Migrant outflows to Australia, wages, and productivity: What is going on?
A rising outflow of New Zealander’s to Australia is causing concern amongst a bunch of people. People move away for a number of reasons, as the Department of Labour nicely points out. However, as economists we like to think at the margin. We are not interested in the general reasons that people are leaving New Zealand, in so much as we are interested in the ‘marginal’ factors that are driving people overseas. The non-policy factors mentioned by DOL are constant, the weather will stay warmer, the country will remain as close, and the culture will remain similar. However, the policy factors (e.g wages, taxes) can be changed, and as a result will have an impact on the ‘change’ in migration levels (beyond some sort of trend).
The Standard provides one piece of the puzzle we require in order to control migrant outflows – we need higher wages. However, the solutions they provide may not necessarily be the correct ones. A important marginal factor in the decision on whether to stay and work in NZ, or do so in Australia is the difference in ‘real disposable income’. Ignoring non-wage income for now leaves us with ‘real disposable salary’. Increasing nominal wages may not lead to an increase in real disposable salary if all it does is increase inflation. If we pay everyone more $$$ but don’t increase the number of goods avaliable to buy, then the price of goods will increase and peoples true living standard will not change.
There are two ways people are talking about increasing real disposable salary:
- Tax cuts that increase the demand for labour more than they increase the supply of labour, or that cause a smaller reduction in the real wage than the quantity of the tax cut, or transfer funds into more productive sectors,
- An increase in labour productivity.
Fundamentally, both these solutions require policy that increases the amount of product produced by labour. Now this begs the question, how do we increase labour productivity relative to Australia.
By cutting taxes we stimulate the economy, although if we are running a balanced budget there must be reduction in government spending, if people value government spending sufficiently this may lead to more people moving overseas! For simplicity lets assume that the stimulus is canceled out by a reduction in government spending.
First let us thing about an individual firm. If some of the incidence of tax falls on the firm then this will increase their cash flows, allowing them to invest more. As an increase in capital increases the marginal product of labour, this will increase wages. However, lower taxes make labour relatively cheaper than capital, increasing the incentive for firms to hire labour instead of capital. As the marginal product of labour falls as the quantity of labour rises, and as capital expenditure has eased, this will put downward pressure on wages. As a result, we care ultimately care about which of these effects dominates, when deciding whether tax cuts will actually increase real wages.
However, one thing we do know about tax cuts is that it decreases the cost of production for the firm – implying that production must increase. As a result, the question we have to ask is whether this surplus is passed on to employees or whether it accrues to the owners of capital – this is an empirical question.
Other arguments have been made stating that we should increase taxes on labour or improve the power of unions in order to increase the relative price of labour, thereby leading to an increase in capital and an increase in the marginal product of labour. There are a few important things to note about this point of view:
- It will lead to a reduction in production in the short-run, as it increases firms costs,
- It may not lead to an increase in capital, as labour increases the marginal product of capital,
- This point of view requires a cut in employment, and so supports people losing their jobs (something I did not expect the left wing blogs to be supporting).
As this policy will reduce national output, its impact on peoples real wage will depend on how it redistributes production between the owners of capital and workers. If increased union power was sufficient enough relative to the change in output, then it may in fact increase the real wage of employees (this would involve a significant of amount of employer power in the labour market currently).
Further discussion has focused on ‘strategic complementarity’ between firms (eg if one firm increases its capital input, it may lead to other firms increasing their capital input). In this case we need to define the spillovers (R&D spillovers?) and figure out how important they are to the problem. The existence of ‘multiple equilibria’ in the economy depends on these spillovers or strategic interactions – so if you hear anyone say that higher taxes may move us too a new, pareto superior equilibrium, ask them what the source of the strategic complementarity is, if they can’t answer you they are talking trash 😉
Ultimately, the impact of government policy on productivity and thereby on migration is an inherently empirical matter, as theory can point use either way. As data on New Zealand labour productivity is relatively recent, subject to constant revisions, and filled with structural breaks, any killer blow to the ideas coming from the left or right of the spectrum is unlikely to appear.
