The Ultimate pro-WalMart Article

[Metsfanmax]

I thoroughly enjoy economics pieces that are simple to understand for those of us whose economics expertise is limited to a semester or two in college; here is one such piece. Basically, the author makes the argument that WalMart is one of the best things to happen to our economy, not the worst, because of how much it has done to increase real wealth. I find it to be a very persuasive argument, and it also illuminates some things about the way the capitalist system works in general. Here is a passage offering an idea I had not ever considered:

It is a waste of time for the Wal-Mart critics to worry about average wages falling too low. Average nominal wages on an economy-wide basis will always tend towards the level of full employment. If average wages go higher or lower than this point, the market automatically works to bring them back to this level.

At any given time, there is a certain quantity of total dollars of demand for labor services by all employers in the entire economic system. Average wages at full employment will be at the level of the total amount of monetary demand for labor services divided by the total number of people who choose to sell their labor services. When the average wage rate is forced above the full employment level there is not enough total monetary demand for labor to pay all those who want to work at this higher average. If, for example, in a hypothetical small economy, the total monetary demand for labor is $1 billion, and the total number of workers seeking employment is one million, the average wage must be $1,000 to reach full employment. If the average wage is forced higher than this point — say to $2,000 — then employers could only hire 500,000 workers. Without artificial interference with average wages, such as minimum wage laws or labor union coercion, unemployed workers would outcompete the employed by accepting lower wages. If the average wage was $2,000, an unemployed person could outcompete an employed person by offering his services for $1,500. The next unemployed person could get a job by accepting $1,400. As wages fell, employers could hire more total workers. This would happen throughout the economic system until the average wage rate was back at $1,000, at which point there would be enough total monetary demand to hire all one million workers. Freedom in the labor market is all that is required to reach full employment.

It is in the self-interest of employers to keep wages from falling below the point of full employment because any lower wage would cause a shortage of labor services for employers. The lower average wage would allow employers who couldn't previously obtain employees to be able to afford them. This would leave many employers who were willing and able to pay higher wages without the employees they desired. In response to this imbalance, the employers who needed more labor services, and were willing and able to pay higher wages, would simply offer higher wages and outbid the employers who weren't able to pay the higher wages. This would happen throughout the economic system until the average wage was back up at the point of full employment.

I have been agnostic about Wal-Mart in the past, but anecdotally I have always respected their decision not to engage in psychological pricing.

Read the rest here.

[Woodruff]

f*ck Wal-Mart!!!!

And as far as it's representation of Wal-Mart's critics, it seems to be intentionally misleading the subject. Most of Wal-Mart's critics are not critical of Wal-Mart's economic methods themselves (as almost everyone recognizes the intelligent business model that it is), but rather of the outlying impacts of those methods. This article completely whitewashes those issues as being based on ignorance, which they certainly are not.

Truly, and I say this while fully admitting that I have a significant anti-Wal-Mart bias, that was not a balanced article in any way, shape or form.

And did the article actually have the statement "Most people couldn't have predicted the Internet just a few years ago."? Was this article written in the early 90s?

[Haggis_McMutton]

It is a waste of time for the Wal-Mart critics to worry about average wages falling too low. Average nominal wages on an economy-wide basis will always tend towards the level of full employment. If average wages go higher or lower than this point, the market automatically works to bring them back to this level.

At any given time, there is a certain quantity of total dollars of demand for labor services by all employers in the entire economic system. Average wages at full employment will be at the level of the total amount of monetary demand for labor services divided by the total number of people who choose to sell their labor services. When the average wage rate is forced above the full employment level there is not enough total monetary demand for labor to pay all those who want to work at this higher average. If, for example, in a hypothetical small economy, the total monetary demand for labor is $1 billion, and the total number of workers seeking employment is one million, the average wage must be $1,000 to reach full employment. If the average wage is forced higher than this point — say to $2,000 — then employers could only hire 500,000 workers. Without artificial interference with average wages, such as minimum wage laws or labor union coercion, unemployed workers would outcompete the employed by accepting lower wages. If the average wage was $2,000, an unemployed person could outcompete an employed person by offering his services for $1,500. The next unemployed person could get a job by accepting $1,400. As wages fell, employers could hire more total workers. This would happen throughout the economic system until the average wage rate was back at $1,000, at which point there would be enough total monetary demand to hire all one million workers. Freedom in the labor market is all that is required to reach full employment.

