Bryan Caplan  

"Wages Must Fall!": Matt Yglesias Edition

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With this, Matt Yglesias instantly enters my sadly short list of good Keynesians:
The depressing truth is that the easiest way to bring good, high-paying manufacturing jobs back to America is to make them less good and less well-paying...
More goodness:
[T]he reality is that story that begins with mass unemployment is inevitably going to end with lower average real wages. The hope is that the increase in the number of employed people and the increased availability of full-time work leads to higher real incomes.
Matt's inspiration?  Another apparently good Keynesian at the New York Times:
Manufacturers are hiring again in America, softening a long slide in factory employment. But for a new generation of blue-collar workers, even those protected by unions, the price of employment is likely to be lower wages stretching to retirement.
The NYT details the erosion of dysfunctional fairness norms:
The shrunken pay scale for newcomers -- $12 to $19 an hour versus $21 to $32 an hour for longtime workers -- threatens to undo the middle-class status of even the best-paid blue-collar jobs still left in manufacturing...

[...]

In an earlier era, that would have been a source of friction, perhaps protest. Now it isn't, and in an interview William Masden, 62, earning $31.78 an hour after 42 years at Appliance Park, attempted an explanation. The younger workers still get annual raises, he noted, and by the time they top out, he and his peers -- the oldest baby boomers -- "won't be here any longer to remind them of what they are missing."

My proposed New Year's resolution for all Keynesians: Learn from Matt Yglesias and the New York Times.  Say it with me, my Keynesian brothers and sisters: Wages must fall!


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COMMENTS (18 to date)
Becky Hargrove writes:

Yes, but falling wages is part of a picture which includes markets with little progress towards a new structural reality. The homes that were built in recent decades were built for people with higher incomes, a reality that can only be changed by bulldozing many of them and subjecting construction to new production standards making it competitive the world over. Then, the worker with the lower wage will still have a way to support a family and lead a normal life.

Nick Rowe writes:

Arrrr, you're incorrigible Bryan!

Wait till there's a risk of accelerating inflation, so that deficient aggregate demand is clearly not a problem, and then say that wages should fall!

David writes:

I am a 40-something rocket scientist with a PhD. in engineering working for a defense contractor in the aerospace field. At my employer, the older generation has a defined benefit pension plan vs. my 401(k) and 5 weeks max. vacation time/yr. vs. my 4 weeks. All under the same roof. This is a generation gap, not just a matter of blue collar wages.

aaron writes:

@ Becky Hargrove

It's also possible for the prices of these houses to fall, although the government is doing its best to keep them from doing so.

Steve Roth writes:

I notice that you don't mention the sensible method to attain real wage reduction that Yglesias favors in the post.

But then, inflation slams creditors, don't want that to happen...

Let's opt for nominal wage reductions and deflation instead! They'll love that. And it won't mollycoddle all those dissolute debtors.

mike shupp writes:

So basically Karl Marx was right? Shouldn't contemporary economists be re-writing textbooks to make that point that an expanding economy does not necessarily lead to ever more affluent lower classes? Used to be, that was treated like a law of nature.

Point 2. Repression leads to rebellion. I gather the modern conservative ideal of limited government includes ubiquitious phone tapping, Homeland Security, Border Control policing, secret courts, torture, and lifetime imprisonment of untried prisoners -- all of which promises to intensify as time goes on. This suggests the sooner the lower classes begin their revolt against the upper classes, the better their chances of success. So when do you think the shooting will start? By 2020? Later? Earlier?

KPres writes:

Mike shupp, lol, are you serious? They're talking about wages falling short-term until the labor market clears, not across any long term trend. In the long term, wages, or rather, compensation costs, rise with productivity increases, as confirmed by 100+ years of data.

Liquidationist writes:

"Wait till there's a risk of accelerating inflation, so that deficient aggregate demand is clearly not a problem, and then say that wages should fall!"

I don't understand the economics behind this statement.

Lowering wages should move demand up the demand curve. I assume the suggestion is that it would also shift the demand curve to the left by somehow reducing AD.

But a reduction in wages should:

1) Increase profit margins so that entrepreneurs will be more willing to invest which will move the demand curve for labor to the right

and

2) Increase total employment and the total wage bill so that AD should actually increase.

Its theoretically possible that wages fall so much that despite more employment the total wage bill actually reduces, but in that circumstance business will just have more money to invest as a result of the greater profit margins. That would lead to better long term growth prospects and higher real wages eventually.

Keynes believed that lowing wages would simply lead to all other prices falling in the same proportion so their would be no net benefit but that was based on his adherence to some sort of labor theory of value.

Chris Koresko writes:

I always assumed that Keynesians advocated lower wages as a response to high unemployment, and lamented wage "stickiness" -- it seems like such a natural implication of their model. That it's actually a minority opinion among them is... odd.

Trying to use inflation to trick workers into accepting lower real wages seems both cynically underhanded and failure-prone. Inflation, especially if it's unpredictable, scrambles the information flow through the whole economy. It's a rather blunt instrument if the goal is to target the price of just one thing.

I'm becoming convinced that the key to recovery is flexibility, i.e., the ability for prices and other economic relationships to adjust freely, quickly, and frequently to new configurations, while the price signals remain valid enough to communicate correctly what the relative productivity of those configurations is. Put another way, I want to see a rapid and efficient search through the available patterns of specialization and trade.

Jeremy, Alabama writes:

If corporation tax was zero, would some of that reduced cost flow to improving worker wages? But unfortunately, workers would rather stick it to their bosses and investors than improve their own incomes.

