Quotulatiousness

February 18, 2019

Mis-measuring inequality

Filed under: Britain, Economics, Government — Tags: , , , , — Nicholas @ 03:00

Tim Worstall explains why any protest in a western country about “inequality” is probably bogus from the get-go:

Their opening line, their justification:

    We live in an age of astonishing inequality.

No, we don’t. We live in an age of astonishing and increasing equality. Thus any set of policies, any series of analysis, that flows from this misunderstanding of reality is going to be wrong.

And that’s all we really need to know about it all.

The problem is that their measurements – the ones they’re paying attention to – of inequality just aren’t the useful ones, the ones we’re interested in. They’re usually pre-tax, pre-benefits. They’re always pre-government supplied services. And they never, ever, look at the thing we’re actually interested in, inequality of living standards.

To give an example, the Trades Union Congress did a calculation a few years back looking at top 10% households in the UK and bottom 10%. They took the average of each decile – so, the average of the top 10% households, the average of the bottom. Then they looked at the ratio between them.

The top 10% gain some 12 times the market income of the bottom 10%. Now take account of taxes and benefits. Then add in the effects of the NHS, free education for all children and so on. Government services. We end up with a ratio of 4 to 1. Life as it’s actually lived gives the top 10% four times the final income – income being defined by consumption of course – of the bottom 10%.

That’s not a high level of inequality.

February 16, 2019

Indian government considers hiking the national minimum wage

Filed under: Business, Economics, Government, India — Tags: , — Nicholas @ 03:00

Tim Worstall explains why this is a bad idea that won’t do much — if anything — to improve the lot of workers already earning the current minimum wage, and might well make things worse:

It’s not surprising that this is happening, India mooting a rise in the national minimum wage. There is, after all, an election in the offing. Just when we would expect crowd pleasing but bad ideas to surface. The problem here is that the Indian minimum wage is already too high. Increasing something that’s too high is not sensible policy. […]

Sure, we can declare a floor price and that will be valid wherever the government’s writ runs. Which, in the Indian economy, isn’t all that far.

    The national minimum wage could be set at Rs 9,750 per month, almost double the current level, along with an additional Rs 55 per day of average HRA for urban workers, an expert committee has submitted. The January report, which went public for suggestions on Thursday, has also suggested an alternate plan, with a range of Rs 8,892-11,622 per month of national minimum wage for five different regions as they have diverse socio-economic and labour market situations, The Indian Express reported.

The specific details don’t matter all that much because the Indian government isn’t that powerful in economic matters.

The point being that any formal minimum wage will only apply to people in the formal economy. Depending upon who you want to believe between 80 and 90% of the Indian economy is over in the informal sector. That’s the part of the economy that doesn’t have health and safety standards, proper contracts and minimum wages. And our proof that the current minimum wage is too high is exactly that, that most of the economy isn’t in the formal sector where it applies.

In one manner raising that Indian minimum wage is an irrelevance because it affects so few people. In another it’s actively bad, as it makes it more expensive to join that formal economy, thus making it less likely. Thus it’s a bad idea either way. But you know, elections, politics.

February 15, 2019

European-style passenger railways don’t scale to North American distances

Filed under: Economics, Europe, Railways, USA — Tags: , , — Nicholas @ 03:00

At PJ Media, Charlie Martin does a good job of showing why the fast, efficient passenger railways of Europe are not replicated in the US and Canada:

… the usual story is something like “the United States should have a world-class passenger train system, with high-speed rail like the French and Japanese have.” @AOC’s official-no-fake-no-just-a-draft-Republican-conspiracy-theory-why-are-you-all-being-mean? Green New Deal FAQ wanted one so good that air travel would become “unnecessary.”

Sounds great, and I love the covert “MAGA” aspect of the pitch, but it has one great big, pretty much insurmountable problem: America.

