• Monetarists misunderstanding other people’s arguments

    Andy Harless responds to my last post in the comments section, this is a good response:

    By your argument, we would have to say that, because wages are going up, there is no excess supply of labor. (To alter your words slightly, “In what economic theory does the value of something that is in excess [supply] actually [rise]?” Is there any reason that your argument should not be symmetrical?) If you want to take that position when the US unemployment rate is close to the highest it has been in 29 years…

    The first thing to notice is that we mean real value here, the positive inflation rate means the real value of money is falling, and the wages Andy refers to are the real wages:

    And they’re rising, well, actually going sideways but they’re higher than when the recession began. 

    Already you can tell a bit of a story here, the initial rise in measured real wages (during the recession) may reflect the fact that those losing their jobs were the lowest earners.  Following that initial uptick real wages have been flat so already Andy is on somewhat shaky ground, real wages are a real candidate for the behaviour I said you’d expect of a price being sticky and failing to clear a market that is in excess supply.  This price isn’t going the wrong way, it’s stuck at a level.

    But wait, there’s more.  Productivity growth has continued, actually accelerated:

    If you think about the firm’s decision to hire an employee or not, it’s clearly the unit labour cost that matters, in the formal models labour is supposed to be measured in “efficiency units”.  Well that fell in the recession and has since been flat:

    So, the wage measure that matters has exactly the behaviour I said was needed to make the sticky price story work, it is stuck at a level, not falling but not going in the wrong direction. 

    Now the clincher, Andy asks “To alter your words slightly, “In what economic theory does the value of something that is in excess [supply] actually [rise]?””.  

    Is the real value of labour rising? 

    Seems to be falling.

    Adam Purzitsky
    Adam Purzitsky
    Senior Quantitative Portfolio Manager, Co-Fund Manager
    Jul 7, 2011 at 11:29pm

1 comment in total
  • Why is it the "real value" that matters? We're not talking about the fundamental value of labor; we're talking about the price adjustment mechanism. The price which adjusts is the institutionally defined price, which, in the case of labor, is the nominal actual wage, not the real effective wage. If you want to talk about the fundamental value, apart from institutionally defined prices, then there is nothing special about zero adjustment, because there's no reason for it to be sticky. In the case of the nominal actual wage, you might say, "Perhaps it doesn't adjust because it's sticky, but it makes no sense for it to go in the wrong direction." You can't make a similar argument about the real effective wage (or the nominal effective wage or the real actual wage). If it's reasonable for it to be constant in the face of excess supply, it's equally reasonable for it to go in the wrong direction; there is no qualitative difference.

    In fact, the nominal actual wage is going in the wrong direction, so the argument that it's not moving because it's sticky doesn't work. Why is it moving in the wrong direction? There is apparently some perverse adjustment mechanism that doesn't respond like a Walrasian auctioneer.

    Posted by: Andy Harless
    Jul 10, 2011 at 6:28 pm

Comments are closed.

Ignis Rates Views moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Ignis Rates Views cannot facilitate requests to remove comments or explain individual moderation decisions.

About Ignis Rates Views

The main author of this journal is Stuart Thomson, fund manager and economist for the Ignis Rates Team at Ignis Asset Management. The other members of the team are involved in forming the views represented here, and will also contribute postings from time to time. We hope you find the content interesting and welcome comments or questions. To find out more about Ignis and our fund range please visit the Ignis website.

Privacy & Data Practices

The Ignis Rates blog uses AddThis buttons to make sharing our content on the web easy. Find out how AddThis collect and use your data as well as how to opt out.