CFM-wages

The so-called economics experts surveyed by the UK Centre for Macroeconomics—whose aim is to inform “the public about the views held by prominent economists based in Europe on important macroeconomic and public policy questions”—are in substantial agreement that “lower real wage growth was beneficial for employment levels during the Great Recession.” A clear majority (65 percent) either strongly agree or agree, which increases (to 70 percent) when the answers are weighted with self-reported confidence levels.

I would bet, based on their responses to other questions, the analogous group of “experts” in the United States—such as the mainstream economists who comprise the IGM Panel—hold the same view.

fredgraph

Here’s the problem: the correlation between wages and employment in the United States (measured in terms of percent change from one year ago in the chart above) does not tell us anything about causality. Mainstream economics experts presume (based on the assumptions embedded in their macroeconomic models) that causality runs from wages to employment. So, in their view, low wage growth is beneficial for employment levels.

What they don’t consider is the opposite relationship: that moderate employment growth (especially during and after a recession) leads to low wage growth.

The key is the Industrial Reserve Army, which is missing from the models used by the so-called experts. As I wrote back in 2015,

While mainstream economists congratulate themselves on a successful economic recovery, which has lowered the headline unemployment rate and requires now a return to “normal” monetary policy, they accept a situation in which a large Reserve Army of Unemployed, Underemployed, and Low-Wage Workers has both been created by and, in turn, fueled a recovery characterized by stagnant wages for most and growing profits and high incomes for a tiny minority at the very top.

In other words, all mainstream economists are doing is congratulating themselves for a job well done—in supporting an economic system that exists not to serve the needs of workers, but in which workers exist only to serve the needs of their employers.

As it turns out, that self-congratulatory stance is adopted by so-called economics experts on both sides of the Atlantic.

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