanks when it becomes to costly to carry. This reduces demand, inventories build up, layoffs increase, and the labor market gains more competition taking wage pressure off.
At that point labor gains maximum bargaining power.
While labor has the bargaining power to increase nominal wages, it does not have the power to increases real wages. Real is what matters and that only comes from increases in productivity. But then again you wrote right after that:
This begins the wage-price spiral upwards with the inflation rate increasing
If price increases negate wage increases, then there's no real bargaining power.
Here are some quotes from an article about a time when workers had a lot of bargaining power:
Did Workers’ Wages Skyrocket During the ’70s? Not When You Figure In Inflation.
The story here is that blue-collar wages rose steadily during the 70s, peaking at annual growth of 9 percent in 1980. During the start of the 1981-2 recession, wages grew about 7 percent, and even by the end of the recession wages were rising about 4 percent. After that, wage growth went up and down but always stayed within a healthy range of 2-4 percent. Add it all up, and blue-collar wages increased 226 percent through the end of the Bush administration. The total blue-collar wage increase through today amounts to 600 percent.
After adjusting for inflation, the author writes:
This looks quite a bit different. Wages went up and down in the 70s, but by the end of the decade hourly wages were a dollar lower than they had been at the beginning. In 1979 wages began to plummet, not getting back to positive growth until 1982. The rest of the decade is something of a train wreck for blue-collar workers, with wages mostly declining throughout the entire Reagan/Bush administration and not finally going positive until the middle of Bill Clinton’s administration. In reality, real hourly wages declined from $21.08 at the start of the Reagan era to $19.61 at the end of the Bush administration. That’s a loss of about $3,000 per year, or close to $6,000 per year in today’s money. If you add in the ’70s, it’s even worse: blue-collar wages dropped from $22.42 to $21.94. That’s a loss of $1,000 per year, or a little over $3,000 in today’s money. Put all this together, and blue-collar workers lost the equivalent of $9,000 in modern dollars, which represented a 13 percent decline in blue-collar wages over the course of a couple of decades. The entire period of the ’70s and ’80s was a catastrophe for blue-collar workers.
This is how inflation works. Sure, wages grew 9 percent in 1980, but inflation grew 11%. A loaf of bread that cost a dollar at the beginning of the year cost $1.11 at the end. Sadly, your salary of $1 only went up to $1.09. Unless you can borrow a couple of pennies from someone, you can no longer even buy a loaf of bread. That’s how things really are.
Workers can and do increase real wages over a limited period. But when the wage increases relative to prices cease and prices increase, then the nominal wage has to increase at least as fast as the price rise. That is unsustainable owing to the tension between the profit rate and the ability to raise prices.
As long as my competitors pay higher wages, my business will prosper?
ReplyDeleteIt is a tragedy that the left has turned its back on the American Revolution and the ideals of civic republicanism. Here is Benjamin Franklin writing in 1783 on wages:
ReplyDelete"....To desire to keep down the rate of wages... is to seek to render the citizens of a state miserable... it is, at most, attempting to enrich a few merchants by impoverishing the body of the nation; it is taking the part of the stronger in that contest, already so unequal, between the man who can pay wages, and him who is under the necessity of receiving them; it is, in one word, to forget, that the object of every political society ought to be the happiness of the largest number.... The low rate of wages, then, is not the real cause of the advantages of commerce between one nation and another; but it is one of the greatest evils of political communities. -- “Reflections on the Augmentation of Wages, Which Will Be Occasioned in Europe by the American Revolution”
https://www.google.com/books/edition/Essays_on_religious_and_moral_subjects_a/5CVNAQAAMAAJ?hl=en&gbpv=1&dq=Reflections+on+the+Augmentation+of+Wages,+Which+Will+Be+Occasioned+in+Europe+by+the+American+Revolution&pg=PA435&printsec=frontcover
It’s the entire MAGA agenda...
ReplyDeleteHere is Navarro on with Bannon excoriating the whole past neoliberal policies...
ReplyDeletehttps://warroom.org/2021/05/07/episode-930-the-club-for-globalists-exposing-club-for-growth-and-bill-barrs-role-in-the-big-steal-w-dr-peter-navarro-sonny-borrelli-marylyn-todd-melissa-huray/
@Tony Wikrent
ReplyDeleteKeeper quote. I don't recall seeing that before. Thanks for posting.
To desire to keep down the rate of wages...
ReplyDeleteThis has it exactly backwards. Businesses drive wages up, not down:
Marxist exploitation theory places workers at the complete mercy of business, but just as businesses must compete against one another to attract consumer dollars, they must also compete against one another to attract workers. Hence, the idea that workers must accept whatever terms they are offered is a fallacy. Reduced to it logical conclusion, this fallacy means that business would be able to drive the wage rate down to zero. Marx’s theory ignores the market mechanism which actually determines the going wage rate: workers competing for jobs drives wages (and total compensation) down; businesses competing for labor drives wages up. The market wage rate is the point at which these two opposing forces intersect. —Glenn Jacobs
Businesses drive wages up, not down:
ReplyDeleteAt full employment.
Rising wage indicates inflationary pressure so the Fed jacks up rates to to the point that the increased cost of borrowing makes investment more expensive, reducing firms' profit rate and making housing less affordable by increasing the monthly nut. This is results in economic contraction and rising unemployment that lowers "inflationary pressure" by increasing competition in the labor market. It's called "the business cycle."
