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Monday, November 29, 2010

Wage Freezes for All?

Today Obama announced a largely symbolic gesture to freeze federal employee pay for 2 years.  That's all fine and good, but I've been thinking about this as a potential broader policy too, particularly in relation to some post-Keyensian economists who are calling for dramatic 'employment' tool(s).  They are in favor of a tool that basically negates the need to try and effect unemployment indirectly with interest rates and spending, and replacing it with a tool whereby the government would hire droves of people during recessions (kind of like a 'New Deal' instrument).  I've mentioned before I'm not in favor of such an idea in large part because it sounds needlessly bureaucratic, full of moral hazard, and could theoretically permanently increase the size of government to a dramatic and largely inefficient level.

However, what if the instrument were not employment levels but the actual wage levels - private wages - the government could control temporarily.   It wouldn't be bureaucratic since the government could pronounce say that, until such time X, Y, Z (sufficient employment/GDP growth has been attained), job-earned wages (including bonuses) are to be kept frozen across the board for EVERYONE.   This in effect would be a way around the New-Keynesian 'sticky wage / sticky price' problem.   According to classical theory if wages were allowed to freely adjust in recessions, employment would not fall as hard.   Economists point out that wages often don't fall downward (or even stagnate - many keep growing) due to union contracts, social pressure/norms, maintaining a sense of morale, etc.   But what if the government had all the power to set wages during extreme downturns?  That would take the stigma off of private employers.

It wouldn't be without issues: timing would still be important.  Rules vs. discretion would be as well.  I would imagine such a program wouldn't work (politically or otherwise) if it was left to discretion, but if certain rules were enacted as law, it might stand a chance.   What the rule is is best left to economists more mathematically inclined that myself.  I suspect tying it positively to some level of inflation would be useful such that the real wage keeps a level of stability.  Unions wouldn't be particularly happy about governments temporarily over-riding their contracts, etc.  But, I think some of them would come around when they saw that the alternative was significant unemployment.   Perhaps the biggest issue is the same big issue with all forms of fiscal/government-mandated stimulus - it all starts with politics, not economics.  That is to say, economics cannot be separated from its political cousin in the real world.  Devising a program rule that would withstand changes in political climate or parties should be paramount - but how one would go about doing that is a bit beyond me at this point....

At best, it could ease unemployment in recessions - create a more direct target for unemployment.  At worst, it could provide evidence for or against the very underpinnings of New Keynesian economics.

10 comments:

Nathan Tankus said...

"I've mentioned before I'm not in favor of such an idea in large part because it sounds needlessly bureaucratic, full of moral hazard, and could theoretically permanently increase the size of government to a dramatic and largely inefficient level." this opinion of yours against a job guarantee comes completely out of prejudice and has nothing to do with the reality or the research (not to mention the times and places where it has been instituted) that has been done. on to the post i find it amazing that you think a job guarantee would be needlessly bureaucratic but the government setting everyone's wages would not me.as keynes showed all those years ago in the beginning of the general theory, a reduction in money wages does not necessarily lead to a fall in real wages and thus an increase in employment since the real wage is subject to the general price level as well as the money wage. he concluded that "Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages, which are seldom or never of an all-round character, even though the existing real equivalent of these wages exceeds the marginal disutility of the existing employment; whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged"

Garth said...

We'll have to disagree on this point. I don't see much 'evidence' of this working. The evidence of the kind of jobs guarantee you are talking has not been tested in large scope numerous times - and certainly not in a vacuum. Elements of it certainly existed in the New Deal, but there are differences in those kinds of policies and the more structured mechanical policies of a dynamic 'jobs guarantee.' In any case, It is not a bias per se - it's an educated opinion. You are right about nominal wage adjustment not necessarily being the be-all-end-all, but I see it as a potential improvement particularly if adjusted with price movements appropriately.

Garth said...

At the end of the day, a jobs guarantee is government takeover of wages and employment. I merely suggest we let the private market do this hiring and producing over time and perhaps have the government indiscriminately alter wage rates (firm costs) to fit recessionary conditions. I think that is far less bureaucratic.

Nathan Tankus said...

'I don't see much 'evidence' of this working." what about the jefes program in Argentina after they defaulted on their foreign debt? they guaranteed a job for every household with members under the age of 18, disabled or pregnant and had 2 million (nearly 5% of the population) people employed in a year or two. this was crucial to their recovery and polls showed 90 percent of members were satisfied or very satisfied with the program ( i urge you to read Wray's report here: http://www.epicoalition.org/docs/ArgentinaJefes.htm). if you have a problem with argentina, what about india which passed the National Rural Employment Guarantee Act five years ago and still has it in place? i fail to see how a job guarantee is "government takeover of wages and employment". i fail to see how the government administering all private wages and prices is less bureaucratic then simply hiring people who can't find a job in the private sector. your claims of "extreme" waste and "bureaucracy" involved in a job guarantee is not borne out by any historical example of job programs. Unemployment is not a function of sticky prices or wages. keynes showed that decades ago, their is no reason to reinvent the wheel.

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