Dear Professor Krugman, Say Its Name!!! “Taboo”
Dear Professor Krugman, Say Its Name!!! “Taboo”
Paul Krugman is coming closer to embracing my “taboo” argument.
A month ago I wrote that raising wages was becoming a taboo. I considered three alternative hypotheses:
1. monopsony (quoting Vox)
[I]n recent years, economists have discovered another source: the growth of the labor market power of employers — namely, their power to dictate, and hence suppress, wages…..{Monopsonistic f]irms [which pay less than “competitive” wages] bear the loss in workers (and resulting lowered sales) in exchange for the higher profits made off the workers who do not quit.
2. skittishness about the longer term economy
3. taboo
[A]n economic taboo [is a] decision to leave profits on the table because they conflict with an even higher priority held by the employer …. [If] I am an employer who *does* believe that the good times are likely to last, BUT I also believe that people who come to work for me ought to be grateful to earn, say $10 per hour, and because of my firm ideological belief, I am not going to budge. If … my ideological belief is shared on a widespread basis by my competitors and other businesses, I am *not* at a competitive disadvantage. Thus depressed wages may persist because raising wages has become a taboo.
Using the JOLTS data, I concluded based on the persistently excessive level of job openings vs. actual hires, together with the near record number of quits, that hypothesis number 3, “taboo,” best fit the evidence.
Again, to briefly summarize: if skittishness about the durability of a strong economy were the primary driver of lower wages, I would not expect those employers to even go looking for new employees to hire at higher wages. In other words, there wouldn’t be an elevated number of job openings vs. actual hires. Further if it were monopsony, we shouldn’t see the near record number of employees quitting their jobs to take other, higher-paying jobs. Also, we wouldn’t see the mismatch between hires and openings among small employers without monopsony power — but we do. So “taboo” is the best hypothesis.
Subsequently, I also pointed out that the rising wage growth for job-switchers, vs. actual *declines* in wage growth for job-stayers, as described by the Atlanta Fed, also supported the idea that raising wages was becoming a “taboo.”A couple of weeks ago, Krugman looked at the issue preliminarily, and tentatively plumped for the “skittishness” argument:
OK, here’s my theory about … wages. What employers learned during the long slump is that you can’t cut wages even when people are desperate for jobs; they also learned that extended periods in which you would cut wages if you could are a lot more likely than they used to believe. This makes them reluctant to grant wage increases even in good times, because they know they’ll be stuck with those wages if the economy turns bad again.
Sunday he took another whack at it, and he appears to be moving off the “skittishness” argument towards the “taboo” argument, even citing the same high number of quits in the JOLTS report that I did:
One [reason for stagnant wages] is simply that it has been a long time since labor markets were tight. Most HR managers, I would guess, don’t remember what a full employment economy is like. They find the idea that there aren’t tons of highly qualified workers lined up for every job opening shocking – and, inevitably, blame the workers.
More speculatively, I’ve suggested that employers are especially unwilling to raise wages because they remember the Great Recession, and don’t want to lock in higher wage costs.
Either way, I’d argue that the combination of downward nominal wage rigidity and monopsony power helps explain both why wages didn’t fall during the period of high unemployment and why employers aren’t doing much to raise wages despite tight labor markets now.”
learned behavior – check
no longer rewarded – check
resulting caterwauling and foot-stomping – check
What Krugman hasn’t fully embraced yet is that the same behavior by employers has persisted for several years, as shown by the spike in job openings vs. stagnant actual hires in the JOLTS data over the last 24 months. By now the HR managers Krugman describes ought to be over their shock and busily raising wages, or training new hires to impart the necessary skills. By and large, they’re not. That, Professor Krugman, means it’s a taboo.
And by the way, Professor, when you get around to crediting the inspiration for your insight:
[cueing 007 music]
The name is democrat.
You are forgetting about the issue of “productivity.” That is, an employee must produce more value than he costs.
An example of this is the bus boy job. The minimum wage here is $10.25/hr. and there are no more bus boys in restaurants. At lower wages in the past, there were lots of bus boys. It’s not that there was a taboo to raise bus boy wages to $10.25/hr., it’s that bus boys are not worth $10.25/hr. to the employer.
Employers really need to be less chicken.
If you raise wages during the boom and a bust comes you go ahead and put on your big boy pants and announce a wage cut if that’s what you need to do. Tell people times are tough, you hope none of them quit, etc.
Heck, start paying ‘bonuses’ during the good times, so you can turn them off with less psychological resistance.
Sammy – Productivity and wages decoupled in the late 1970s. Productivity has soared, but wages have been stagnant or declining. Magic isn’t going to happen.
Kaleberg,
Productivity has soared because of technological advances.
Two main things influence wage prices 1) productivity, which puts a cap on wages and 2) substitutes,. While an employees is much more productive due to technology, his skills are relatively easily replicated in the market and overseas, this also puts a lid on wages.
These make much more sense than the thesis that employers are irrational, ie. there is a “taboo” on wage increases no matter what the profit potential.
From 1948 to 2016, the productivity of the average American employee increased 242% while wages rose only 115%, Lawrence Mishel 2015. The argument the decrease in salaries was due to automation and robotics was set aside by evidence showing in years when concentration increased, corporate investment in machinery and equipment decreased. There was a clear correlation between the increase in concentration and decrease in the share going to employees, Simcha Barkai. Pretty simple read here: Productivity has Outstripped Wages The more concentration, the more corporations can keep wages down.
Denis Drew has a legitimate point with regard to the loss of Labor bargaining power mostly due to the concentration of corporate power and its influence within and on government. Trump’s presidency is mostly due to the influence of corpocracy or a society dominated by politically and economically large corporations. The rise of the noncompete agreement signed when one accepts work, keeps talent in place at companies, and helps to stymie wage increases.
Not sure why you insist on backing a minority which wields the power used against your own interests.
Sammy,
No busboy in the US has ever received minimum wage. They are tipped employees, not to say that even if you knew that you would still post this kind of comment.
And quite frankly, I would think your taste in foods matches your posts, which would mean you think there are no more busboys. Hard to find in McDonald’s.
Emichael,
Oregon is unusual in that tipped employees also receive minimum wage. I just used it as an example of how wages do not exceed productivity in general.
I agree with Jeff Fisher.
On a related matter, the employees who really make out like bandits are govt employees who whine when their salaries “can’t keep up” with private industry. They get sweetened pension plans to compensate, then when the bottom falls out in private industry and everyone’s stock options are worthless, govt workers get to keep their sweetened pensions instead of giving back, as in the real world. We need to pay everyone cash today, ditch the retirement plans, so we can adjust on the fly in real dollars.