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September 06, 2004

Bob Herbert in the NYT.

Bob Herbert in the NYT on the Economic Policy Institute's report on the State of Working America. Amazingly, given my shouting at them at TCS they did not, as promised, provide me with an advance copy of the report. Anyway, the heart of Bob's column:

American workers are in an increasingly defensive position. In a tight labor market, when jobs are plentiful, workers have leverage and can demand increased wages and benefits. But today's workers have lost power in many different ways - through the slack labor market, government policies that favor corporate interests, the weakening of unions, the growth of lower-paying service industries, global trade, capital mobility, the declining real value of the minimum wage, immigration and so on.

One part of the analysis, that in a tight labour market, workers can imrove their position, is true. A second part, that in a slack labour market, they cannot, is similarly true. All of the other points in the piece, about gains in productivity flowing to capital not labour follow ineluctably from those two points. The spectres of globalisation, immigration and so on do not need to be raised.
The question is, are we in a weak labour market or not?
There was a time, roughly 1980-1995, when 5.4% unemployment would be regarded as a very tight labour market indeed. Indeed, it would be regarded as below the structural norm for the USA and would inevitably lead to wage inflation. We now have a 5.4% unemployment rate and we do not have wage inflation. So, we must conclude that there has been some structural change in the US economy. That's pretty much one of those "Yeah, Duh" statements.
Can we think of any structural change in the US labour market? One that would, as predicted by theory, reduce the rate of unemployment at which we would expect to see wage inflation? Strangely, yes. Richard (now Lord) Layard spent most of the 1980's banging on about this. It's all to do with NAIRU, the Phillips Curve and other slightly discredited notions, that there is some trade-off between unemployment rates and inflation rates. Layard's insight was that even if such relationships do hold, the long-term unemployed do not have much influence. They are discouraged from even applying for jobs, essentially fall out of the labour force and thus have little influence upon the bargaining power of those in employment. Anecdotally we can see that this is true....or at least anyone who has either been unemployed for a long time or been in a hiring position can....applications and CV's from those who have been out of work for a year or more simply do not get considered.
The policy prescription from this insight was to force those in long-term unemployment back into the labour force. Stop benefits being open ended, insist that in order to receive public assistance people must actively search for a job. If they really can't get one, subsidize them in employment or training, but above all make certain that they do not fester as the lumpen-proletariat, but are active, even if unsuccessful, participants in the labour force.
The most enthusiastic adopter of this idea was in fact Bill Clinton with his welfare reform programme. Welfare is now limited to four years total for any individual (I think that's right) and to get it for other than short periods you have to keep applying for jobs or go into training.
So, there has been a change, a structural one, one which theory predicts would have the result we now see: what would in the past have been considered a tight labour market leading to wage inflation is now regarded as a slack labour market, one which does not give labour increased bargaining power. All at the same unemployment rate of 5.4%. In the jargon, NAIRU has been shifted down, or the Phillips Curve shifted left, something that we should regard as a good thing. The long term unemployed are no longer left to fester in slums, but encouraged, indeed forced, to go out and join in the American dream.
What bugs me about Herbert's analysis, that of the EPI and others, is that this structural change is regarded as a bad thing, when in fact it is something to be celebrated. Much to everyone's surprise a Democratic Administration listened to a leftist academic, managed not to screw up the implementation and actually had a success with an economic plan. This is something so unusual that we really ought to celebrate it.

Update. Welcome Instapundit readers....have a look round, see if there's anything else here that takes your fancy. While my two main intellectual interests are economics and environmentalism, with a special reference to how the two interact, this is a personal blog and so covers myriad subjects, some jokes, personal stories, comments on news items, even the strange case of the thief this weekend who appeared to need bacon, sausages and instant coffee. In sum, you'll find here the passing thoughts and fancies of this particular middle-aged Englishman.

September 6, 2004 in Economics | Permalink

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» Surely You're Joking, Mr. Reynolds from TheGantelope
Instapundit Glenn Reynolds links to a piece by Tim Worstall in which Bill Clinton is credited with the federal welfare reform of the 1990s. That's not how I remember it. Nor is it how P. Kent Weaver describes the subject... [Read More]

Tracked on Sep 6, 2004 4:01:35 PM

» Surely You're Joking, Mr. Reynolds from TheGantelope
Instapundit Glenn Reynolds links to a piece by Tim Worstall in which Bill Clinton is credited with the federal welfare reform of the 1990s. That's not how I remember it. Nor is it how P. Kent Weaver describes the subject... [Read More]

Tracked on Sep 6, 2004 4:05:05 PM

» Surely You're Joking, Mr. Reynolds from TheGantelope
Instapundit Glenn Reynolds links to a piece by Tim Worstall in which Bill Clinton is credited with the federal welfare reform of the 1990s. That's not how I remember it. Nor is it how P. Kent Weaver describes the subject... [Read More]