Not the country, the geography. People living on the coasts just don’t realize how big this country is. I was discussing it on Twitter with a Swiss who lives in Zürich who was telling me how great the Europeans trains are — and they really are comfortable, pretty fast, have great scenery to look at — but, well, let’s compare Colorado and Switzerland. Similar climate, mountains, pretty scenery, cranky natives who are suspicious of newcomers. But let’s go to the maps:

Colorado is 6.5 times as big, has 60 percent of the population — and, it happens, about two-thirds of the gross “national” product per capita.

Compare the lower 48 states with all of Western Europe:

The truth is, we’re in flyover country out here. The coastal clerisy don’t realize that on their five-hour flight from LAX to LGA they’re traveling 2,500 miles. Now, back in the days of the Super Chief and the 20th Century Limited, you could make that trip by train in only 76 hours, not counting changing trains in Chicago. (It takes longer on Amtrak.)

So, let’s say we could get high-speed trains for the whole trip that averaged 200 miles per hour, and could travel as the crow flies: that’s 12.5 hours.

Except of course you couldn’t because the crow is flying over some of the highest mountains in the country. You’re going to need rights of way, and you can’t use the rights of way that exist because they’re not suited for that kind of speed and they’re pretty full anyway. Also, it wouldn’t do to interrupt the existing freight lines, which actually are about as good as anywhere in the world.

February 13, 2019

California mercifully kills the High Speed Train project

Filed under: Economics, Politics, Railways, USA — Tags: , , , — Nicholas @ 05:00

In Reason, Scott Shackford reports on the sudden acceptance that California’s high speed train dream is dead:

Construction of the Fresno River Viaduct in January 2016. The bridge was the first permanent structure constructed as part of California High-Speed Rail. The BNSF Railway bridge is visible in the background.
Photo by the California High-Speed Rail Authority via Wikimedia Commons.

California’s wasteful, expensive, and likely doomed-to-fail statewide bullet train project is getting killed. Today, Democratic Gov. Gavin Newsom said he’s abandoning the plan as “too costly.”

Newsom made the announcement in his State of the State address this morning. As the Associated Press reports:

    Newsom said Tuesday in his State of the State address it “would cost too much and take too long” to build the line long championed by his predecessor, Jerry Brown. Latest estimates pin the cost at $77 billion and completion in 2033.

    Newsom says he wants to continue construction of the high-speed link from Merced to Bakersfield in California’s Central Valley. He says building the line could bring economic transformation to the agricultural region.

    And he says abandoning that portion of the project would require the state to return $3.5 billion in federal dollars.

    Newsom also is replacing Brown’s head of the board that oversee the project and is pledging to hold the project’s contractors more accountable for cost overruns.

Newsom actually turned against the bullet train project years ago but then went quiet about it when he began his plans to run for governor. He declined to discuss what he saw as the train’s future on the campaign trail, but after he was elected he suggested some sort of cutback was coming, possibly eliminating the bottom half of the project, making it a train from San Francisco to the Central Valley of California.

Now it looks like he’s scaling even that back. Californians are just going to be left with a train in the middle of some of the more rural parts of the state because the Newsom administration doesn’t want to have to repay the federal funding.

Whatever may come next, this is happy news for most California citizens. Voters approved a ballot initiative in 2008 that set aside a $10 billion bond to begin the project of building a high-speed rail line from Los Angeles to San Francisco with the promise that more funding would come through from the feds or from private sources, that the train would not require subsidies to operate, and that it would help fight climate change.

February 9, 2019

The price tag for Alexandria Ocasio-Cortez’s renewable energy dream

Filed under: Economics, Environment, Politics, USA — Tags: , — Nicholas @ 03:00

At Reason, Ronald Bailey looks at how much it would cost to implement Alexandria Ocasio-Cortez’s post-fossil-fuel plans:

There’s a lot to consider in this resolution, but let’s for the time being focus on the goal of “meeting 100 percent of the power demand in the United States through clean, renewable, and zero-emission energy sources” by 2030. The resolution is light on fiscal details, so let’s consider the question of how achieving this goal would cost.