Glenn Jacobs, the WWE Wrester that promotes Austrian economics?
Glenn Jacobs discusses Austrian Economics, Internet Sales Tax, & the Federal Reserve
At full employment.
ReplyDeleteThis has it backwards also. Reserve army of the unemployed and all that. As research has shown, real wages rose sharply throughout the Great Depression.
Perhaps more significant, and more puzzling, than the behavior of the workweek, was the behavior of the real wage. My paper with Powell showed, for the industry data set used also in this paper, that real wages were typically countercyclical during the prewar period. This countercyclicality is equally apparent if indexes of wage rates: are used instead of average hourly earnings to measure real wages; it seems to have held for the manufacturing sector as a whole (Alan Stockman, 1983) as well as, for individual industries. The tendency of real wages to rise despite high unemployment was especially striking during the major depression cycle (1929—37): real wages rose during the initial downturn (1930—31). They rose sharply again in 1933—34 and 1937, despite unemployment rates of 20.9 percent in 1933, 16.2 percent in 1934, and 9.2 percent in 1937 (according to Darby's correction of Stanley Lebergott's 1964 figures). In contrast, my paper with Powell found some evidence of real wage procyclicality in similar data for the post-war period.
—Essays on the Great Depression (Ben Bernanke) (p. 207)
Glenn Jacobs, the WWE Wrester that promotes Austrian economics?
Ad hominem attack.
I take wisdom where I find it, even if said by a follower of Austrian economics, a school of thought that I mostly disagree with.
The point that businesses drive the real wage up is simplistic. It pretends to be a general principle but it only holds in special cases.
ReplyDeleteThe issue is basically labor's wage share versus capital's profit rate. This is the fundamental dialectic in a capitalist economy. A tightening labor market does raise the wage faster than inflation at first, but as full employment is neared labor bargaining power accelerates and firms have to raise prices to sustain the rate of profit at which makes investment profitable.
This analysis is simplistic in an open economy where labor is less expensive to import rather than use locally. Capital flows to where labor is least expensive in terms of production cost and other costs such as shipping from abroad.
In a closed economy the real wage can grow through a competitive labor market without excessive inflationary pressure until full employment. After that, it is no longer merely a matter of labor gaining a larger share relative to capital. At that point labor gains maximum bargaining power.
This begins the wage-price spiral upwards with the inflation rate increasing to the point that the increased cost of borrowing reduces the profit rate to the point at which firms cut back and housing becomes more unaffordable. This is the "ordinary" business cycle.
Generally, the cb steps in near full employment as the labor market tightens, raising wages. The cb jacks rates above the fate of inflation to cool the over-heating economy. Firms lay off workers as investment becomes unprofitable and RE tanks when it becomes to costly to carry. This reduces demand, inventories build up, layoffs increase, and the labor market gains more competition taking wage pressure off.
At that point labor gains maximum bargaining power.
ReplyDeleteWhile labor has the bargaining power to increase nominal wages, it does not have the power to increases real wages. Real is what matters and that only comes from increases in productivity. But then again you wrote right after that:
This begins the wage-price spiral upwards with the inflation rate increasing
If price increases negate wage increases, then there's no real bargaining power.
Here are some quotes from an article about a time when workers had a lot of bargaining power:
Did Workers’ Wages Skyrocket During the ’70s? Not When You Figure In Inflation.
The story here is that blue-collar wages rose steadily during the 70s, peaking at annual growth of 9 percent in 1980. During the start of the 1981-2 recession, wages grew about 7 percent, and even by the end of the recession wages were rising about 4 percent. After that, wage growth went up and down but always stayed within a healthy range of 2-4 percent. Add it all up, and blue-collar wages increased 226 percent through the end of the Bush administration. The total blue-collar wage increase through today amounts to 600 percent.
After adjusting for inflation, the author writes:
This looks quite a bit different. Wages went up and down in the 70s, but by the end of the decade hourly wages were a dollar lower than they had been at the beginning. In 1979 wages began to plummet, not getting back to positive growth until 1982. The rest of the decade is something of a train wreck for blue-collar workers, with wages mostly declining throughout the entire Reagan/Bush administration and not finally going positive until the middle of Bill Clinton’s administration. In reality, real hourly wages declined from $21.08 at the start of the Reagan era to $19.61 at the end of the Bush administration. That’s a loss of about $3,000 per year, or close to $6,000 per year in today’s money. If you add in the ’70s, it’s even worse: blue-collar wages dropped from $22.42 to $21.94. That’s a loss of $1,000 per year, or a little over $3,000 in today’s money. Put all this together, and blue-collar workers lost the equivalent of $9,000 in modern dollars, which represented a 13 percent decline in blue-collar wages over the course of a couple of decades. The entire period of the ’70s and ’80s was a catastrophe for blue-collar workers.
This is how inflation works. Sure, wages grew 9 percent in 1980, but inflation grew 11%. A loaf of bread that cost a dollar at the beginning of the year cost $1.11 at the end. Sadly, your salary of $1 only went up to $1.09. Unless you can borrow a couple of pennies from someone, you can no longer even buy a loaf of bread. That’s how things really are.
Did Workers’ Wages Skyrocket During the ’70s? Not When You Figure In Inflation.
Workers can and do increase real wages over a limited period. But when the wage increases relative to prices cease and prices increase, then the nominal wage has to increase at least as fast as the price rise. That is unsustainable owing to the tension between the profit rate and the ability to raise prices.
ReplyDeleteProfit Rate