The visible hand in economics

Archive for the ‘Labour economics’ Category

My recent post on universal student allowances was relatively provocative (I thought it might be a little more provocative – maybe it would have been if I said all students and all unemployed people should borrow money instead :P ). As a result, it is a good time to briefly go through the way I see the labour market and a few of the things I think are important for analysing it.

The labour market is a difficult thing to analyse given that it is the only input to production where we also value the outcome for the input!  The best way to look at labour in this case is to separate out the person selling the labour and the “labour input” – so when you go to work you are “selling an input” and the price you receive is your compensation for that – the wage.

Fundamentally, the labour market starts with the core bit – actual working labour. There are people who are employed in firms working for those that own capital.

Now, just by looking at employees and capital owners we can’t say anything about the labour market without rabid conjecture an flying euphemisms. In order to get an idea about how the “trade” between the owners of labour and the owners of capital occurs we need to get an idea about the people who do own labour but aren’t selling it.

Note: Very long post – skip to conclusion if you want, I doubt you will lose anything ;)

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I’m always confused when I hear the economists are against strikes. After all, it is perfectly sensible to place strikes in the bargaining relationship between employees and employers.

I think the confusion stems from the fact that many economists also say that there is a definite limit to strike action – as if it is set up by a significantly powerful union it merely represents the action of a monopoly against a weaker consumer (in this case the firm). As we know that market power leads to suboptimal outcomes, the case of a strong union and a weak firm will lead to a suboptimal outcome – namely too little production, because too much of the surplus is extracted by the seller (labour).

However, this does not imply that economists are completely against the option of striking being available.

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Over at Econospeak

There appears to be a fair amount of disdain in his post about the mathematical nature of economics. However, I will forgive him for this – he is a heterodox economist after all, so his very discipline is focused on critiquing areas where mainstream economic thought makes a wrong turn. Although I do not share the mis-trust of mathematical theory (infact I believe it is a very useful way to organise ideas (sort of like writing them down), I do agree with the concept that an over reliance on technical models, without an understanding of the underlying assumptions, can lead to spurious conclusions in economics (however, as we have said before, this is a problem with the subjective application of a model – it is not invalidate the model in of itself).

Anyway, the authour appears to believe that economists ignore the idea of a worker. Fundamentally, I get the impression that he is believes economics discusses the rights of capital owners in far more detail than we talk about the rights of workers. However, I’m not certain that I agree – let me try to explain:

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Over at The Standard they are discussing ‘triangular employment situations’ and a bill that is coming in to play that will give employees greater rights in these situations. Now that’s cool, I don’t have any issues with that. If I had to critique the bill I would run with the employee choice argument – if the employee chooses that he wants to work in a scheme where he doesn’t get sick leave etc (as he gets compensated for this) then these schemes provides this opportunity, so removing this opportunity will reduce the welfare of the workers in the scheme.

Still this isn’t my point. I was interested in the fact that Steve Pierson mentioned the surplus value of labour. The wikipedia definition for this is:

Surplus value is a concept created by Karl Marx in his critique of political economy, where its ultimate source is unpaid surplus labor performed by the worker for the capitalist, serving as a basis for capital accumulation.

Now I always found this idea a bit unusual. Fundamentally it states that labour unit creates more value than it is paid by the capitalist, and that excess value is taken by the capitalist and either used to create more capital or for their own consumption. Fundamentally, as capital is in some sense equivalent to savings, which is deferred consumption, the capitalist is taking this surplus away from the labour that created it.

Many contemporary proponents of the theory would not be this extreme – however, they would still fundamentally say that the surplus that the capitalist extracts comes from the exploitation of the worker. As a relatively middle of the road economist this isn’t how I feel:

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There is talk in the air that the New Zealand government may one day look at “income splitting” as a form of providing tax relief.

Income splitting changes the fundamental economic unit that is taxed from the individual to the household. The most likely form of income splitting we could see in New Zealand would see the gross income of the main income earner and their partner (either through marriage, civil union, or some other definition) aggregated and then split evenly between the two partners before being taxed at the individual tax level. As tax rates increase with income, this would lower the tax liability of all two-person households.

However, is this policy fair, or even sensible?

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Yesterday we had the dual announcements of both Fisher and Paykel and ANZ moving work overseas.

The Standard has taken issue with this activity. Particularly, two posts at the Standard lamented the “exploitation” of foreign workers and stated that consumers should stand up to protect domestic jobs.

On a separate note we have seen the closure of a Dunedin knitwear company at the same time, while the D&B payment survey shows that manufacturers are taking a long time to pay their bills, taking 53.6 days on average (can only find old one :P ):

What do these stories have in common other than the sad fact of job losses? What do these stories tell us about the New Zealand economy?

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Consider the ‘traditional’ capitalist (envisage the Monopoly™ man). This capitalist owns the means of production, such as a factory, or piece of machinery, a building, or piece of land. The capitalist uses their means of production to extract economic profit.

Times are changing. As we move towards a service based economy, like all other developed countries, increasingly the means of production take the form of human capital. Human capital is the capital that is built up within an individual, for example through education, on the job training and everyday work. The holder of human capital is herein referred to as the ‘modern’ capitalist (envisage a slimmer, more refined Monopoly™ person, possible black, possibly Asian, possibly a woman, possibly trans-gender – we don’t discriminate).

Human capital is the foundation of professional service firms, ranging from the glamorous, such as private sector economic consulting firms, to the pedestrian, such as lawyers and accountants.
But this trend towards human capital accumulation brings us to what I term the curse of human capital. Read the rest of this entry »


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