Posts Tagged ‘labor surplus’

VanishingMiddleClass2

Both Peter Temin and I are concerned about the vanishing middle-class and the desperate plight of most American workers. We even use similar statistics, such as the growing gap between productivity and workers’ wages and the share of income captured by the top 1 percent.

productivity top1

And, as it turns out, both of us have invoked Arthur Lewis’s “dual economy” model to make sense of that growing gap. However, we present very different interpretations of the Lewis model and how it might help to shed light on what is wrong in the U.S. economy—with, of course, radically different policy implications.

It is ironic that both Temin and I have turned to the Lewis model, which was originally intended to make sense of “dual economies” in the Third World, 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 where much of agriculture, like the manufacturing and service sectors, is organized along capitalist lines. But Lewis, like Adam Smith before him, did worry about the parasitical role of the landlord class and the way it might serve, via increasing rents, to drag down the rest of the economy—much as today we refer to finance and the above-normal profits captured by oligopolies.

So, our returning to Lewis may not be so far-fetched. But there the similarity ends.

Temin (in a 2015 paper, before his current book was published) divided the economy into two sectors: a high-wage finance, technology, and electronics sector, which includes about thirty percent of the population, and a low-wage sector, which contains the other seventy percent. In his view, the only link between the two sectors is education, which “provides a possible path that the children of low-wage workers can take to move into the FTE sector.”

The reinterpretation of the Lewis model I presented back in 2014 is quite different:

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.

For Temin, the goal of economic policy is to reduce the barriers (conditioned and created by an increasingly segregated educational system) so that low-wage workers can adopt to the forces of technological change and globalization, which can eventually “reunify the American economy.”

My view is radically different: the “normal” operation of the contemporary version of the dual economy is precisely what is keeping workers’ wages low and profits high across the U.S. economy. The problem does not stem from the high educational barrier between the two sectors, as Temin would have it, but from the control exercised by the small group that appropriates and distributes the surplus within both sectors.

And the only way to solve that problem is by eliminating the barriers that prevent workers as a class—both black and white, in finance, technology, and electronics as well as retail and food services, regardless of educational level—from participating in the appropriation and distribution of the surplus they create.

profits-wages

source

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.

Lewisgraph

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.