As it happens, a team of Stanford engineers led by Mark Jacobson outlined just such a plan back in 2015. Jacobson’s repowering plan would involve installing 335,000 onshore wind turbines; 154,000 offshore wind turbines; 75 million residential photovoltaic systems; 2.75 million commercial photovoltaic systems; 46,000 utility-scale photovoltaic facilities; 3,600 concentrated solar power facilities with onsite heat storage; and an extensive array of underground thermal storage facilities.

Assuming steep declines in the costs of each form of renewable electric power generation, just running the electrical grid using only renewable power would still cost roughly $7 trillion by 2030. The Information Technology and Innovation Foundation calculated that the total cost of an earlier version of Jacobson’s scheme would amount to $13 trillion. And based on how fast it has taken to install energy generation infrastructure in the past, Jacobson’s repowering plan would require a sustained installation rate that is more than 14 times the U.S. average over the last 55 years and more than six times the peak rate.

The cost — $7 trillion — would be spent to save … how much?

    ..global warming at or above 2 degrees Celsius beyond preindustrialized levels will cause— (A) mass migration from the regions most affected by climate change; (B) more than $500,000,000,000 in lost annual economic output in the United States by the year 2100;

$500 billion a year isn’t a lot in the context of the US economy. It’s currently around $20 trillion in size, so we’re talking about 2.5% of the economy being lost. But of course we’re also predicting that the economy will grow between now and then. Actually, we think the US economy will be about $100 trillion a year by 2100. So we’re talking about 0.5% of that economy. Or about the change in size of the US economy between September and December last year. Think how much richer we did feel over those few months. And how much poorer we’d be if it hadn’t happened, that growth.

Oh, and to avoid that loss AOC is suggesting that we spend $7 trillion now? That just doesn’t pass the cost benefit test. It doesn’t even pass at the Stern Review’s special discount rate.

Which is, of course, what all the economists have been trying to tell us all about dealing with climate change. Don’t do it by central planning, do it by using market incentives. Have a carbon tax. Don’t try and do it too quickly – William Nordhaus gained his Nobel in part for saying this – but do it more gradually over time. Don’t junk what we’ve got that already works, instead when the normal time comes to replace it then make sure it’s non-carbon emitting. Finally, don’t do it the expensive way, do it the cheap way. For the cheaper we make it to solve it then the more of the problem we’ll solve. You know, humans usually doing less of the expensive things and more of the cheap?

QotD: The global utility of a national carbon tax

Filed under: Economics, Environment, Government, Quotations — Tags: , , , — Nicholas @ 01:00

James Griffin [of] Texas A&M’s Bush School of Government […] is a carbon-tax advocate who begins by acknowledging what everyone knows but hardly anyone says: that, absent subsidies and mandates, renewables and so-called green energy could not begin to compete with oil and coal, and the market would be entirely dominated by fossil fuels.

The carbon tax is one of those policy ideas that is largely sound in theory but runs up hard upon the shoals of reality. I am not convinced that a national carbon tax would change U.S. consumer behavior to such an extent that it would have positive effects on what is after all a global phenomenon, nor am I convinced that the U.S. government would use the revenue from a carbon tax to invest in real climate-change mitigation. That makes the carbon tax a very expensive way of demonstrating good intentions, which does not seem to me like a very fruitful way to work. And compared to more direct programs, such as clearing the way for the development of new, modern, nuclear-power facilities, a carbon tax is even less attractive.

Kevin D. Williamson, “The Case for a Carbon Tax”, National Review, 2017-03-08.