Anyone that can improve my logic, or explain to me where I might be mixed up is welcome to do so in the comments 😉
1. It will lead to a reduction in production in the short-run, as it increases firms costs,
2. It may not lead to an increase in capital, as labour increases the marginal product of capital,
3. This point of view requires a cut in employment, and so supports people losing their jobs (something I did not expect the left wing blogs to be supporting).
I find it difficult to match these assertions with reality.
1. While fail to see how an increase in costs will lead to loss of production, I’m going to guess that you mean that more money on wages means less money for reinvestment in capital. In practice quite the reverse is true as employers tend to recognise they need to make better productivity gains to offset labour costs. A low wage economy offers no incentive to do so. There are also sound arguments that the extra costs of higher wages are partially or totally compensated for by increased retention and reduced HR costs. The decision by Henry Ford to double factory wages and thus save money over all is perhaps the most famous example of this.
2. I don’t even understand what you are talking about. Could you clarify please?
3. This is a simplistic demand and supply interpretation that simply does not bear out in the real world. Having watched the minimum wage increase considerably over the last few years while unemployment falls I can only suggest that your model is too simplistic.
Hi,
For point 1:
The firm makes products from a combination of capital and labour. There is a price for both of these and a budget constraint (often called an iso-cost curve). If you increase the cost of labour then the budget constrain has to shift back everywhere except at the point where the firm only grabs capital. As the firm can no longer choose the point it did previously on its budget constraint, it has to reduce production in order to satisfy its budget constraint.
In other words, the firm can’t afford to produce its old level of production if the cost of one of its inputs rise – it has to lower production.
Your Henry Ford example provides us a case where the firm saw a potential strategic advantage and made use of it. If such an advantage existed now, firm’s would likely take advantage of it, given the improvement in people knowledge of industrial competition. If it is in the firms interest they would do it themselves, they don’t need the government to make them do it.
Point 2:
If capital and labour were perfect substitutes in production, then an increase in the price of labour would lead to more capital being used. However, any decrease in labour (from a higher price for labour) would also have a negative impact on capital through the impact they have on each other. If you reduce your labour, the marginal product of your capital stock falls, as less people are making use of capacity. Think of it this way – the more labour you have, the more they will be able to do with an additional unit of capital, and so the higher the stock of labour the greater the marginal product of capital.
It is possible that this effect could be significant enough such that a reduction in labour (from a higher price of labour) would lead to a reduction in capital.
Point 3:
As both unions and higher taxes will increase firm costs then we need to think about how they might react. In order to satisfy their budget constraint they could – increase capital and reduce labour, leave capital unchanged and decrease labour, decrease both, decrease capital and not change labour, or decrease capital and increase labour. A situation where both capital and labour rise is impossible unless there is some strategic complementarity going on.
I don’t think that this point of view is ‘simplistic’ I think its logical. If you increase the price of something, the quantity consumed/used will fall.
The minimum wage example is interesting insofar as the reduction in labour has tended to be minimal, however it is still negative. Furthermore, minimum wage workers are in a situation where demand for workers is relatively inelastic as their wage accounts for a small proportion of total costs. The introduction of higher taxes in areas with greater elasticity of demand will have a more significant impact on employment.
Matt, can I start with the obvious (and I think most salient) criticism that if we throw human capital into your growth model, and interpret income taxes as a tax on investing in human capital, then it is fairly straightforward to produce the result of: a reduction in labour taxes -> more human capital -> higher growth/wages.
Leaving that aside, the question you’re asking is whether tax cuts increase capital stocks. I think it is fairly unambiguous (assuming for the moment the standard model type responses) that cuts to corporate taxes or taxes on savings (ie on capital) should deliver greater amounts of capital.
It is not clear cut that cheaper labour leads to less capital investment (as you imply). There’s an income effect as well as a substitution effect. But empirically labour supply is pretty inelastic so I would expect that most of a labour tax cut just results in higher post-tax wages for labour, with very little change in employment or in firm labour costs.