It is in the self-interest of employers to keep wages from falling below the point of full employment because any lower wage would cause a shortage of labor services for employers. The lower average wage would allow employers who couldn't previously obtain employees to be able to afford them. This would leave many employers who were willing and able to pay higher wages without the employees they desired. In response to this imbalance, the employers who needed more labor services, and were willing and able to pay higher wages, would simply offer higher wages and outbid the employers who weren't able to pay the higher wages. This would happen throughout the economic system until the average wage was back up at the point of full employment.

Now I'm far from an economics authority, but this passage seems to me like it should have enough asterisks appended to make a small galaxy.

First thing that pops in mind: Isn't this assuming wages are completely elastic? Is there not a minimum wage level under which people are unwilling to go regardless of the employment situation (because, for instance, going lower would mean they starve)?
Under the assumption the article is making would it not be possible for the "full employment wage" to be something way below the poverty line?

Second thing: This passage seems to be assuming there is only one possible equilibrium point, as if the "total demand for labour services" is some kind of cosmic constant value. In reality, aren't all these values intertwined in a complex cycle? Is it not possible, for instance, that having higher wages means people have more leisure money to spend and so there are more business opportunities to pursue to satisfy these needs and therefore more "total demand of labour services" ?

I think that passage suffers from a severe case of physics envy. Unfortunately, I don't think economics will ever be that clear cut. But I'd be happy to be proved wrong.

[AndyDufresne]

Unfortunately, I don't think economics will ever be that clear cut. But I'd be happy to be proved wrong.

My wallet was empty recently. It felt pretty clear cut.


--Andy

[Timminz]

...As wages fell, employers could hire more total workers...

Yes, in the theoretical world of economics text books. I suspect that a real-world business, in the situation described (falling wages due to increased unemployment), would still only need 500,000 employees (they got by with that number before), but would simply expect the same amount of work, for lower wages.

Here's a scenario for us to consider:

Business owner/manager: "Hey, people are only demanding $1200 for labour, when they used to demand $2000. That's great! Now we can ____________________________________________."

fill in the blank:

a) "hire a bunch of new people, give all employees shorter work weeks, and still make the same amount of money."

b) "save $800 per employee, and give ourselves bonuses for cutting expenses so well."



If you've ever worked in an actual business, you'll know which answer is more likely.

[Lootifer]

Blergh my eyes glazed over pretty quickly; and im an economist (sorta). How did you find that any more accessible than the usual crap?

Anyhoo. My opinion on the matter is more fundamental:

I am a critic of walmart (and similar places: our local ones are called "The Warehouse" and "Mitre10 Mega"), but not just because they pay low wages.

The real issue here is why they are paying low wages. That reason, I think, is what they are selling. Instead of locally sourced, high quality items, they are churning out asian sourced low quality items.

While for the consumer the decision is quite easy: Buy item X from walmart for $5 or buy it from the locally owned and operated shop for $25? Simple really. But economically its essentially adding straight into your balance of trade deficit (the difference between how much your country buys vs what it sells - privately, lets not worry about government spending here) and making that pool of $$$ available for all employees in the economy smaller.

The reason why walmart wages are shit? Because we are addicted to cheap crap.

[Metsfanmax]

First thing that pops in mind: Isn't this assuming wages are completely elastic? Is there not a minimum wage level under which people are unwilling to go regardless of the employment situation (because, for instance, going lower would mean they starve)?

I don't follow. If your choice is between having no money and starving, or having a little money and starving a little less, aren't you going to choose the latter?

Under the assumption the article is making would it not be possible for the "full employment wage" to be something way below the poverty line?

Sure it is possible. Perhaps the author is arguing that without government intervention in the market, this is just unlikely to be the case.

Second thing: This passage seems to be assuming there is only one possible equilibrium point, as if the "total demand for labour services" is some kind of cosmic constant value. In reality, aren't all these values intertwined in a complex cycle? Is it not possible, for instance, that having higher wages means people have more leisure money to spend and so there are more business opportunities to pursue to satisfy these needs and therefore more "total demand of labour services" ?

