tag:blogger.com,1999:blog-8764541874043694159.post7624361651456910644..comments2024-03-28T12:23:39.665+00:00Comments on Coppola Comment: The clash of micro and macroFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-8764541874043694159.post-78929034040515581352014-07-21T19:12:24.474+01:002014-07-21T19:12:24.474+01:00What makes you think that the new staff are a) une...What makes you think that the new staff are a) unemployed b) claiming benefits? I did not say that. They might simply be inactive people returning to the labour force - we've had a lot of those. <br /><br />Also, if you recall we have something called Tax Credits, which are paid out of general taxation. If these people claim Tax Credits to top up their wages, who do you suppose pays for that?<br /><br />There is actually no direct pass-through from benefit reduction to tax cuts. The workers in my widget factory aren't going to get tax cuts because I have taken on 10 new staff. Even if every factory in the country took on 10 new staff, they still might not get tax cuts. Government might simply find something else to do with the money. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-39027121764129066862014-07-21T17:42:32.158+01:002014-07-21T17:42:32.158+01:00Frances,
In your widget example, I think you’ve i...Frances,<br /><br />In your widget example, I think you’ve ignored the question as to who was supporting the 10 new employees before they were taken on. When the new employees are taken on, EXISTING employees pay less tax to support the previously unemployed. So everyone’s after tax wage / income will rise. Or at least AVERAGE incomes will rise.<br /><br />Even if there’s no formal social security system, the unemployed INEVITABLY live off the employed by begging, borrowing or stealing as they did 100/200 years ago.<br /><br />On a different point and re the title of your article (Clash of Macro and Micro) that is apt because in working out the effects of workfare one has to think of both macro and micro effects. Richard Layard (labour market economist if ever there was one) once referred to the “quagmire” that lies between macro and micro.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-57898514975691609952014-07-21T12:36:11.456+01:002014-07-21T12:36:11.456+01:00Ralph. Let me give you a simple example.
Supposin...Ralph. Let me give you a simple example.<br /><br />Supposing I am a widget manufacturer who employs 20 people at £10 per hour. Instead of investing in capital equipment to improve the productivity of my existing staff, I take on 10 new staff at a lower rate of £8 per hour. My wage bill has risen, clearly. My turnover has increased. My profits MAY have increased, though my failure to invest might mean I only just barely cover my costs and my profits remain low. Result is is higher employment, higher GDP, flat wages (or falling, actually, since I recruited my new staff at a lower rate) and flat profits. Rising GDP and rising employment do not necessarily translate directly into either higher profits or higher wages. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-55799373026061011742014-07-21T12:25:18.796+01:002014-07-21T12:25:18.796+01:00“Forcing down wages may increase employment, and h...“Forcing down wages may increase employment, and hence GDP, but that does not necessarily follow through into higher wages. Just look at Germany.”<br /><br />I’m puzzled as to exactly how it’s possible to raise GDP while wages fall. The only possible explanation (assuming all else equal – terms of trade in particular) is that profits rise AT THE EXPENSE of wages. But I don’t see that introducing workfare has a big effect on profits: a significant proportion of employers regard workfare employees as being more trouble than they’re worth. <br /><br />Moreover, even if introducing workfare DOES increase profits at the expense of wages, market forces ought ultimately to return profits to their “normal” level, to use economics jargon.<br /><br />“forcing the less productive into work has a negative effect on productivity.” Agreed. Workfare employees are relatively unproductive, so average productivity declines when workfare is introduced, but that can be consistent with rising GDP. To illustrate, if numbers employed rises by 1%, while the output of those extra employees is half the average, then average productivity declines, while GDP rises.<br /><br />“If the average marginal product is falling, then wages will not rise even if GDP is rising: higher employment means the TOTAL wage bill rises, mopping up the GDP gains…”<br /><br />Again, I’m baffled as to how it’s possible for wages to fall when GDP is rising. Where does the extra output go? It can only go to profits – there’s nowhere else for it to go. And for reasons I gave above, I don’t see that there’s much effect on profits.<br /><br />“At the macro level, total wages rise. At the individual level, they do not - indeed they may even fall.” I’m baffled again. How is it possible for “total wages” to rise (I assume you mean in real terms) while “at the individual level” wages fall? Total wages are simply the sum of “individual wages” aren’t they?<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-48154064376179118742014-07-21T10:46:35.197+01:002014-07-21T10:46:35.197+01:00No, there is a logical disconnect there, Ralph. Fo...No, there is a logical disconnect there, Ralph. Forcing down wages may increase employment, and hence GDP, but that does not necessarily follow through into higher wages. Just look at Germany. <br /><br />Furthermore, forcing the less productive into work has a negative effect on productivity. The UK's puzzle is rising employment, falling real wages AND poor productivity. If the average marginal product is falling, then wages will not rise even if GDP is rising: higher employment means the TOTAL wage bill rises, mopping up the GDP gains, without INDIVIDUAL wages rising at all. It's the macro/micro clash again. At the macro level, total wages rise. At the individual level, they do not - indeed they may even fall. And as labour becomes cheaper the incentive for employers to do anything about low individual productivity, for example by capital investment, declines. What you end up with is a low-skill, low-productivity, high-employment economy. Is that what we really want?Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-1833903046580409552014-07-21T10:39:00.232+01:002014-07-21T10:39:00.232+01:00You would think so, but in fact it depresses wages...You would think so, but in fact it depresses wages far out along the curve. I think that is because we generally see workfare in slack labour markets where there is unemployment among many skilled categories as well as the unskilled. Where there is workfare, the skilled unemployed face being forced into unskilled (demeaning) jobs, so will accept skilled jobs at lower wages. Of course, there are always some skill categories that don't suffer this effect, and their wages may continue to rise even as others fall. The labour market is not homogenous. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-82097597398164102072014-07-21T10:35:06.890+01:002014-07-21T10:35:06.890+01:00On second thoughts, there is a reason for thinking...On second thoughts, there is a reason for thinking that workfare does no even necessarily reduce wages for the less skilled. In fact it might INCREASE them. The reason is this.<br /><br />The marginal product of labour declines as employment rises (i.e. as unemployment falls). That’s because as unemployment falls, the SUITABILITY of the unemployed for vacancies declines. That unsuitability at some stage prevents a further reduction in unemployment (i.e. the economy hits capacity or NAIRU). However, if workfare makes up for that unsuitability, then TOTAL NUMBERS EMPLOYED will rise (i.e. NAIRU declines). Ergo GDP rises. Ergo potentially EVERYONE’S wage rises.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-3789137726185804092014-07-21T10:23:53.723+01:002014-07-21T10:23:53.723+01:00One bit of evidence that supports Montgomerie is ...One bit of evidence that supports Montgomerie is that Bill Clinton slashed welfare and a significant proportion of the allegedly unemployed soon found jobs. But obviously that bit of evidence doesn’t prove Montgomerie’s case.<br /><br />“Workfare depresses wages not just for those being forced to earn their benefits, but for everyone. So it may be that making life on benefits more miserable does increase jobs, but at the cost of lower wages.” I suggest it’s only wages at the lower end of the scale that get depressed by workfare: i.e. workfare employees are not exactly competition for qualified plumbers, bricklayers, lawyers, doctors, etc.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.com