Taking a different approach, if tax-cuts are revenue neutral (that is spending is cut), then unless people have a marginal propensity to consume of 1 then savings must increase.
Congrats on pointing out how stupid the idea that artificially increasing the cost of labour will benefit us is. As before, the income effect doesn’t guarantee more capital, the only unambiguous result is less employment and less output. Furthermore, people are confusing an ongoing incentive to invest (such as a lower tax on capital) with the one-off adjustment increase in the capital stock that higher labour costs might produce. (p.s. I realise that a lower capital tax still results in a steady state level of capital in the simple models, I am hopeful that this is not how the world works in reality).
Finally, I think there is some value in modeling the Australian immigration issue as a game. They choose low tax/low social services/low income redistribution, we choose high tax/high social services/high income redistribution. The simple result of such a game is high income people are better off in Australia, low income people better off in New Zealand, which in turn suggests that our strategy becomes unsustainable. I’m not claiming this story is all or even much of a full explanation, but it is worth bearing in mind.
Hi CPW.
I agree with 99% of what you are saying, my focus was on business decisions so I agree that I left out the details associate with human capital investment from lower income taxes – good point.
I didn’t mean to say that “cheaper labour leads to less capital investment”, I meant to say that it was ambiguous – the conflict for the firms choice lies between the relative price of capital for labour (the interest rate impact you said does change this story substantially and is another important point), and the complementarity between the inputs. If cheaper labour leads to more labour being hired, and additional labour substantially increases the marginal product of capital, then the equilibrium choice of both may rise if wages fall – the ultimate outcome needs to be derived by empirical models methinks.
1. Once again you treat this as an issue in isolation. There is not necessarily “budget constraint” as the term implies that there is distinct and limited resource. Reallocation of a portion of profit to operating budget would provide for an increase in wages with no subsequent decrease in production. It’s also absurdly naive to claim firms would take advantage of a strategic advantage if higher wages would provide them with one. This smacks of the “rational man” discourse that has been throughly discredited. People run businesses and people hold prejudices and lack perfect information. How you can believe a group of such people assembled under the auspices of “business” can transcend these limitations is beyond me.
2. I understand now, you’ve predicated your second point entirely on the flawed rationale of your first.
3. Again “budget constraint” is a flawed analysis as it assumes budget is fixed. I would suggest that when you claim increased labour cost will result in less demand for labour you might want to consider how a reduction in supply of labour (as seen in New Zealand by record high employment) has not exerted a great deal of upward pressure on wages when such a significant shortage should have, in theory, shifted the point of equilibrium just as significantly.
4. (I thought I’d add one) I would suggest that the mathematical models you are using to reach your conclusions are suitable only for the hermeneutic conditions of singular theoretical situations. Once they hit the real world they become, at best, useful rules of thumb and at worst a the equivalent of trying to navigate Toronto with a map of Uzbekistan.
1. So does this mean that as wages rose to the point that there was zero profit production would remain unchanged?
3. “a reduction in supply of labour (as seen in New Zealand by record high employment) has not exerted a great deal of upward pressure on wages when such a significant shortage should have, in theory, shifted the point of equilibrium just as significantly”
I think you are confused,why does a reduction in the supply of labor lead to high employment? a reduction in supply would mean more unemployment and higher wages, which as you’ve pointed out we don’t have.
While I accept that people don’t behave perfectly rationally all the time, we’ll just have to agree to disagree. I don’t really believe that all people are stupid and thus economic models are as entirely useless as you portray them. But I’m obviously biased in that regard.
Hi again,
Point 1:
“It’s also absurdly naive to claim firms would take advantage of a strategic advantage if higher wages would provide them with one”
Its naive to assume that firms will not try to use a strategic advantage and that the government has to do it for them. As you said, Henry Ford realised there was an advantage – and he took it. Now the efficiency wage idea is well known by people. Agnitio discusses this more here: http://tvhe.wordpress.com/2008/02/05/high-wages-and-productivity-where-are-the-emporers-clothes/
Furthermore, your criticism of a budget constraint doesn’t make sense. Firms’ do work within a limited budget, just like families, and government. Firms are not running magical super-normal profits which require government action to remove some of the surplus. Firms do react to increases in costs, either with increases in prices, a reduction in production, or both.