February 6, 2019

“The haggis croquette is the most London-thing ever done in London”

Filed under: Britain, Economics, Humour — Tags: , , , , — Nicholas @ 05:00

At the IEA, Andy Mayer reports on the first attempted Burns Night Supper in the City of London:

Haggis is a traditional Scottish dish made with sheep’s heart, liver and lungs, and stomach (or sausage casing); onion, oatmeal, suet, and spices. It’s either a local delicacy or an elaborate joke played on the English (take your pick).
Photo by “Lordvolom1” via Wikimedia Commons.

Last week the City of London held their first attempt at a Burns night supper, with the First Minister and representatives of the Scottish Government as guests of honour.

It is a difficult tradition to get wrong. Largely it requires steaming piles of Scotland’s revenge on the sausage, poetry that the English politely pretend to understand while feeling vaguely threatened, and bonhomie to overcome it, enabled through litres of distillate infused with the flavour of an entire peat bog.

The City served haggis croquettes, with wine.

There’s possibly a Glaswegian satirist somewhere who’s just given up. “Ach I canne compete. The sassenach dough-monkeys just served wee Nicola a haggis croquette, on Rabbie Burns night! I’m breaking-me pen.”

Meanwhile in Shoreditch two Millenials have just set up the Haggis Croquette Cafe, serving Organic Iron-Bru made from recycled plastic girders. The haggis croquette is the most London-thing ever done in London.

I spent much of the evening talking to trade officials. Their job is to sell Scottish opportunity around the world and open up its markets.

This was interesting – how would descendants of Adam Smith visiting the birthplace of trade economist David Ricardo define their comparative advantage? What can Scotland do better than anyone else? What might they do well enough that they can carve out positions, despite larger rivals, better off leaving such things to Scotland? Fundamentally, how are they going to compete?

There was an uneasy pause after these questions. And then to paraphrase, “Oh no, we don’t want to compete, we want to cooperate! With everyone! Not being threatening, that’s our advantage!”

I feel very sure that Smith, on hearing this, would have reached out, to extend the invisible hand of history across time, to give this official a mild slap. “Encouraging competition, with and from other places, and then getting out of the way, is the whole point”, he might say.

The “Green New Deal” of Alexandria Ocasio-Cortez won’t work

Filed under: Economics, Environment, Politics, USA — Tags: , , — Nicholas @ 03:00

Tim Worstall predicts — well in advance of hearing any details of Alexandria Ocasio-Cortez’s Green New Deal — that it won’t work:

Alexandria Ocasio-Cortez speaking at the Reardon Convention Center in Kansas City, on 20 July 2018.
Photo by Mark Dillman via Wikimedia Commons.

Alexandria Ocasio-Cortez is to reveal the details of her Green New Deal in the next few days – the one thing we absolutely know about this being that it won’t work. This isn’t a commentary upon climate change nor the desirability of doing something about it. This is just a simple statement of fact about the universe we inhabit. As with the climate the economy is a complex, even chaotic, thing. Plans to substantially reform it therefore don’t work, no matter how egghead the planners nor pure in motive the instigators.

All of this being why the very reports which tell us we should do something about climate change – say, the Stern Review – tell us that we shouldn’t try to have those detailed plans for what we’ll do and how we’ll do it. Instead we’ve got to use the only management technique we’ve got for something this complex, markets and prices. Which is why near every economist who has even thought about the problem advocates either cap and trade or a carbon tax.

This is, of course, just a rerun of Friedrich Hayek’s point in his Nobel Lecture, “The Pretence of Knowledge”. That universe out there is a complicated place. There’s just no manner that the planner can gain enough information about it, in anything like real time, to be able to plan it. We’ve thus got to use other methods to bend that reality to our will. We can jam a crowbar into prices with a carbon tax for example, but we can’t start planning who should be taking how many car journeys in what sort of vehicles powered in what manner.

So, the Green New Deal from Alexandria Ocasio-Cortex, it fails at this first and basic hurdle. She’s using the wrong method to try to solve the agreed upon problem. Central planning just doesn’t work.

