Noah Smith: “Why the 101 model doesn’t work for labor markets”
by Sandwichman
Noah Smith: “Why the 101 model doesn’t work for labor markets”
At Noahpinion:
A lot of people have trouble wrapping their heads around the idea that the basic “Econ 101” model – the undifferentiated, single-market supply-and-demand model – doesn’t work for labor markets. To some people involved in debates over labor policy, the theory is almost axiomatic – the labor market must be describable in terms of a “labor supply curve” and a “labor demand curve”. If you tell them it can’t, it just sort of breaks their brain. How could there not be a labor demand curve? How could there not be a relationship between the price of something and how much of it people want to buy?
Funny thing is this is pretty similar to what Sandwichman is saying in Boundless Thirst for Surplus-Labor. The “lump of labor” is a partial equilibrium model and rebuttals to the “fallacy” also invariably rely on partial equilibrium models. They are both wrong.
Obviously, the Minimum Wage and the welfare programs distort the market for unskilled labor. So do illegal immigration and the rest of the underground economy.
MY COMMENT OVER AT NOAH:
In practical, everyday political discussions (which I’m more familiar with than general equilibrium effects, heterogeneity and forward-looking behavior) …
… what’s endlessly lost is that labor is bought and sold more or less on margin — the price of labor being only a fraction (33% fast food, 7% Walmart) of the price of the product “demanded” by the ultimate consumer. Discussions of the minimum wage for the easiest example unthinking assume something like 10% higher labor costs may mean 10% fewer product buyers.
The buyer of labor has to figure out how to input higher costs into his product prices — just like any other input.
Should a broad section of labor — example lower income labor unionize enough to raise their labor price significantly — that could actually cost higher wage labor to lose some jobs as demand is redirected towards products of lower wage economy — as people tend to buy proportionately more at levels they get paid at.
Super-simple, but seems lost in every political discussion.
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I guess I should throw in my little theory that an influx of low skilled labor(ers) should not depress low skilled labor’s price that much as long as collective bargaining is setting the price by the max the consumer will pay rather than the minimum the most desperate worker will show up for.
HERE I SHOULD ADDRESS THIS LATTER TO WARREN. :-O
You’re theory ignores the fact that illegal immigrants are hired by unscrupulous employers trying to get cheap labor. They would not be part of the union.
Your 7% figure for WalMart is also erroneous. You are considering only the labor paid by WalMart to it’s employees, not the cost of all the labor involved in the production of the products.
If WalMart could raise it’s prices by 10%, they would already have done so and pocketed the profits.