Point 3:
There has been a large increase in wages. Wages were rising by over 6%pa in 2005, and are currently increasing at over 5%pa (from the unadjusted labour cost index). Furthermore, non-wage costs are going through the roof as more income earners try to avoid tax through fringe benefits.
Point 4:
I haven’t used a mathematical model directly, I’ve used logic and a few basic mathematical properties that come with it.
You talk about reality, but you seem to have no way to describe it outside of your own normative musings. Although you seem happy to call me naive, you seem to live within a fantasy where firms do not suffer from the issue of scarcity and, if forced to, can lavish their workers with uncountable riches.
I would be happy to hear your analysis of the situation though, to see if this changes my impression.
why does a reduction in the supply of labor lead to high employment?
Um, high employment rates mean there is less surplus labour and greater competition for labour.
As you said, Henry Ford realised there was an advantage – and he took it
Henry Ford had to be convinced of this by all accounts it took a long time to bring him around. He could have just as easily ignored it. Prejudice. Information gaps.
Firms are not running magical super-normal profits
Many firms are. The Australian-owned banks operating in NZ are a prime example. As are telecommunications firms and media. Here’s a stat: the NZX increased in value by 22% last year alone.
There has been a large increase in wages. Wages were rising by over 6%pa in 2005
Is this median or mean – I suspect you will see the majority of that increase has gone into the hands of a few high income workers.
You talk about reality, but you seem to have no way to describe it outside of your own normative musings
I’m interested to see you use loaded terms like “can lavish their workers” – I have never suggested such a thing. I have merely pointed out that your arguments are flawed and that there is certainly considerable space for many firms to increase wages without decreasing production (or even greatly reducing profits – and certainly not in the long term).
robinsod,
1. Any business can decide to make less profits in order to invest more in either capital or labour (assuming they are making profits to being with). But businesses that consistently earn much lower returns on their capital as a result of doing so are unlikely to be around for long. There is substantial evidence that capital is fairly mobile, and post-tax rates of return tend to equalize across countries. I don’t get how you can say “It’s also absurdly naive to claim firms would take advantage of a strategic advantage if higher wages would provide them with one.” after you raised the Henry Ford example. Pointing out the real world is more complicated than a simple model doesn’t in any way suggest how the simple model is likely to be wrong. How do we know that imperfect information doesn’t mean that workers are already getting paid too much?
3. The last seven or so years could be characterized as having strong increases in labour demand, partly mitigated by increasing labour supply (immigration and higher participation rates), with an entirely standard result: lower unemployment and real wages that have risen faster than labour productivity. Where’s the beef?
4. Models remain an excellent starting point for discussion. Why not be specific about your objection, rather than hand-waving? It seems to me that the specific claim you’re hinting at is that firms’ labour demand curves are essential vertical. Do you have any evidence for this?
“Henry Ford had to be convinced of this by all accounts it took a long time to bring him around”
But it is a common part of managerial practice now.
“Here’s a stat: the NZX increased in value by 22% last year alone”
That does not tell us anything about potential supernormal profits. At the margin an increase in costs will force some firms to shut down, and others to reduce employment – that is a fact. As a result, higher taxes will lead to a reduction in employment growth.
“I suspect you will see the majority of that increase has gone into the hands of a few high income workers”
The income distribution is not becoming wildly spread all of a sudden. Wage growth has been strongest in wholesales trade and construction industries.
“I’m interested to see you use loaded terms like “can lavish their workers” – I have never suggested such a thing”
You did not say that, but you’re belief that firms will just cut profits and leave employment unchanged when the price of employees rising is equivalent.
“I have merely pointed out that your arguments are flawed”
You have pointed out that you don’t believe my argument. That is fair enough everyone can believe what they want. However, you have not provided an alternative way to describe reality. Instead you have simply assumed that employment will not fall, and assumed that wage increases are accruing only to the wealthy – this is not satisfactory.
