Benefits of full emp: wages pressures and maybe even a full-employment-productivity multiplier

December 18th, 2015 at 1:08 pm

Over at WaPo. The wage part of the story I show, lifted from a piece in WSJ about Lincoln, NE, where unemployment is 2.3%, is a familiar one, though the magnitude of the growth rate is pretty striking.

But the productivity part is, of course, trickier (“of course” because I don’t think economists really know nearly enough about what moves productivity growth). The figure below plots a smooth trend of productivity growth against the Levin employment gap measure we like to use around here, where zero implies full employment (the gap accounts for unemployment, involuntary part-time work, and a share of those missing from the job market).

The last time we were at full employment, in the latter 1990s, productivity growth notably accelerated. It has since slowed considerably, and my WaPo piece suggests a possible reason why. In weak labor markets, firms can maintain profit margins–and high ones at that, in this expansion–by squeezing labor costs. In tight markets, with wage pressures, firms can absorb higher costs by finding efficiencies they previously ignored.

Of course, they could raise prices as well, and I’d expect to see some of that. But while the idea that firms are leaving efficiencies on the table in weak periods doesn’t square with classical economics–such firms should be quickly crushed in a competitive market–I suspect in real life, where multiple equilibria exist, that sort of thing happens more often than not.

Source: BLS, our analysis

Source: BLS, our analysis

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9 comments in reply to "Benefits of full emp: wages pressures and maybe even a full-employment-productivity multiplier"

  1. readerOfTeaLeaves says:

    Dr B — bit of a driveby, but want to make sure that you see this article. It is tangential to this particular post, but arguable still relevant. Plus, it has some stats that I’ve never seen before (and arguably gives a bit more detail to your graph in this post).

    http://evonomics.com/yes-concentrated-wealth-and-inequality-crushes-economic-growth/

    Regards, rOTL


  2. Smith says:

    This post notes “such firms should be quickly crushed in a competitive market”

    Ok, which planet do you live on where there are such things as a competitive market? I have decried repeatedly decried the lack of a competitive markets and the consequences. Economic analysis fails and may in fact end up not just being inadequate or ineffective, but actually damaging because it doesn’t account for the lack of competitive markets.

    Lets list the obvious markets
    Health care, 17% of GDP. Energy 6%, Communications and IT 7.5%, natural monopolies even after the breakup of Standard Oil and Ma Bell, or never broken behemoths Microsoft, Apple, Google, Amazon, and IBM. The ever consolidating too big to fail banks and financial services at bloated 17%, Auto oligopoly dominated with 3.5%. While Walmart only accounts for a little over 10% of retail sales (35% GDP) that’s another 3.5% of GDP and the price pressure leaves them a disproportional impact. The effect is similar to being able to control a public company with only 10% of shares. I would add the defense industry to this list too at 3.5%. Then there is also government spending excluding defense and transfers, another 15% of GDP (state, local, and federal). I’m in the neighborhood of 80% of highly non competitive sectors. Even allowing for some minor overlap in the above analysis, non competitive markets are the rule, not the exception.

    It is a major failure of modern economics not to come to terms with reality. I could cite in particular John Kenneth Galbraith who pointed to the problem over 50 years ago. I wouldn’t follow his prescription of nationalized industries and ubiquitous price controls, but greater price regulation, public options (like free public college), anti-trust enforcement, and restoration of bankruptcy (to restore moral hazard to creditors of financing price increases with debt) are needed.

    The first problem is to restore full employment to generate wage increases. But liberal economists have no answer for the spiraling inflation that would ensue due to the control of prices by business. How many times do I have to write about this?


    • Smith says:

      Are these differences of degrees or fundamentally opposing interpretations? Do “inefficiencies on the table” “more often than not” equate with no competitive market with 80% clearly so?

      Also what’s the deal with this? It says the 2000s were banner years for productivity growth?
      http://www.bls.gov/lpc/prodybar.htm
      The graphs from BLS and the graph above don’t match, or are they apples and oranges and I’m not paying enough attention to what they represent?


    • Jared Bernstein says:

      Read the post a bit more carefully–the “should be crushed” is set up as a critique of the assumption of a single, efficient equilibrium.


      • Smith says:

        Apologies, I somehow missed the humorous understated sarcasm on first read, and thus did try to backtrack a bit in the following reply to my own post.

        Still puzzled about the link on productivity http://www.bls.gov/lpc/prodybar.htm I found vs. graph, but still could be missing something, will read again more carefully, thanks.


  3. Kevin Rica says:

    Given that the Law of Supply and Demand actually works in the labor market begs the question:

    “What happens if Trump gets his way and U.S. employers have to fill in behind 8 million departed immigrant workers?”


    • JF says:

      Hey, nothing begs the question like your opening assumption. OK, lets play along. If we could stretch the limits of reality to imagine both a world in which “the Law of Supply and Demand works in the labor market,” and a world in which Donald Trump is elected president, what would happen when President Trump puts all of those people in camps?


      • Kevin Rica says:

        JF,

        My opening assumption is the conclusion of the Lincoln NE story: wages work just the way your econ prof drew it up on the board (or probably flashed his Powerpoint on the screen in your case).

        If you are so certain that Trump can’t win, then don’t get so worked up.

        But the question remains unanswered:

        “What happens if Trump gets his way and U.S. employers have to fill in behind 8 million departed immigrant workers?”

        Take a shot JF. Write an economically sound talking point for Hilary.


      • Kevin Rica says:

        JF,

        My opening assumption is the conclusion of the Lincoln NE story: wages work just the way your econ prof drew it up on the board (or probably flashed his Powerpoint on the screen in your case).

        If you are so certain that Trump can’t win, then don’t get so worked up.

        But the question remains unanswered:

        “What happens if Trump gets his way and U.S. employers have to fill in behind 8 million departed immigrant workers?”

        Take a shot JF. Write an economically sound talking point for Hilary.


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