I think that passage suffers from a severe case of physics envy. Unfortunately, I don't think economics will ever be that clear cut. But I'd be happy to be proved wrong.

Well, I agree. From my limited understanding of economics, the best you can do in most cases is to assume a magical world where "all other things are equal," and then derive some conclusions from that. But real economics is a non-linear system, where all other things are not equal, and so I think the author can at best only make qualitative statements about Wal-Mart in the real world based on his fantasy land scenario.

Blergh my eyes glazed over pretty quickly; and im an economist (sorta). How did you find that any more accessible than the usual crap?

Mainly because it was couched in terms of a real practical situation (how to feel about Wal-Mart) rather than a purely abstract situation. But as a scientist and mathematician, I guess I would find it more interesting than others.

Anyhoo. My opinion on the matter is more fundamental:

I am a critic of walmart (and similar places: our local ones are called "The Warehouse" and "Mitre10 Mega"), but not just because they pay low wages.

The real issue here is why they are paying low wages. That reason, I think, is what they are selling. Instead of locally sourced, high quality items, they are churning out asian sourced low quality items.

While for the consumer the decision is quite easy: Buy item X from walmart for $5 or buy it from the locally owned and operated shop for $25? Simple really. But economically its essentially adding straight into your balance of trade deficit (the difference between how much your country buys vs what it sells - privately, lets not worry about government spending here) and making that pool of $$$ available for all employees in the economy smaller.

The reason why walmart wages are shit? Because we are addicted to cheap crap.

It seems the author is trying to make the point that cheap crap is good. And I think this is a valid point, at least in a vacuum -- the whole point of economic progress is to be able to do the same thing for less input resources. All of the problems that are generated because of that, like global warming and political injustices resulting from economic inequality, are kind of external to the point being made by the author. I guess you just have to really be drinking the Kool-Aid to hope that if we just let the market do its thing, that it will magically correct things -- even though classical economic theory tells us that the market just won't do a good job dealing with externalities (e.g. greenhouse gas emissions).

[Woodruff]

First thing that pops in mind: Isn't this assuming wages are completely elastic? Is there not a minimum wage level under which people are unwilling to go regardless of the employment situation (because, for instance, going lower would mean they starve)?

I don't follow. If your choice is between having no money and starving, or having a little money and starving a little less, aren't you going to choose the latter?

Wal-Mart depends on the government to make up the difference. Yes, DEPENDS ON IT. Advertises for it in the workplace, actually. So at a certain point of lowering wages, workers are just going to go full-bore on the government welfare rather than accept the poverty wage plus some government welfare.

I guess you just have to really be drinking the Kool-Aid to hope that if we just let the market do its thing, that it will magically correct things -- even though classical economic theory tells us that the market just won't do a good job dealing with externalities (e.g. greenhouse gas emissions).

Yes, you do (BBS, I'm looking at you <smile>).

[Night Strike]

First thing that pops in mind: Isn't this assuming wages are completely elastic? Is there not a minimum wage level under which people are unwilling to go regardless of the employment situation (because, for instance, going lower would mean they starve)?

I don't follow. If your choice is between having no money and starving, or having a little money and starving a little less, aren't you going to choose the latter?

Wal-Mart depends on the government to make up the difference. Yes, DEPENDS ON IT. Advertises for it in the workplace, actually. So at a certain point of lowering wages, workers are just going to go full-bore on the government welfare rather than accept the poverty wage plus some government welfare.

I don't ever recall seeing such advertisements within Walmart. Although we do know that the government actively advertises the "free" money they hand out to people to get more people signed up, so perhaps those ads were forced into Walmarts. The problem is the welfare system, not the businesses. If the government would stop handing out limitless "free" money to people, then those people would either demand more money or work somewhere else. And now, Obamacare has actually made the low wages problem worse by outlining exactly what businesses have to do to avoid providing health care: work no more than 30 hours a week to not be penalized, which also drives down wages. Walmart, and all the other businesses that do the exact same thing yet aren't hated, aren't the cause of these problems; the crony government being perpetually involved in business is the problem.

[Woodruff]

First thing that pops in mind: Isn't this assuming wages are completely elastic? Is there not a minimum wage level under which people are unwilling to go regardless of the employment situation (because, for instance, going lower would mean they starve)?