Now if you explicitly state some objective reasoning for what you expect we can discuss it. If you have different value judgments to me, we will disagree, but at least we can be satisfied that we understand each other 😉
– Just before posting this I read CPW’s comment.
Good points CPW
when people talk about the labor supply they are generally referring to the number of people who willing to work, therefore to have very high unemployment the supply of labor must be high, or the demand for labor must be very high. I know this is overly simplistic supply and demand models, but if the demand for labor increases the wages will increase and if the supply of labor increaes wages will decrease.
I think we were just talking about different things when we said labor supply.
Just on that profits point, I put earnings per share for the NZSX50 at 7.2% for 2007. That hardly seems like excessive profits with a risk-free 10-year government bond paying 6.3%. (And we’re probably nearer the top than the bottom of the earnings cycle).
after you raised the Henry Ford example
My point with the Ford model is that there was a considerable period of time that this opportunity was not taken and it was only a historical accident that it did – for many years there was market failure and if Ford had not been convinced by his 2IC it would have continued. I suggest you read Stiglitze on information asymmetries if you don’t understand my rationale. I’m not a mathematician but I have studied physics to a reasonably high level and am aware that the economic models you are using are akin to Newtonian physics. They do not work when applied to complex systems.
I would suggest that the best way to understand these systems (outside of the say the application of chaos theory – certain economic behaviours do seem to suggest the presence of “strange attractors” which can easily be mistaken for fundamental rules) would be through statistical analysis of real world examples. Again I am not advocating a different version but pointing to where I see yours diverging from real-world realities.
when people talk about the labor supply they are generally referring to the number of people who willing to work, therefore to have very high unemployment the supply of labor must be high, or the demand for labor must be very high
You may have misread me – I said “high employment” not “high unemployment”. I use this term because low unemployment and high employment are two different things (though obviously interrelated) things.
“I suggest you read Stiglitze on information asymmetries if you don’t understand my rationale”
We do understand information asymmetries, its one of the main fields of modern economics. The reason you raised that point is that you don’t believe me when I say that many firms now hire people to try and discover the best ways to structure their business.
When you originally brought up HF, you were saying that higher wages may not lead to lower production. I said that firms know about efficiency wage theory now, and as a result this advantage does not exist anymore.
Fundamentally, your position requires assuming that higher wages will increase productivity, firms don’t know it does, but the government does. Anytime someone starts saying that the government knows more than an industry than the business’s in it do I get suspicious – I am not convinced.
“would be through statistical analysis of real world examples”
Again, we do this. Economists use a lot of statistics to try and discover the underlying relationships in things. That is why I said during the post that “ultimately, the impact of government policy on productivity and thereby on migration is an inherently empirical matter, as theory can point use either way.”
Logical models are a good way to frame problems, then we need to look at the data in order to see what is important.
sorry typo, i meant to say very low unemployment
firms don’t know it does, but the government does
Equally firms may know it does in the mid-term and further out but may not be in a position (or feel they are in a position) to take the short-term risk presented stepping ahead of the competition. In such circumstances it is up to an outside force (such as legislation) to ensure that the bar is raised equally.
“Equally firms may know it does in the mid-term and further out but may not be in a position (or feel they are in a position) to take the short-term risk presented stepping ahead of the competition.”
That would be one of these strategic complement actions – a case with a second mover advantage. Do we actually have a situation where most of the firms’ in New Zealand are suffering from a second-mover advantage type equilibrium with regards to employees wages?
This seems to contradict the idea of efficiency wages where firms’ get an advantage from paying a wage that is relatively higher than the rest of the market. We would need employees to punish firms for paying above the market rate – I don’t think this is the case.
I agree that situations like this can exist, but I’m not sure that employees wages is one of these situations.
The reason you raised that point is that you don’t believe me when I say that many firms now hire people to try and discover the best ways to structure their business.
