On unemployment for UK liberty

We’ve a thread here about unemployment and zero hours contracts and so on. Just to clarify for UK liberty and others.

Just about every economist, classical, neo-classical, New Classical, Keynesian, Marxist, the lot, will agree that involuntary unemployment is the result of the price of labour being higher than the market clearing price of labour. Thus the solution is to either lower the price of labour or to bring the market clearing price up to that price.

Why the prices are different is argued about. How to solve it all causes catfights.

Many things change that market clearing price: higher welfare payments will, ceteris paribus, raise that. The financial system falling over will, ceteris paribus, lower it. A property crash will lower it (for there’s a “wealth effect”. We see our wealth go up, we’re willing to spend more now, this increases the labour required to produce for our spending. Prices crash, the effect goes into reverse).

So, for example, in 2008/9, in Spain, vast property crash. There’s going to be a recession. Undoubtedly. And that means rising unemployment. what’s the solution? One might spend lots of borrowed money to boost the economy, raise the demand for labour thus bring the market clearing price up to current price of labour. Unless you can’t borrow any more that is. Or you might think that the price of labour should fall. Problems there: the existence of welfare puts a floor under wages. Also, people hate having their nominal wages cut (Keynes made this point forcefully). So, it has to be a mix of job changes (ie, people lose one job then get another at a lower wage), inflation (nominal wages stay static, real wages fall) and just general growth in productivity (the market clearing price will fall over time as labour productivity increases) to get there. Thus it can take, if direct action isn’t taken, many years to mop up that unemployment.

But the basic point remains. Involuntary unemployment is because the price of labour is too high for the market to clear. There’s no mystery here, no one thinks that a burst of unemployment is as a result of a burst of laziness. The only questions are why have the two prices changed and what in buggery are we going to do about it?

18 comments on “On unemployment for UK liberty

  1. you are over cooking it again Tim.

    first of all there is frictional unemployment, which although transitory can be of quite long duration and has nothing to do with prices not clearing.

    then, in certain circumstances, flexible prices might not help at all. here is Krugman:
    http://krugman.blogs.nytimes.com/2013/10/13/wage-flexibility-in-doctrine-and-policy-wonkish/?_r=0

    Keynes certainly shouldn’t be on your list:
    http://rajivsethi.blogspot.co.uk/2009/12/on-consequences-of-nominal-wage.html

    and let’s not forget basics like some people not being worth employing even if the wage is zero

  2. Abolish the Minimum Wage and then lots of youngsters who don’t have a job can get one doing something useful that is worth £4/hour or £5/hour and have twice as much spending money as from JSA. This will provide a boost to demand.
    It will also reduce demand for unpaid internships – adjusting for inflation I was paid a bit under £3/hour in my vac jobs which was a good deal for both sides.

  3. Sorry Luis but you’re not going to find the answers to Spain’s economic problems in your economics textbooks. Particularly Keynes This is the Spanish you’re dealing with. You try artificially stimulating demand & you’ll find your stimulation’s disappeared into some Spaniard’s pocket. Like a great deal of the EU money was hosed around did. It’s the cause off Spain’s problems, not its cure.

  4. bis

    fine. different situations = different policies.

    I merely pointed out Tim’s error in claiming all economists think unemployment is explained by prices failing to adjust to clear the labour market.

  5. john77,

    It also gets people on a “career ladder”. You do any job in a company, do it well, don’t piss people off and show willingness and you’re a more valuable person than someone off the street. A lot of the regional managers in retail companies are people who started work on a till at 16. They turned up on time, did a good job, went the extra yard for customers and the manager noticed them, made them supervisor, store manager etc.

  6. Yes Tim, but jobs are a cost. Think of all the money we’re saving not having jobs for all those poor bastards.

    Sarcasm aside, your argument seems to assume that problems always have solutions. I don’t see that this must be the case. It may just be Heinlienian “bad luck”.

  7. Okay, on a specific part here-

    and just general growth in productivity (the market clearing price will fall over time as labour productivity increases)

    no, that bit isn’t true. Or rather, Tim is confusing two different prices of labour- the worker’s wage and the labour cost of a product. When we’re talking about the market clearing price, we’re talking about the worker’s wage (per hour, day, week, month, etc).

    Productivity improvement reduces the amount of labour for a given output. The worker produces more widgets, the cost of widgets therefore falls. But he is paid the same per hour for making widgets. He just makes more widgets per hour, so the labour cost per widget is reduced, not the labour cost per worker.