[…]

The reason we want cheap solutions to climate change is that this justifies producing more of a solution. Again, the justification of doing something about climate change is that it will be expensive. So, we should spend up to the amount of the damage to prevent it. Say it will cost $100, then we’re willing to spend up to $99.99 to stop it. This makes us one cent better off. We’re not willing to spend $200 to stop those $100 damages, that would make us poorer.

And more – we should spend that $99.99 as efficiently as we can because that means we’ll stop more climate change for our dollars. That also makes us richer.

Don’t forget, we’ve all already agreed that we’re going to have some climate change. Our arguments are over how much and how much are we willing to do to stop how much of it?

February 5, 2019

Macron’s desperate efforts to keep the “European Project” on life-support

Filed under: Economics, Europe, France, Government, Politics — Tags: , , , , — Nicholas @ 03:00

Justin Raimondo on the plight French President Emmanuel Macron is facing:

The EU was a joint project of Euro-intellectuals who wanted a super-socialist State and were afraid Europeans might turn away from “Europe.” They sought to create an ersatz Euro-nationalism that has still only caught on among deracinated yuppies and oligarchs, if anyone at all. What they wanted and still want is what every true state has – an army. Which Macron has been agitating about for some time now. He doesn’t want to persuade Italy and Poland and Hungary to take more refugees – he wants to force them. Even more, he wants a reliable force to crush domestic protests, one that is unlikely to sympathize with the protesters.

Protests are everywhere: the media loves to cover them provided it’s the right cause – and one of the qualifying requirements of coverage should be drama. One would think therefore that the most recent and most violent would attract the media. Not so! We hear nothing about the twelve-week riots that have shaken the Macronist regime to its foundations.

But as the so-called Yellow Vests run roughshod in France – and all over the self-proclaimed “anti-nationalist” Macron – their origins, their ideology, their story remains untold.

French President Macron, a fanatic environmentalist, decided to revise the fuel tax code so that the small urban cars beloved by his circle had their tax reduced, while fuel for trucks and more industrial uses went up as much as 30%. It was a deliberate insult to the rural working poor who must drive long distances.

Macron went out of his way to convey his contempt for the rural voters who did not vote for him. The original reduction was actually intended for long-distance fuel, but Macron changed it around at the last minute to punish this use.

The French “Deplorables” reacted swiftly and not with the usual threat to strike: they simply started an insurrection. No preliminaries. They call themselves Yellow Vests referencing the safety vests required by French law of all motorists to signal emergency: yes, they declare: there IS an emergency going on!

February 2, 2019

Remy: Better Now?

Filed under: Economics, Humour, Politics — Tags: , , — Nicholas @ 06:00

ReasonTV
Published on 1 Feb 2019

Promised an improved way of life, Remy does everything he can to believe in a new ideology – except the math.

Written and performed by Remy. Video produced by Austin Bragg. Music tracks and mastering by Ben Karlstrom.

Reason is the planet’s leading source of news, politics, and culture from a libertarian perspective. Go to reason.com for a point of view you won’t get from legacy media and old left-right opinion magazines.

—————-

LYRICS
Listened to those leaders so intently
Those Che Guevara shirts all seemed so trendy
Thought that things would be so good and friendly
So why’m I eating my neighbor’s dog Benji?

Twenty million killed, sure, that’s stuff I don’t like
But I could stay on Momma’s plan for the rest of my life
A guaranteed job digging ditches? Well what’s not to like?
It’s failed miserably each time so trying again seemed wise

Now I’m looting, looting, looting, looting
Grabbing wieners like I’m Kevin Spacey
Told a crowd “we need free markets instead”
Now my neck is no longer attached to my head

They promised things would all be better now, better now
If pure equality was finally found, finally found
Now we’re all grocery shopping at the pound, at the pound
Said that we’d have everything
Now we don’t have anything
Whoa…