I didn’t say I don’t believe you, I said it still doesn’t sort out to the situation of imperfect information. I’m also yet to hear a consultant say “pay your workers more”. The truth is that firms in New Zealand are generally badly managed and our management has an international reputation for being… well… not very good.
“I’m also yet to hear a consultant say “pay your workers more”.”
I know consultants that give that type of advice. Usually its more in the form of changing the pay structure to provide incentives for workers. Even when I was a student working at the Warehouse we would have consultants coming and asking us about our motivations and how the structure of the company and pay structure influenced us. Of course there will always be some imperfect information, but I do not think that firms are that behind the eight ball with respect to pay.
It would be difficult for firms to be behind the eight ball with regards to pay at the moment especially, with unemployment at record lows! Firms that pay a sufficiently low rate are likely to suffer, especially with the improvements in information provided to workers on the market pay rates.
from personal experience knowing what market rates are for someone with your skills and qualifications provides a great deal of bargaining power. In a tight labor market like we have it’s not that hard to negotiate above the market rate because they have to beat the market rate either through either financial or non-financial (working environment etc..) measures or you will go somewhere else
MN – I have some experience in HR and am more than familiar with “incentivising” and with the fact that it often works to create divisions between employees (thus weakening their negotiating power) and generally doesn’t add a great deal to the wage-pool.
A – I am well aware of the leverage available at the moment but I am also reasonably well educated and experienced in my field. For many people there are cultural obstacles to negotiating (I include many middle-class white people in this group) there is also the issue of “stickiness” which is to say many people are unwilling to undergo the upheaval and stress of changing jobs that one inevitable needs to be willing to go through for the “higher wage down the road” argument to have any teeth. This “irrational” conservatism and its outcomes is another example of the gap between a market analysis and reality.
The simple truth is that most employees need to negotiate collectively to take best advantage of the current labour shortage. I noticed earlier that Matt referred to unions as if they are a third party in the employment relationship (“As both unions and higher taxes will increase firm cost”) which surprised me as I see unions as simply an example of individuals cooperating within the market to consolidate their bargaining power. I find it hard to believe that they can then be considered a market distortion. May I ask where you stand on the issue?
I think unions can either be a distortion or correct a distortion and that it comes down to the individual market in question. If employers have the majority of the bargaining power and are paying workers less than their marginal product then creating unions can correct this. On the other hand it is possible for unions to drive wages above workers marginal product in which case I would see them as a distortion.
I would hazard a guess that in low skilled jobs unions may be more of a correcting force but in skilled professions they would be more of a distorting force as they distribution of bargaining power is probably much different in unskilled jobs than it is for skilled jobs. But I’m just basing that on my own personal experience (which is admittedly limited and at a good time in the business cycle) where I’ve felt I was in stronger bargaining position that my potential employers.
That said I’ve know a few people who have worked as grads at the big law firms, now if anyone needs a union it is them! in terms of skilled labor that is as close to exploitation as you can get! They work investment banking hours but get paid like accountants….
I agree that people are probably reluctant to go through a bunch of upheaval for a little bit more money, but even having offers from other companies can strengthen your bargaining position with your current employer. Even if it’s as simple as letting your boss know that company A offered you X dollars but you turned them down. You aren’t making demands but at the same time are letting you work know what you are worth.
“I have some experience in HR and am more than familiar with “incentivising” and with the fact that it often works to create divisions between employees (thus weakening their negotiating power) and generally doesn’t add a great deal to the wage-pool”
It shouldn’t be the firms’ aim to maximise the wage of employees, it is their aim to come up with the most productive firm structure. The more productive the firm structure, the more they will end up paying their staff, especially in a tight labour market
“cultural obstacles to negotiating (I include many middle-class white people in this group) there is also the issue of “stickiness” which is to say many people are unwilling to undergo the upheaval and stress of changing jobs that one inevitable needs to be willing to go through for the “higher wage down the road” argument to have any teeth”
Yes I agree that there is stickiness in wages etc, almost all economists do. When we talk about these incentives we are talking at the ‘margin’. There will be firms that are only just surviving – higher costs will stop them producing, there are employees who are on the verge of looking for a new job a slight increase in information will convince them to go and look. A change in policy might not affect most peoples behaviour, but that doesn’t matter as the changes we are discussing are at the margin – we are interested in what those people will do.
