Scott Sumner  

Confused by a price change

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Minimally Convincing... A Lawyer's Perry Mason Moment...

The Financial Times has a story with a headline that caught my attention:

The eurozone's strange low-wage employment boom

Alexandru is one of the luckier ones. A 24-year-old who emigrated to Italy from Romania at the age of 12, he has recently secured a job with a permanent contract as a printer at a typographer in a small town near Milan.

"It's a good place," he says of his new employer. "Now if I'm sick, they pay me. I have holidays, I have insurance. In the firm I worked for before, I didn't have anything."


Good news, but economists are puzzled:

The recovery in the eurozone's labour market has taken economists by surprise. Businesses are creating jobs at a pace that few had foreseen. But while there is little doubt that the region is getting back to work, there are big question marks about the quality of the jobs being created.

Wage growth remains poor, even in stronger economies such as Germany.


I suspect that two things confuse many economists:

1. In some older Keynesian models, higher wages lead to higher aggregate demand. Keynes himself criticized wage cutting as a cure for depression, claiming it would only serve to further depress aggregate demand. (Keynes is not popular in Germany, which ignored his advice and achieved dramatically lower unemployment rates.)

2. In modern Keynesian (Phillips curve) models, tighter labor markets are associated with rising wages. Admittedly that might not be expected in southern Europe, where economies are still weak despite recent job gains, but Germany has very low unemployment.

Here's what is actually going on:

Screen Shot 2017-07-06 at 8.39.27 AM.png

When you start thinking about "never reason from a price change", it's hard to think of anything else.

PS. When I first read that FT headline, I was reminded of the old New York Times headline, which said something to the effect: "Prison populations keep expanding, despite fall in crime rate".

Screen Shot 2017-07-06 at 8.37.39 AM.png


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COMMENTS (9 to date)
Andrew_FL writes:
When I first read that FT headline, I was reminded of the old New York Times headline, which said something to the effect: "Prison populations keep expanding, despite fall in crime rate".

This has in common with the wage story that it describes a supposed paradox which is not in fact a paradox. But the error in this case is that the prison population should be expected to vary something like proportionally with the *integral* of the crime rate (minus the rate at which inmates leave prison, in one way or another)

(Keynes is not popular in Germany, which ignored his advice and achieved dramatically lower unemployment rates.)

Is this referring to the Great Depression?

Hana writes:

James Taranto, 'Fox Butterfield Effect'

Benito writes:

So according to the model presented, the employment boom is caused by an increase in labour supply.

Is this because of a growing population, higher workforce participation or another factor I'm not thinking of?

Hazel Meade writes:

Did Europe lower minimum wages or liberalize labor markets? Why did these low wage jobs not exist before?

Scott Sumner writes:

Andrew, I am referring to the German labor market reforms of 2004, which reduced wages in an attempt to increase employment. Keynes said that sort of policy would not work, but it did.

Hana, Thanks, I had not heard that term before.

Hazel, There have been some labor market reforms, but I don't know all the details. Some of the decline in unemployment is simply sticky wages responding with a lag.

Thaomas writes:

Are academic economists -- serious people like Brad de long or Larry Summers -- puzzled or are "macro media" folks puzzled?

Thaomas writes:

And the confusion appears to result from reasoning from a quantity change.

Henry writes:

It could be because when we had the great recession in 2008 it destroyed a lot of good wage jobs that where available before the recession like manufacturing and factory jobs. Most of the jobs available now for the average citizens in American and Europe are service jobs that less skilled and pay less. Also we are probably still recovering from the great recession because the recovery always takes much longer the recession so it could be a couple more years before we see average wages increase again.

Parleo writes:

Here's a good overview of the effects of the 2012 labor reforms in Spain. Disclaimer: I was laid off with less than expected compensation thanks to them :-/

https://www.thelocal.es/20170521/spains-labour-reform-delivers-jobs-but-at-a-cost

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