How much plasma are they gonna take?
Before I finally have enough to trade?
For toilet paper or a rodent steak?
I keep on looking back on better days

They promised things would all be better now, better now
If free expression it was not allowed, not allowed
But I just caught my Roomba texting Mao
Said that we’d have everything
Now we don’t have anything

They promised things would all be better now, better now
If men with guns took farmers’ land and plow, land and plow
Now it’s another night of Rat Kung Pao, Rat Kung Pao
Said that we’d have everything
Now we don’t have anything

They promised things would all be better now, better now
If we just nationalized oil in the ground, in the ground
Now somehow gasoline can not be found, not be found
Said that we’d have everything
Now we don’t have anything

January 30, 2019

The high cost Canadians pay to support our oligopolies

Filed under: Cancon, Economics, Politics — Tags: , , , , , , — Nicholas @ 03:00

In the National Post, Andrew Coyne compares the Liberal and Conservative parties’ respective claims to lower the cost of living for Canadians, and points out some examples that neither party is willing to address:

For example, there is the notorious system of agricultural quotas known as supply management — a price-fixing ring the government not only approves but organizes and enforces, whose effect is to double or even triple the prices of such basic food items as milk, cheese, eggs and chicken. For all their pretended concern for affordability, all parties and every MP, with the sole exception of Maxime Bernier, are publicly, nay fervently in favour of it.

But while the farm cartel gets a lot of ink, there are plenty of other examples. Canadians pay among the highest wireless telephone fees in the world, for starters — maybe even the highest — as study after study has found. The latest report from Tefficient, a European consultancy, found Canada’s carriers take in more revenue per gigabyte of data than their counterparts anywhere else in the world — 23 times more than in Finland.

Similarly, Canadians pay among the highest air fares in the world. The travel website Kiwi. com recently found flights from Canada on a full-service airline cost roughly five times as much per 100 kilometres as flights from the United States. The situation was a little better for domestic flights, where costs were only twice as high as in the U.S. The makers of Hopper, the travel app, note it is typically cheaper to fly from Vancouver to Hawaii than from Vancouver to Regina, though Regina is 3,000 km closer.

Finally, there are Canadian bank fees, also — you guessed it — among the highest in the world, particularly for mutual funds. What is the common thread among these three industries? All are highly concentrated oligopolies: three big wireless carriers, two big airlines and five big banks dominate their respective markets.

Rather than compete as vigorously as they might for Canadian consumers, these quasi-cartels are permitted, in effect, to harvest them. They do so, again, not only with the tolerance but the active participation of the government. Foreigners are effectively precluded from competing in any of them, whether by foreign-ownership restrictions or outright prohibitions on competition — foreign airlines may not fly from one Canadian city to another, for example.

None of the parties currently boasting of their desire to make life more affordable for Canadians proposes to change a line of this, either. Whatever else may be in (artificially) scarce supply, in Canadian politics there’s never any shortage of rank hypocrisy.

January 20, 2019

The Short-Run Aggregate Supply Curve

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Marginal Revolution University
Published on 9 May 2017

In this video, we explore how rapid shocks to the aggregate demand curve can cause business fluctuations.

As the government increases the money supply, aggregate demand also increases. A baker, for example, may see greater demand for her baked goods, resulting in her hiring more workers. In this sense, real output increases along with money supply.

But what happens when the baker and her workers begin to spend this extra money? Prices begin to rise. The baker will also increase the price of her baked goods to match the price increases elsewhere in the economy. As prices increase, workers demand higher wages to be able to afford goods at a higher price.

In this example, the increase in money supply initially increased nominal and real wages for the baker and her employees, but as prices begin to rise, real wages begin to fall, and workers can afford less. Overtime, the demand for the baker’s goods will fall to pre-spending levels.

The takeaway? An increase in spending can increase output and growth in the short run, but not in the long run. To model this scenario, this video will show you how to draw a short-run aggregate supply curve. Let’s get started!