Why does this matter? We are interested in what impact a policy will have on how many people do a certain thing, by focusing at the margin we can tell whether a certain policy will increase or decrease the amount of people consuming/producing/working/eating etc.
If we were trying to come up with full on general equilibrium numbers we would need more, however, as we just want to say what direction change will occur in we look at the margin.
“I noticed earlier that Matt referred to unions as if they are a third party in the employment relationship ”
I meant to say an increase in union power, rather than unions per see, as I was talking about government policy specifically. Unions are definitely just a cooperative group looking to increase their market power (i’m not sure consolodate is quite the right word)
“I find it hard to believe that they can then be considered a market distortion”
Unions give market power to employees in the same way that a cartel gives market power to firms – ergo both are distortonary. However, I am pro-unions in the case where employees have less bargaining power than firms – in these cases a union is required to counter-balance the force of the firm.
The problem with many union structures though is that unions are strong where employees are already strong while they are often weak where employees are weak – this could be a good reason for government intervention in some way.
Even if it’s as simple as letting your boss know that company A offered you X dollars but you turned them down.
I wish I could agree with you on this but you’re heading into the inexact art of psychology here and the truth is that some employers will see such a statement as a signal you need higher pay but others will see your unwillingness to shift jobs as an opportunity. While some can do quite well by playing this poker game a lack of forthrightness can lead to longer term difficulties in the employment relationship (uncertainty is not a good basis for such a relationship).
Unions give market power to employees in the same way that a cartel gives market power to firms – ergo both are distortonary
MN – I guess this is the crux of my issue with a market analysis. I can’t see how a product of a market (such as a union or a cartel or a monosopy, etc) can also be considered a distortion of it. It seems to assume some ideal marketplace and then predicate its analysis on that ideal. I note your comment:
However, I am pro-unions in the case where employees have less bargaining power than firms – in these cases a union is required to counter-balance the force of the firm.
The issue I have with this is that whether something is a “distortion” or not becomes an arbitrary call based on your subjective intuition of the power (im)balance. Which kinda sounds like a “‘cos I think so” argument to me.
My question is at what point does a union (or a cartel, etc) satisfy your ideal of balance and become a distortion and how do you tell?
For clarity I’ll slightly rephrase that last paragraph:
My question to you Matt, is at what point does a union (or a cartel, etc) satisfy your ideal of balance and move on to become a distortion and how do you personally tell when this tipping point has been reached?
” guess this is the crux of my issue with a market analysis. I can’t see how a product of a market (such as a union or a cartel or a monosopy, etc) can also be considered a distortion of it”
I wouldn’t call them ‘a distorton’ I would be more likely to say that they are distortionary. In this sense all i’m saying is that the behaviour of this group takes us away from what we would deem efficient.
“My question to you Matt, is at what point does a union (or a cartel, etc) satisfy your ideal of balance and move on to become a distortion and how do you personally tell when this tipping point has been reached?”
I wouldn’t be able to quantify when this has happened because i’m not a professional industrial economist, I’ll think I’ll leave quantifiying that to them. The appropriate type of economist would compare the natural bargaining position of the employer and employee in order to match some subjective definition of what is fair, as fairness in itself is a subjective concept.
You complain about subjective definitions, but any policy analysis requires them. I think we can objectively state that there will be some point where the market power of employees is too strong, however quantifying it is inherently subjective. I’m happy to talk about directions and possibilities, but I’d rather let someone with the data define a test of excess market power in the labour market.
When criticising economists it is important to remember the difference between someone giving you a direction that things will move in and giving you a full blown set of co-ordinates from policy. Economists are good at picking directions, but it requires a much wider team of skills in order to try to quantify the output of policy. That is why everything I’ve written here has been talking about increases or decreases, but I have recognised that empirical work would be required before an appropriate set of policies could be established. I think that is fair enough,
I wouldn’t call them ‘a distorton’ I would be more likely to say that they are distortionary.