Chris Koresko writes:

Jeremy, Alabama: If corporation tax was zero, would some of that reduced cost flow to improving worker wages?

If I understand correctly, the answer is that it depends on whether the demand for the corporation's products is elastic or inelastic. The taxes are paid by the workers in the first case, and by the customers in the second case.

Steve Roth writes:

"Wait till there's a risk of accelerating inflation, so that deficient aggregate demand is clearly not a problem, and then say that wages should fall!"

-- "I don't understand the economics behind this statement."

I don't understand the *irony* behind this statement. I think Nick's saying, hey Brian, try saying that when it's hard instead of when it's easy.

??

mike shupp writes:

KPres:

"They're talking about wages falling short-term until the labor market clears, not across any long term trend. In the long term, wages, or rather, compensation costs, rise with productivity increases"

That's what economists used to say. It's not what is being said now. Arnold, Bryan, Matt Yglesius, Tower Cowen are talking about sizable (50% or better) wage cuts, going on forever, for maybe half the working population. Moreover, this reduction isn't seen as especially unfortunate or even a neutral response to a reduced market need for low skilled workers. It's a GOOD thing. It's MORALLY DESERVED. As Bryan puts it, low wages will erode "dysfunctional fairness norms." This is getting rid of workers who can't pull their weight ("ZPG") after all, workers who use too much sick time and file too many OSHA complaints and get pregnant too often, workers too lazy to give up unemployment compensation, workers with unrealistic expectations (the Occupy XXX movement), etc.

This isn't a nice neutral market flucuation we're talking about, in other words. This is God striking down the unrighteous to make the world better for the 1%.

Chris Koresko writes:

mike shupp: Arnold, Bryan, Matt Yglesius, Tower Cowen are talking about sizable (50% or better) wage cuts, going on forever, for maybe half the working population. Moreover, this reduction isn't seen as especially unfortunate or even a neutral response to a reduced market need for low skilled workers. It's a GOOD thing. It's MORALLY DESERVED.... This is God striking down the unrighteous to make the world better for the 1%.

With due respect, I believe you are reading far too much into what these guys are saying.

Arnold's big push now is to move macro from a paradigm in which everything important is an aggregate of a handful of numbers, to one in which the complexity of the economy is more explicitly accounted for.

Bryan seems to be thinking along the same lines. If I read him right, the "dysfunction fairness norms" he's talking about are imagined as the source of sticky wages... which cause workers to get laid off rather than suffer a modest, and likely temporary, pay cut during times of economic recession.

I'm not as familiar with Matt Yglesius or Tyler Cowen's ideas, but what little I've read of them doesn't point to any enthusiasm for crushing middle class prosperity.

Liquidationist writes:

@Steve Roth. 0oops, you're right.

(Except according to the Keynesian wouldn't it be easier to call for lowering real wages when there's a risk of accelerating inflation since all you would need to do is to push for them to be increased at less than the rate of inflation and the workers wouldn't notice what was happening ?)

Lori writes:

At least Matt Yglesias, underneath the "good Keynsiean" persona is a human being, and as such has the decency to describe his theory as a "depressing truth," rather than expressing snarky glee at the discovery that Hard Science fails to vindicate humanity's sought-after ideals.

mike shupp writes:

Chris Koresko:

Here's Arnold: (not Arnold himself, but a quotation he thinks is worth reflection)
Various Sentences to Ponder

"So if you're going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut."

Here's David Henderson:
Response to Arnold on Zero Marginal Product

Arnold has gone from saying that a 25% wage cut could solve the problem but that's of no practical significance to suggesting that only a cut to third-world wage levels would motivate employers to hire many unemployed Americans. But that's more like an 80 or 90% cut in wages.

Here's Tyler again, at the top of this very page

The NYT details the erosion of dysfunctional fairness norms:
The shrunken pay scale for newcomers -- $12 to $19 an hour versus $21 to $32 an hour for longtime workers -- threatens to undo the middle-class status of even the best-paid blue-collar jobs still left in manufacturing...


Here's the Yglesius Bryan pointed to:

The depressing truth is that the easiest way to bring good, high-paying manufacturing jobs back to America is to make them less good and less well-paying:
With labor costs moving down at its appliance factories here, [General Electric] is bringing home the production of water heaters as well as some refrigerators, and expanding its work force to do so. The wages for the new hires, however, are $10 to $15 an hour less than the pay scale for hourly employees already on staff — with the additional concession that the newcomers will not catch up for the foreseeable future.

As for a Tyler Cowen quote, hitting Google with the phrase "Zero Marginal Product Worker" will give you 14 million references. Look for the one which pleases you the most.

Whether or not these guys and others like them are "enthusiastic" about wiping out the American middle class, I won't get into. Their moods seem to be mixed, let's say. But they're looking at the same phenomena and coming up with the same diagnosis, and it isn't "modest, and likely temporary, pay cuts."

Candidly, I think you're working very hard at ignoring the clear sense of what these folk and various other conservatives are saying.

Oliver writes:

I find it striking fact that only the lower level employee wages are mentioned. Considering statistics on CEO vs average employee wage worldwide (it varries from 12x in Japan or Scandinavian countries to 25x in the U.K.), I think there's some good cost cutting possible in the American CEO's wages. Can someone look up that statistic for the U.S.? The overall company budget allocated to wages could remain the same, so this in itself would have no impact on the employee budget of firms.

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