January 16, 2019

Tropico, the game for budding central planners

Filed under: Economics, Gaming — Tags: , , , — Nicholas @ 05:00

At FEE, Ong Jia Yi Justin looks at the video game Tropico and what it can show about real world economics:

In Tropico 5, you are El Presidente — the leader of a Caribbean island that is a semi-democratic banana republic. Your primary objective is to preserve your rule by micromanaging your country’s economy to appease your citizens, the Tropicans. If they are dissatisfied with your rule, they can vote you out in the next elections or stage a coup d’état, costing you the game.

First released in 2001, the city-building and management game has sold millions of copies worldwide, and the sixth installment is scheduled for release later in 2019. The game was even banned in Thailand due to concerns it would stir social unrest. In a hilarious response, the game developers included a mission in its DLC (downloadable content) to steal away tourists from Thailand.

Tropico 5 presents an engaging platform for players to craft their socialist paradise and examine the mechanics of socialist economies. Apart from sandy beaches and skyscrapers, Tropico 5’s appeal arises from loading players with a swarm of decisions to make, each with certain trade-offs that must be accounted for. Since most of us formulate our ideals from an armchair perspective, Tropico 5 delivers a much-needed dose of reality and numerous lessons on economics for its players to reflect upon.

Pineapples, Cotton, or Death

The first focus when you start up the Tropico 5 game is managing your agricultural sector. Players must choose between constructing two types of farms. Farms producing food crops for local consumption, such as bananas and pineapples, boost your approval rating but don’t add income to your budget. Conversely, farms growing economic crops such as tobacco and cotton bring a healthy income stream but don’t feed your people.

Some players prefer to amass large sums of wealth in the early game through cotton exports and then focus on food production later, hopefully before too many people starve to death. Other players risk bankruptcy in their attempt to bring their popularity to a safe level by spamming pineapple plantations before transitioning to economic crops later. Either way, you’re stuck between a rock and a hard place.

January 10, 2019

What Happened to America’s Passenger Trains?! The Truth – from Class to Crap!

Filed under: Economics, Government, History, Railways, USA — Tags: , , — Nicholas @ 02:00

American Rail Club
Published on 1 Jul 2017

Did America’s once industrious and world-famous passenger rail system fall because of “fair and equal” competition – or did the federal government tax it to death? Did America’s shift from rails to roads come out naturally – or from lobbying from General Motors? We visit two of America’s passenger rail cars from a bygone era to reminisce and then dive into the history and truth behind the decline of America’s passenger railroad system.

January 9, 2019

Sticky Wages

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Marginal Revolution University
Published on 2 May 2017

Imagine you’re an employer during a recession, and you desperately need to cut labor costs to keep your firm afloat. Are you more likely to cut wages across the board for all employees, or institute layoffs for only some?

While it may seem that wage cuts are the “better” choice, they aren’t as common as you might think. Why is that?

To answer that question, this video explores a phenomenon known as “sticky wages.”

In other words, wages have a tendency to get “stuck” and not adjust downwards. This occurs even during a recession, when falling wages would help end the recession more quickly.

However, that’s not to say that wages cannot adjust downward for an individual during a recession. This can happen, but likely only after an employee has been fired from their initial job, and eventually rehired by a different firm at a lower wage rate.

Back to our original question — why are employers unlikely to cut wages? A big reason has to do with the effect on morale. Employees may become disgruntled and angry when they experience a nominal wage cut, and become less productive.

An important note here — notice that we said nominal wage cut, meaning, not adjusted for inflation. If an employee receives a 3% raise in nominal wages, they may remain happy in their current position. But what if inflation is 5%? What does this mean for their real wage? (Hint: For an in depth answer to this question check out our earlier Macroeconomics video on “money illusion.”)

Next week we’ll return to our discussion on the AD/AS model for a look at how factors such as “sticky wages” affect the economy in the short run.

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