That’s semantics. I could rephrase the question as: “how can they be distortionary when they are a product of the market themselves”. If you would prefer to answer that question please do.
I’ll think I’ll leave quantifiying that to them.
I note you have a masters student who “loves industrial economics” on board. Perhaps they would like to attempt to quantify this particular power relationship?
You complain about subjective definitions, but any policy analysis requires them.
No, actually, I don’t complain about subjective definitions. What I complain about is folk who adopt a subjective analysis and then claim (or imply) it is objective. What I really complain about is when that subjective analysis is taken as essential truth because it is backed up with [dismal] “science” . And what I really, really complain about is when that subjective analysis is taken as an essential truth and used to cause real objective financial pain to people in the name of some free market Valhalla.
When criticising economists it is important to remember the difference between someone giving you a direction that things will move in and giving you a full blown set of co-ordinates from policy
That’s a back down. You are more than happy to accept the mantle of “all knowing” when your analysis (or rather, the analysis you subscribe to) is unchallenged but to then default when challenged to the claim that it’s “all subjective” is ontologically dishonest. The precepts you subscribe to are used again and again to make real material changes that seriously affect people’s lives. You should stand by them as truths or qualify them properly from the get go.
Matt. I’ve enjoyed our discussion tonight but I will draw your attention to the fact that you earlier described my argument as “normative musings”. So far you have failed to show me that your “musings” are any less “normative” and you have in fact reverted a fallback position of subjectivity, if you (or one of your fellow bloggers) have some proof of the essentially non-factitious nature of your logic that I have missed in my reading of economics then I would appreciate you putting me straight. I just don’t think you can.
I agree with you that empirical work is required for policy to be set but I have real issues with your analysis (and thus the analytical parameters such empirical analysis would be conducted and read within). Specifically, I take issue with the fact that your analytical framework has an unwarranted hegemony that allows it to (as I have previously stated) effect significant change on people’s live without good reason. And I mean reason in every sense of the word.
ah, arguing economics with lefties, always a good time!
“So far you have failed to show me that your “musings” are any less “normative” and you have in fact reverted a fallback position of subjectivity”
You have ignored what I have said. Like I said, policy analysis – which requires subjective assumption. However, that is not what I did. I used an objective framework to discuss what direction things will move in – I believe it is objective because I take it as a fact that people toss up costs and benefits when making a decision (this includes the transaction costs of making a decision in the first place). Now ultimately we run into the problem that you can make everything a subjective assumption, however I am confident that this framework is appropriate given its wide use in society and the fact it is a virtual tautology 😉
If you had read this post regularily (you would be the only one 😉 ) you would see I talk about the difference between this and normative value judgments quite a bit. So far you have only provided me with conjecture and opinion and that is why I termed what you said normative musings – if you could describe how these tradeoffs work in more detail we could have a discussion about it.
“how can they be distortionary when they are a product of the market themselves”
Well this is the whole reason for government intervention. Individual incentives in this case cause a market failure (prisoners dilemma for example), and as a result they are a distortonary in the sense that they drive us away from what the government (and as a proxy society) views as optimal.
“what I really, really complain about is when that subjective analysis is taken as an essential truth and used to cause real objective financial pain to people ”
We are not in the 80’s anymore, economists have moved on. As I said earlier we tend to work with a much wider group of disciplines (psychologists, sociologists) in order to define costs and benefits. A cost is not just monetary, but the loss of welfare to people – that is why policy analysis is subjective. An economist is good at objectively defining the monetary cost, but we work with people from other disciplines to get a feeling for the subjective social costs.
“Specifically, I take issue with the fact that your analytical framework has an unwarranted hegemony that allows it to (as I have previously stated) effect significant change on people’s live without good reason. ”
Like I have been saying, when applying policy analysis these subjectively defined costs and benefits are included. The point of what I wrote was to show that saying employment and capital expenditure will increase if we increase income taxes was as crazy as saying that a cut in taxes will increase tax revenue.