    It’s pretty easy to see with a simplified economy- imagine a fixed money supply and everyone’s wages falling. You’d end up with excess money not being paid to anybody. Which would mean the same quantity of stuff being bought with less money being spent. What actually happens (and why improved productivity is good) is that more stuff is bought with the same amount of money. Unless as is current policy you force the economy into a Ricardian mode, so more and more money goes on rents, but that’s another issue.

    Anyway, wages (the price of labour) aren’t supposed to fall. Output for a given wage rises. Not the same.

  8. @ The Stigler
    Quite right.
    When I was a young analyst (actually when I was young some owner-managers were still starting their sons on the “shop-floor” in the factory) I attended a meeting with Dowty, one of the UK’s top engineering companies which progressed from mining machinery to aerospace, and was briefed in advance that the CEO had been Dowty’s first apprentice.

  9. Part of the problem with that is the recent growth of the ideology of graduate entry, which a cynic might argue is a form of cartelised discrimination, but whatever.

    I worked for one very large financial business whose managing director had been a man of humble origins who had started in the post room. After a corporate merger with a more shiny-suited business full of New Brooms, the same company while I was there (as an agency engineer) had employed a new manager of our department, who implemented a policy that nobody would ever be promoted up from the workshop to a managerial position again; graduate only.

    We used to worry about people pulling up the ladder behind them. It’s now policy under the new managerialist dogma to simply saw the bottom half off the ladder.

  10. Probably needless to add, but this same manager knew nothing whatsoever of engineering and thus had to hire consultants to advise him on the simplest of decisions.

  11. Probably needless to add, but this same manager knew nothing whatsoever of engineering and thus had to hire consultants to advise him on the simplest of decisions.

    That’s not necessarily a bad thing. In my experience the best managers of an engineering department will listen to the opinions of the engineers and then use those opinions to inform a decision.

    Though it probably does help if the manager does have a basic understanding of engineering, I don’t think it’s an absolute requirement.

    Of course, there are far too many PHBs around.

  12. I always worked on the basis that an engineering manager _needs_* to know no more than when the engineers are bullshitting him or her.

    That can come from having enough of an understanding of the area, through being an engineer or through experience. It can also come from being a very good people person.

    Obviously, the above are of little use if there is no pragmatic 2nd engineering opinion available.

    * actually, having out of date or out of specialism engineering knowledge or even expertise can be harmful. Not just Dunnjng Kruger by also bad “engineering rules of thumb”.

  13. Just in passing:

    http://www.arnoldkling.com/blog/self-control-and-unemployment/

    Analyzing unemployment data from two nationally representative British cohorts (N = 16,780), we found that low self-control in childhood was associated with the emergence and persistence of unemployment across four decades. On average, a 1-SD increase in self-control was associated with a reduction in the probability of unemployment of 1.4 percentage points after adjustment for intelligence, social class, and gender. From labor-market entry to middle age, individuals with low self-control experienced 1.6 times as many months of unemployment as those with high self-control.

    You might think that the unemployed had bad habits which contributed to their unemployment.

  14. Though it probably does help if the manager does have a basic understanding of engineering, I don’t think it’s an absolute requirement.

    I’ve been an engineering manager, and my view is that you need an appreciation, a general understanding of engineering. You also need to be an engineer or technician of some sort: a historian won’t cut it. But you’re better off being a crap engineer, like I am, and instead having better communication and organisation skills. Unfortunately, in my industry most of the managers are former engineers: you can guess which discipline they’re from because that is the part of the plant they want to design themselves. Almost all of the them are micromanagers who cannot for the life of them see a big picture.

  15. @ Tim Newman
    Not a crap engineer, just not an autistic over-brilliant one. My first job (excluding being a bar porter in school holidays while I was too young to drink) was as a trainee computer programmer and the section head was one of the two people (excluding my two fellow trainees of whom I saw too little off outside lunch-hour to make a judgement) who might have been less good at it than I. Two of his subordinates were frighteningly bright, the Cambridge graduates who were near the top end of human came third and fourth. Dr L was in charge because he was a good manager and none of the top programmers wanted to be managers *and* he could understand what they were talking about when allocating priorities and talking to top management to secure funding for good projects and refusing to take on junk because some salesman had said it mattered. A decade later I heard his deputy, Dr R referred to as a genius but Dr R was unable to imagine that I was *not* a genius which was why Dr L was a better manager.

  16. Thanks Tim.

    no one thinks that a burst of unemployment is as a result of a burst of laziness.

    Well, there was a suggestion that unemployment is due to laziness, then a refusal to answer the question about whether a burst in unemployment can be attributed to a burst in laziness.

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