Posts Tagged ‘unemployment’



The current situation—what I continue to refer to as the Second Great Depression—presents a real problem for mainstream economists. Corporate profits (and, with them, the stock market and salaries at the top end of the income distribution) continue to soar while workers’ wages stagnate (based on high levels of unemployment and a declining value of the federal minimum wage).

Clearly, the modeling tools of mainstream economics are useless in analyzing these trends. For example, the only way you can get involuntary unemployment in a neoclassical world is for wages to be too high (that is, above the equilibrium wage rate), such that the quantity supplied of labor is greater than the quantity demanded of labor.

This has forced an economist like Paul Krugman to look elsewhere and to stumble on a tradition that looks a lot more like Marx and Kalecki than traditional neoclassical (and, for that matter, Keynesian) economics. In this alternative tradition, there’s a fundamental conflict between labor and capital, the Reserve Army of labor regulates the level of wages, and corporations prevent the state from enacting the kinds of stimulus measures and social programs that would decrease the economy’s dependence on the “state of confidence” of private employers and investors.

The question is, how does one model fundamental features of the Second Great Depression in this alternative tradition? Krugman seems to think he can do it in with an efficiency-wage model. But, remember, that model was invented to make sense of situations in which employers offer wages above the equilibrium wage rate (in order to purchase worker loyalty, decrease “shirking,” and increase effort) and, by extension, employers choose not to decrease wages as much as they might in the face of massive unemployment.

But the problem, as I’ve explained before, is not downwardly rigid nominal wages but upwardly rigid real wages. That is, even as the economy recovers, firms are not willing to bid up the prevailing wage rate. As a result, real wages remain constant while, with increasing productivity and economic growth, corporate profits rise. The real coordination failure is exactly the opposite of the one posed in the efficiency-wage story: each employer actually wants to pay the lowest wages possible, while hoping that all other employers offer higher wages, in order to buy back the goods and services being produced. All you need to do is work through Nick Rowe’s attempt to use an efficiency-wage model to make sense of Krugman’s problem to realize it’s probably not going to get us very far.

So, if the efficiency-wage model is a nonstarter, where else might we look? One possibility, it seems to me, is the labor-surplus model first developed by W. Arthur Lewis. I understand, the purpose of that model was quite different: it was designed to make sense of “dual economies” 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 much of agriculture is organized along capitalist lines). But, in my view, a suitably modified labor-surplus model might be a better starting point than the efficiency-wage model for making sense of what is going on in the world today.

What I have in mind is redefining the subsistence wage as the federally mandated minimum wage, which regulates compensation to workers in the so-called service sector (especially retail and food services). That low wage-rate serves a couple of different functions: it’s a condition of high profitability in the service sector while keeping service-sector prices low, thereby cheapening both the value of labor power (for all workers who rely on the consumption of those goods and services) and making it possible for those at the top of the distribution of income to engage in conspicuous consumption (in the restaurants where they dine as well as in their homes). In turn, the higher average wage-rate of nonsupervisory workers is regulated in part by the minimum wage and in part by the Reserve Army of unemployed and underemployed workers. The threat to currently employed workers is that they might find themselves unemployed, underemployed, or working at a minimum-wage job.

In addition, the profits captured from both groups of workers are distributed to a wide variety of other activities, not just capital accumulation as presumed by Lewis. These include high CEO salaries, stock buybacks, idle cash, and financial-sector profits (with a declining share going to taxes). And, if the remaining portion that does flow into capital accumulation takes the form of labor-saving investments, we can have an economic recovery based on private investment and production with high unemployment, stagnant wages, and rising corporate profits.

Now, I can’t say the labor-surplus model is the only way to model some of the stylized facts of the Second Great Depression. But, to my mind, it’s certainly a better starting-point than the efficiency-wage model.


Special mention

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As Steven Rattner explains,

While job growth has picked up steam in the last few months, the fall’s higher pace of job creation – around 200,000 per month – would still not be nearly enough to bring unemployment down to pre-recession levels. According to calculations by the Brookings Institution’s Hamilton Project, even if the 200,000 jobs per month rate were maintained, the unemployment rate would not fall to the November 2007 level of 4.7 percent for another five years.

To repeat: not until December 2018!

Chart of the day

Posted: 28 December 2013 in Uncategorized
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Under the emergency federal program ending today, jobless workers were able to receive unemployment insurance payments for up to 73 weeks, depending on their state. Without the federal program, the percentage of unemployed workers who are receiving any type of jobless benefit is projected to drop to a record low of 26 percent by the end of the year.


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Map of the day

Posted: 27 December 2013 in Uncategorized
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Thus, for example, Illinois, with an official unemployment rate of 9.2 percent, has 64,300 workers who will lose unemployment insurance benefits as of 1 January and 89,1000 more workers who will lose benefits in the first half of 2014. Right now, 73 weeks of unemployment benefits are currently available; after 28 December, only 26 weeks will be available.

A full-screen map is available here.


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Meanwhile, 10.9 million workers remain officially unemployed (4.1 million of them for 27 weeks or more)—to which we should add the 7.7 million workers who are involuntarily working part-time jobs and 2.1 million who are only marginally attached to the labor force. For all of them, the Second Great Depression is far from over.


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Chart of the day

Posted: 22 December 2013 in Uncategorized
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The data in these charts (from here and here) reveal the changing fortunes of two generations: the lost generation of young people who can’t find work, and the found generation of the elderly who are being forced to have the freedom to continue to work long past a reasonable retirement age.