I don't follow. If your choice is between having no money and starving, or having a little money and starving a little less, aren't you going to choose the latter?

Wal-Mart depends on the government to make up the difference. Yes, DEPENDS ON IT. Advertises for it in the workplace, actually. So at a certain point of lowering wages, workers are just going to go full-bore on the government welfare rather than accept the poverty wage plus some government welfare.

I don't ever recall seeing such advertisements within Walmart.

Have you been employed by Wal-Mart? They make a point of having their employees apply for government assistance to the point of it being advertised in their break rooms and made part of their employee briefings. Of course, they do this under the guise of "helping our employees", but the reality is that they know as long as their employees are being made survivable by the government, then Wal-Mart won't have to do it themselves.

The problem is the welfare system, not the businesses.

No. Absolutely not. That is an entirely DIFFERENT SUBJECT. That is a problem, I agree...but that is not THIS problem. At all.

THIS problem is that businesses like Wal-Mart (they are not at all the only one) actively use government welfare to subsidize their own wages.

[Night Strike]

Have you been employed by Wal-Mart? They make a point of having their employees apply for government assistance to the point of it being advertised in their break rooms and made part of their employee briefings. Of course, they do this under the guise of "helping our employees", but the reality is that they know as long as their employees are being made survivable by the government, then Wal-Mart won't have to do it themselves.

Yes, I was. And the assistance you're talking about is the same that has to be mentioned at other jobs such as lists of the eligibility for Medicaid and other child assistance programs. These notifications are mandated by the government, not the businesses.

[Night Strike]

Besides, Walmart is doing quite well on their own of driving away customers because of their refusal to schedule enough workers to keep cash registers flowing and shelves stocked. That had started even before I left, but only appears to have become much more pronounced.

[Woodruff]

Have you been employed by Wal-Mart? They make a point of having their employees apply for government assistance to the point of it being advertised in their break rooms and made part of their employee briefings. Of course, they do this under the guise of "helping our employees", but the reality is that they know as long as their employees are being made survivable by the government, then Wal-Mart won't have to do it themselves.

Yes, I was. And the assistance you're talking about is the same that has to be mentioned at other jobs such as lists of the eligibility for Medicaid and other child assistance programs.

Yes and no. Certainly that is a part of it, but Wal-Mart makes it an advertising program for all forms of state and Federal aid, not at all just those.

These notifications are mandated by the government, not the businesses.

Having something pinned on the board in the break room or within an employee handbook is required. Having it be a part of regular employee briefings are not required.

[Woodruff]

Besides, Walmart is doing quite well on their own of driving away customers because of their refusal to schedule enough workers to keep cash registers flowing and shelves stocked. That had started even before I left, but only appears to have become much more pronounced.

I have to admit this is one part of their strategy I've not understood. I realize that customer service hasn't really been a part of their business model since probably Sam Walton left the company, but this doesn't make sense to me. As tremendous as their logistics system is (and it is), if they would simply apply those exact same methodologies to their staffing, this wouldn't even be an issue AND they'd be just as money-making (due to accessing more of their customers money more quickly).

[Haggis_McMutton]

First thing that pops in mind: Isn't this assuming wages are completely elastic? Is there not a minimum wage level under which people are unwilling to go regardless of the employment situation (because, for instance, going lower would mean they starve)?

I don't follow. If your choice is between having no money and starving, or having a little money and starving a little less, aren't you going to choose the latter?

If it's not enough money to maintain some minimum standard of living you're presumably gonna choose option C: riot, start stealing, etc.

[Night Strike]

Besides, Walmart is doing quite well on their own of driving away customers because of their refusal to schedule enough workers to keep cash registers flowing and shelves stocked. That had started even before I left, but only appears to have become much more pronounced.

I have to admit this is one part of their strategy I've not understood. I realize that customer service hasn't really been a part of their business model since probably Sam Walton left the company, but this doesn't make sense to me. As tremendous as their logistics system is (and it is), if they would simply apply those exact same methodologies to their staffing, this wouldn't even be an issue AND they'd be just as money-making (due to accessing more of their customers money more quickly).

