Janet Yellen serves all people, but trusts firms to set optimal wages
In her acceptance speech for Fed Chair, Janet Yellen said… (at the 1:30 point in this video from The Daily Conversation)
“The mandate of the Federal Reserve is to serve all of the American people”
And then it appears as though she almost choked on those words. She must sense the rage and power seething among people, especially the young and underpaid. or she senses the embarrassment of an economy gone elitist. It would be nice if the Federal Reserve could do more to help people, but what can the Fed do?
She says…
“The Federal Reserve can help, if it does its job effectively. We can help insure that everyone has the opportunity to work hard and build a better life.”
Many people already work hard and don’t get ahead in life.
The problem she faces is that there is no transmission mechanism to put money into the hands of people. Many people are simply marginalized from the economy. They can’t get loans. Wages are stuck. Social programs are in jeopardy. A lack of aggregate demand is keeping unemployment high. And labor has no bargaining power, not even with the government.
She wrote a paper on efficiency wages back in the 1980’s. The idea of efficiency wages justifies the going wage rate and does not address what a socially optimal wage would be.
She writes in her paper on efficiency wages…
“However, for a natural but subtle reason, the efficiency-wage model is consistent with nominal wage rigidity and cyclical unemployment.”
“In the Akerlof-Yellen model, firms are efficiency-wages setters and monopolistic competitors. In the long run, wages and prices are set by all firms in an optimal way. In the short run, in response to aggregate demand shocks, some firms keep nominal wages and prices constant, while other firms choose these variables optimally.”
What she wrote back in the 1980’s would lead me to think that she trusts firms to set appropriate wages. She would not question how or why firms set the wages that they do. And yet, she must know that firms have private interests as their priority, not social interests. Then how can she trust that wages will be optimal? Does she mean optimal for firms? But what about optimal for society?
She said nice words yesterday, but there is nothing that she can do short of stating a case for higher wages.
Ben Bernanke never gave much weight to the idea of raising wages. He felt that people needed to raise their skill level and education. But now we see many college graduates not finding appropriate jobs. Somewhere he got it wrong.
I have no hope that she will do anything to help labor directly. All her actions will help firms directly, and labor indirectly, if labor is so lucky. But then again, she says that firms set wages in an optimal way. I doubt she understands that firms have been taking advantage of their power to suppress wages over the years in a sub-optimal way for the overall economy.
So… To expect that Janet Yellen will do anything directly to help labor would be expecting too much.
Lambert
you are exactly right. i don’t know enough about the Fed to know if she “could” help improve workers wages, but i suspect that policies (interest rates) that favor “business” (as opposed to “banks” or “bond holders”) would help. (Greider argued that the Fed prolonged the “Reagan recession” in spite of Reagan’s stimulus fiscal policies by “fighting inflation” for far too long.)
but I don’t think ANYONE in the higher reaches of government, or economic policy, has any interest in helping workers. They are all in the grips of bad thinking like “optimal wages” or even “social security hurts “the economy” by discouraging savings and discouraging work.”
i have heard that Yellen in fact endorses “entitlement reform.” One can hope the Fed can’t influence that, but I suspect the Fed chairman can. We may find that “a woman chairman” is no more the road to the promised land than a black president.
You wants the FED or the feds to set wages? Or influence the process? Or regulate the process?
And how are we defining optimal wages.
Obvously the Fed does not set wages and has nearly zero control or influence on that beyond its role in general macro conditions. However, regarding Yellen’s remarks, I note that the Stiglitz-Akerlof-Yellen “efficiency wage” is actually higher than the strictly competitive marginal revenue product one. It involves essentially firms wanting to retain workers because it knows their skills and wants to maintain morale, although with the ultimate effect of there being fewer jobs offered overall, atlhough clearly one can dispute this latter outcome.
Professor Rosser
No doubt true, but the fact of life is that “valued workers” can always get a raise. But the number of “valued workers” is quite small compared to “the reserve army of the unemployed.” That means ordinary workers end up working for what the traffic will bear… which tends toward subsistence levels or less over time.
Without unions, and government policy that protect unions from the overwhelming practical power of employers… not always non violent.. workers as a whole will always get a much smaller share of the pie than decency suggests they should. And I am no believer in “equality.” Nothing at all wrong with some people doing better than others… up to the point where those doing better squeeze the poor into conditions of misery.
I don’t know if it can be fairly said that that is where we are today. I think the poor still benefit greatly from the remains of the New Deal. But the curve has been running the wrong way for a longish time now. I think the lack of hope demoralizes the working class into a condition where they do not acquire the education or “virtues” that our Republican friends and the “economists” claim is what they need to lift themselves by their bootstraps and become rich like they are.
Rusty
there was a time when the government helped “set” wages by offering jobs at “fair” wages, forcing other employers to “compete” by offering better wages.
now that a cabal of very rich malefactors have essentially taken over government at all levels, that no longer happens.
but that, and fair labor laws, and generally laws that restrict the kinds of crimes that only the very rich can commit, would certainly help.
probably some protection of workers from their own lack of sophistication in dealing with banks and “school,” might, if not improve wages, at least reduce the losses of workers to scams. but we have been deregulating ourselves into a con artists paradise and we are beginning to see the results of that.
i believe businesses define optimal wages as that wage which produces the highest profit, which in practice means the lowest wage at which they can find workers. including, perhaps, the occasional “rare” workers with skills suited to the current “growth” opportunities, soon to be replaced by an oversupply of such workers thanks to the junior colleges and shifting demand for their skills.
there is nothing wrong with this for the companies themselves. i would not expect them to do otherwise.
optimal wages for the economy might be defined, if one knew how to do it, those wages at which the income to workers and to capital balances the need for “consumption” and for “savings” to keep the ball rolling. frankly, i don’t trust “optimal wages” or “optimal taxes” because i don’t think economists are very smart or that politicians are very honest.
but i do think that the workers, acting in their own interests, with government help… government elected by those workers… trying to improve the lot of “people” would almost certainly result in something “more optimal.” i am reasonable sure capital could take care of itself.