Blogging the 2016 ASSA conference. Why the labor market is different.
One of the sessions at the conference is titled: ‘Why Labor Is Not Like Broccoli: Session in Honor of Robert E. Prasch III‘ . Robert Prasch, who died in 2015, is famous for publishing an article which analyses the differences between the market for broccoli (or sacks of concrete or whatever) with the most important market of them all (when we look at the number of people engaged and the money involved): the labor market. Differences are, according to him, caused by fundamental points: “1) Labor cannot be separated from its providers. (2) Labor cannot be stored. (3) Labor embodies the quality of self-consciousness. (4) Labor is the one “factor of production” that most of us wish, in the end, to see well compensated”. To understand the significance of this it might be added that even (self-conscious) monkeys go on strike when one ‘earns’ a grape and the other ‘only’ a piece of cucumber. Really. Wages are set according to such standards of fairness too, according to the Akerlof and Shiller ‘Animal spirits’ book.
One of the contributions to the session is by Daphne T. Greenwood, who elaborates such ideas in her paper: “Institutionalist Theories of the Wage Bargain: Beyond Demand and Supply“. Her conclusion:
“In sum, a host of contemporary issues such as the right level for minimum wages as well as growing wage inequality within occupations and educational levels or the ability to raise minimum wages without causing unemployment are better explained by the extended family of institutionalist models. Identifying core principles and propositions is an attempt to make the richer and more complex analysis of wage determination in institutionalist models more accessible to those accustomed to one general model.”
Her paper contains a very useful oversight of the ‘extended family’ (see the annexes). An excerpt of the text:
Bringing it All Together: The Last Five Principles
Thus far, I have outlined reasons why wage determination can’t be explained well using the price-auction model. Principles six to ten describe how wages are determined and how this affects society. The strong relationship between on the job training and skills (#6) leads some firms to pay ‘efficiency wages’ to reduce shirking, minimize turnover and increase worker morale. These firms pursue dynamic rather than static efficiency, with an eye on profits rather than minimizing costs. But this leaves some workers willing to work at the lower ‘market clearing’ wage unemployed (Thurow 1975, 83-84) and others pushed into the secondary market which operates more on wage competion.
The seventh principle explains the influence of non-economic characteristics (race, gender, or ethnicity) on wages as the outcome of a particular process and structure of jobs, more than from barriers to entry. Wages represent not only the cost or ‘price’ of labor to an individual firm: they are signals of status and place in a society as well as primary determinants of the standard of living that different people and their families can achieve (Champlin and Knoedler 2009). Figart and Mutari describe the “three faces of wages:” a price or cost to the firm, a living to the individual and their family and a social practice that reinforces the structure of the community. Socially constructed ideas of the “other” affect more than where one stands in the labor queue: they shape the job structure (2004, p.181-4).
Turning to the relationship between pay and productivity, the eighth principle recognizes that labor’s marginal product is extremely difficult to measure in jobs that involve co-operation and teamwork. Average productivity is more easily measured and does place upper limits on worker compensation, but it resides largely in the job rather than the worker (Thurow 1975, 106-110). That is because there is a given quantity and quality of capital, management, on the job training, and co-workers associated with each job. Individuals obviously vary in skills and motivations, but have more room to exercise their capabilities in some jobs than others. And the price of the firm’s output affects their marginal or average revenue product.
The ninth and tenth principles focus on how wage determination affects social well-being. Rather than increasing social welfare, competition can be destructive – a menace rather than a blessing (Atkinson 2004, 41-9). Unless the power of the employer is balanced by legal restrictions or bargaining institutions, firms are motivated to shift costs of production to the larger society (Commons 1909, 68-9) .The greater the competition in the product market, the more firms will be inclined to “race to the bottom” on the labor cost side. The increased role of financial institutions in determining corporate behavior (Applebaum 2014, Lazonick 2009, Weil 2010) has created increasing pressure to engage in destructive competition, regardless of whether that is even in the long-term interests of firms.
The tenth principle of institutionalist wage determination is both macroeconomic and ethical. High wages are not the problem, but the goal (Prasch 2004, 153). High wages create high demand and thus more employment. They provide a better tax base for public investments in education, infrastructure, and environmental protection. Economic development is about increasing the productivity of workers to the point where all can earn wages that support a good standard of living (Greenwood and Holt 2010, Ch.5).