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