Tracked on Sep 6, 2004 4:06:50 PM

» Surely You're Joking, Mr. Reynolds from TheGantelope
Instapundit Glenn Reynolds links to a piece by Tim Worstall in which Bill Clinton is credited with the federal welfare reform of the 1990s. That's not how I remember it. Nor is it how P. Kent Weaver describes the subject... [Read More]

Tracked on Sep 6, 2004 4:07:39 PM

» Structural Change from Catallarchy
Back in the day, a 5.4% unemployment rate in the United States was considered a very tight labor market. Now, not so much. Tim Worstall comments on why that may be, prompted by a Bob Herbert article in the NYT on the same subject. Concludeth Tim: ... [Read More]

Tracked on Sep 6, 2004 4:57:11 PM

» Surely You're Joking, Mr. Reynolds from TheGantelope
Instapundit Glenn Reynolds links to a piece by Tim Worstall in which Bill Clinton is credited with the federal welfare reform of the 1990s. That's not how I remember it. Nor is it how P. Kent Weaver describes the subject... [Read More]

Tracked on Sep 6, 2004 7:30:36 PM

Comments

Interesting thoughts. And yet, the Clinton Administration listened more to the Republican Congress, which had been pushing these reforms for years, than to a leftist academic. I don't discount the possibility that his ideas may have influenced the debate here, but "workfare" was in the air as long ago as the Reagan Administration.

Secondly, do you draw a distiction between wage inflation and, well, inflation? Part of the reason US unions could demand increased wages in the 1970s was that there was so much more money around. Arthur Burns, head of the US Fed, gunned the printing presses in 71-72 to get Nixon re-elected, which is now generally agreed to have been the cause of the long-lasting US inflation. Other factors (tight labor markets, high energy prices) are drags, but they're not inflationary.

Posted by: Joshua Sharf | Sep 6, 2004 2:59:14 PM

Layard taught me at the London School of Economics in the mid 1980's. His ideas were well known but not yet mainstream then. I actually think his greatest service was to providing a better rationale for workfare (or welfare reform, your choice) than simply "Why should we support these lazy bums"?
I'll admit that my use of "wage inflation" is a bit sloppy. This is a blog post after all, not an academic paper. I do believe in the concept of wage inflation....in two parts. One is where wages are rising faster than labour productivity, ie we have inflation in the cost of labour. The other is a slightly more controversial view, that such inflation will cause general inflation throughout the economy. I'm not sure whether the second exists or not, it's so long since I actually studied macro-economics. I am, after all, only an interested amateur, not an academic or professional economist.

Posted by: Tim Worstall | Sep 6, 2004 4:17:13 PM

Hmmm.

How surprising the Republican Congress didn't have anything to do with this. Amazing that leftist academics did.

So which leftist academics were in favor of ending unlimited and endless welfare? Isn't the entire point of being a leftist academic dependency for life on the state? Isn't a leftist academic an example of someone who is entirely dependent for life on the state?

Curious.

Posted by: ed | Sep 6, 2004 4:46:25 PM

Richard Layard is English (which by US standards makes him leftish of course). He teaches at the London School of Economics which doesn't make him one side or the other. He was an advisor to the Social Democratic Party of the 19890's which certainly makes him a little leftish, and I believe his peerage came from the Liberal Democrats, which again makes him leftish if not leftist by US standards.
The rest of your comment is a nice snark which I thoroughly agree with.

Posted by: Tim Worstall | Sep 6, 2004 4:55:44 PM

First, thanks to Reynolds for linking this blog. As a dual US-Canada citizen I instinctively seek out (or is that oot) blogs with things spelt -our, but would not have found it absent the Instapundit link. Now bookmarked.

We give far too much credit to our politicians for structural changes in the economy, rather than nibbles around the edges. US Republicans can't claim that Roosevelt's actions in the '30s had no effect on the economy, but Reagan's in the '80s did. Or vice versa.

More to the point there is a vast body of evidence suggesting that the world economy is shifting from a century of inflation (inflection point, 1897) to a century or so of more moderate deflation (inflection point will probably prove to be about 1998).

When a 'tight' labour market is pushing in the same direction as inflationary forces -- as in 1973, or even the disinflationary '80s and early '90s -- it tends to exacerbate underlying inflationary forces.

It is now pushing against coalescing deflationary forces, and is effectively submersed in more powerful cyclical trends.

Not really much credit (or blame) for Clinton, Bush, or any of the others. It's the same thing world over. Just ask the Japanese.

.

Posted by: Bart Hall (Kansas, USA) | Sep 6, 2004 5:50:51 PM