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URL:  http://boards.fool.com/w-but-still-the-root-point-is-mostly-valid-30687819.aspx

Subject:  Re: smaller government, DrB? Date:  5/16/2013  6:04 PM
Author:  rmhj Number:  423095 of 445720

~w: But, still, the root point is mostly valid: People are out of work, and not able to find jobs. Why is that?

The labor market works by supply and demand and price, like everything else. Right now, for some professions, the supply or price is still too high, so prices "should" fall to the point where the markets clear; to where demand and supply meet up again. There's a huge body of economic research on why markets don't clear as quickly under deflation, and I think there are things we can do to help that, like letting people clear student loans in bankruptcy, or not letting banks price bad assets however they like.


But it doesn't. Wages are sticky, constrained by contracts, and a lot else. What does happen is what's happening now: workers mostly keep the wages they've got, but those out of work wind up either unemployed or take jobs at lower wages.

The other end doesn't work either: although basic macro tells us that raising the minimum wage should decrease employment rates, it doesn't in fact seem to have much effect at the low end. There are a lot of natural experiments in this area (cities that straddle state lines with differing minimum wages), and the results are anything but clear cut.

Finally, during a recession, falling wages are highly deflationary. Deflation is really, really bad for economies. It not only discourages consumption, it discourages investment, and strongly diminishes velocity.

Overall message: we certainly have to strike a balance in cutting wasteful gov't spending during deflationary times. Still, wasteful spending is wasteful spending, even if it inflates GDP, so we should still ultimately be looking to phase it out.

One person's waste is another's benefit.

In this case, it not only benefits the recipient, it benefits the whole economy. Certainly when an economy is in full employment, or even more is overemployed and/or suffering excessive inflation, moving workers from make-work to market-demand work is all to the good. (Even aside from reducing safety-net expenditures.) But when an economy is depressed, providing wages to the poorest workers is among the best uses of government monies: low-wage earners will spend the monies they get (rather than saving them or otherwise removing them from the economy). (Thereby increasing demand, ... and the whole virtuous cycle thing.)

Adam Smith had a lot to say about labor and wages. Even today, large corporations collude to reduce wages and manipulate the labor market. And not just basic labor -- many large hi-tech companies have been sued for collusion re: engineering talent. In general, allowing 'the market' to set wages w/o regulation is a recipe for financial disaster.

rj
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