Why You Should Never Use a Supply and Demand Diagram for Labor Markets
Dan here…I noticed further writing on the macro side of labor and asked Peter’s opinion, and he reminded me of this post.
by Peter Dorman (originally published at Econospeak)
Why You Should Never Use a Supply and Demand Diagram for Labor Markets
You would know this if you read your Cahuc, Carcillo and Zylberberg, but you probably won’t, so read this instead.
A standard S&D diagram for the labor market might look like this:
It’s common to use W (wage) on the price axis and N (number of workers) on the quantity axis. Equilibrium is supposed to occur at the W where quantity supplied equals quantity demanded. From here you might introduce statutory minimum wage laws, or jobs with different nonpecuniary benefits and costs, etc. The default conclusion is that free markets are best.
But hold on a moment. S and D don’t tell you how many workers actually have jobs or how many jobs are actually filled—these are offer curves. The S curve tells you how many workers would be willing to accept a job at various wages, and the D curve tells you how many jobs would be made available to them. That’s not the same as employment.
They would be the same in a world in which labor markets operated according to a two-sided instantaneous matching algorithm, something designed by Google with no human interference at any stage of the process. In such a world all offers would enter a digital hopper, and all deemed acceptable by someone else’s algorithm would be accepted immediately. Maybe not Google but Priceline.
But that’s not the world we live in. Finding out about job openings and job applicants is somewhat haphazard and time-consuming. Applicants and jobs differ from one another in lots of obscure, subtle but crucial ways. You really wouldn’t want an algorithm to make these decisions. And so only some workers who offer their labor, even at what might be an equilibrium wage rate, are taken on, and only some job openings workers willingly apply for are filled. When we measure unemployment and vacancies à la JOLTS, we are not seeing offers but changes in actual employment and disemployment.
So let’s redraw that diagram.
To the left of N*, the equilibrium number of employment offers, we find N**, the number of workers whose offers have actually been accepted and are now on the job. A little reflection should be enough to indicate that S&D is a lousy way to frame this distinction.
First of all, what determines this gap between wanting to work (or fill a job) and actually working (or filling it)? What does this apparatus tell you about N*–N**? Nothing. It isn’t built to answer that question, and it doesn’t answer it.
But it’s worse. The apparatus indicates that N*–N** is the same on both sides of the market: the number of workers looking for work is exactly equal to the number of jobs looking for workers. But why would we expect that to happen? What reason is there to think that it’s equally easy for workers to find jobs and jobs to find workers? On the contrary, the ratio of unemployed workers to job openings never falls to 1.0, or hasn’t since we’ve had JOLTS to inform us.
S&D is simply the wrong model, based on a failure to distinguish between offers and transactions. Fortunately, there’s a better model out there, search theory, with fairly straightforward intuitions and tons of available data.
Anyone who waves an S&D model at me and makes claims about the labor market is simply advertising that they know less about economics than they think they do.
The way I see the labor market: the employer does not desire X amount of labor for his or her personal gratification — she desires X amount of work to gratify the ultimate consumer of labor and capital’s combined product and thereby influence the ultimate consumer to make a purchase.
If labor can withhold its portion of production to maximize its gratification with the price it charges — then labor joins capital and consumers in a balance of gratification all around.
This is not just academic. The typical labor market computations I see — often from so-called progressivie academics — completely and wholly ignore the monopsony-induced degradation of non-union labor which has no choice but to take whatever or starve (labor must be sold everyday or it rots).
Equal gratification of two but not three equals the destruction of the quality of life of the third — who constitute the overwhelming majority of society. So when are progressive economists (Krugman, etc.) and politicians (even Bernie) going to move re-building union density to the top of their to-do lists and keep it there until done?!
* * * * * *
In the day of the individual cloth weaver in Britain, the balance of market power between the weavers and buyer allowed the former a decent living. When steam looms made operators 100X? more productive, employee families ended up living on oat cakes three times a day because they couldn’t even afford wheat bread — because they had no way to withhold their labor to get a better price.
How many times does it have to be said? Do this or do nothing!
THIS CAN BE BEGUN AT THE STATE LEVEL
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If (big if), back in the year 1935, when the NLRA(a) was passed, a few states had criminal penalties for union busting, does anyone think the NLRB(b) regulatory machinery would have nullified state criminal court prosecutions? Even if the NLRA/NLRB actually provided substantial protections back then (may have then; not-no more)?
Farm workers were deliberately left out the NLRA(a) in 1935 (to score enough votes). California (only) has a virtual mirror image of the NLRA(a) for farm workers — the CALRA. Should (a future Democratic) Congress move to include farm workers under the NLRA(a) — under federal preemption the the presumption is that the CALRA would fall to the wayside.
OTH, if Congress should wake up and make union busting a federal felony — triable and punishable in criminal court — there is no such presumption that state prosecutions would bowl over — no more than state bank robbery prohibitions or even state minimum wage regulations have to yield to federal preemption. (In any case, all previous convictions would hold — and any new prosecutions would simply take place at the federal level.)
THIS CAN BE BEGUN OUTSIDE THE LEGISLATIVE PROCESS — BY THE PEOPLE THEMSELVES — IN BALLOT INITIATIVE STATES
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Last week I predicted [to 350 California unionists and activists, journalists and legislators over three days] that enough registered voters in California would sign a ballot initiative to make union busting a felony to line them up around the block. Based on: 5% of previous governor’s race voters (365,000) are needed to succeed — and — 45% nationally earn $15/hr or less – and – 45% nationally down from 15% overall income share to 10% over the past two generations (California wages higher, but prices also).
On average, the 45% are down to two-thirds share — but of twice as much (due to productivity growth) — which should feel better off in absolute terms, but people can’t help comparing their situation to others’. And since incomes are on a slope, the very bottom 10-15% are down in absolute terms (see today’s $7.25/hr fed min wage compared to 1968’s $11.45/hr fed min wage).
https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1.60&year1=196802&year2=201705
SHILL EFFECT
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I noticed when I was a street peddler in Manhattan and the Bronx in the early 1970s that you could sit for ten minutes waiting for somebody to buy something – but when someone did, four other people were likely to shell out too.
I’m not suggesting anything like fooling people with fake lines around the block. I am just suggesting setting up demonstration lines to make a point – the kind of point the cameras love on the six-o’clock news. We could start make-believe lines before the initiative is legally written up (couldn’t fool anybody with that) just to get the idea going (around the block :-]).
ROBERT KUTTNER WROTE IN A CURRENT ARTICLE
“If there is [a return to progressive governance], it will likely originate in America.”
If you look hard enough, the S and D graph supports Rick Perry’s that if you increase supply, demand will follow.