Actually, they DO try to apply those same systems to their staffing, which is why you have what you have now. There were constant issues with non-store higher ups or even computers putting together staffing numbers and schedules with local managers only being allowed to make small tweaks to the schedule. It assumes that all people are exactly equal in their productivity and that the system can account for historical trends better than the local people.

[PLAYER57832]

I thoroughly enjoy economics pieces that are simple to understand for those of us whose economics expertise is limited to a semester or two in college; here is one such piece. Basically, the author makes the argument that WalMart is one of the best things to happen to our economy, not the worst, because of how much it has done to increase real wealth. I find it to be a very persuasive argument, and it also illuminates some things about the way the capitalist system works in general. Here is a passage offering an idea I had not ever considered:

It is a waste of time for the Wal-Mart critics to worry about average wages falling too low. Average nominal wages on an economy-wide basis will always tend towards the level of full employment. If average wages go higher or lower than this point, the market automatically works to bring them back to this level.

At any given time, there is a certain quantity of total dollars of demand for labor services by all employers in the entire economic system. Average wages at full employment will be at the level of the total amount of monetary demand for labor services divided by the total number of people who choose to sell their labor services. When the average wage rate is forced above the full employment level there is not enough total monetary demand for labor to pay all those who want to work at this higher average. If, for example, in a hypothetical small economy, the total monetary demand for labor is $1 billion, and the total number of workers seeking employment is one million, the average wage must be $1,000 to reach full employment. If the average wage is forced higher than this point — say to $2,000 — then employers could only hire 500,000 workers. Without artificial interference with average wages, such as minimum wage laws or labor union coercion, unemployed workers would outcompete the employed by accepting lower wages. If the average wage was $2,000, an unemployed person could outcompete an employed person by offering his services for $1,500. The next unemployed person could get a job by accepting $1,400. As wages fell, employers could hire more total workers. This would happen throughout the economic system until the average wage rate was back at $1,000, at which point there would be enough total monetary demand to hire all one million workers. Freedom in the labor market is all that is required to reach full employment.

It is in the self-interest of employers to keep wages from falling below the point of full employment because any lower wage would cause a shortage of labor services for employers. The lower average wage would allow employers who couldn't previously obtain employees to be able to afford them. This would leave many employers who were willing and able to pay higher wages without the employees they desired. In response to this imbalance, the employers who needed more labor services, and were willing and able to pay higher wages, would simply offer higher wages and outbid the employers who weren't able to pay the higher wages. This would happen throughout the economic system until the average wage was back up at the point of full employment.

I have been agnostic about Wal-Mart in the past, but anecdotally I have always respected their decision not to engage in psychological pricing.

Read the rest here.

Yeah, if you accept that building wealth for the top is really beneficial and that we can just ignore costs inherent with low wages, failure to buy locally, environmental destruction, etc.

But, hey, its those who make money that write the "rules" for economics, so ....

[PLAYER57832]

Have you been employed by Wal-Mart? They make a point of having their employees apply for government assistance to the point of it being advertised in their break rooms and made part of their employee briefings. Of course, they do this under the guise of "helping our employees", but the reality is that they know as long as their employees are being made survivable by the government, then Wal-Mart won't have to do it themselves.

Yes, I was. And the assistance you're talking about is the same that has to be mentioned at other jobs such as lists of the eligibility for Medicaid and other child assistance programs. These notifications are mandated by the government, not the businesses.

Oh bull... that is as "real" as your claim that medical care is some kind of optional service that people can just do without.

Oh, and its not just medical care these people cannot afford, its also rent, food, childcare and transportation. Those "profits" are fully supplemented by OUR tax dollars, not the company income. Claiming that is a legitimate profit is false.

PS its not some remote "government" that demands we provide food stamps and the like, its PEOPLE who understand that letting fellow citizens starve or go homeless helps no one, particularly when its kids, but even for adults. We have been there already... you might study history before demanding that we repeat it, again.

[PLAYER57832]

First thing that pops in mind: Isn't this assuming wages are completely elastic? Is there not a minimum wage level under which people are unwilling to go regardless of the employment situation (because, for instance, going lower would mean they starve)?

I don't follow. If your choice is between having no money and starving, or having a little money and starving a little less, aren't you going to choose the latter?

Wal-Mart depends on the government to make up the difference. Yes, DEPENDS ON IT. Advertises for it in the workplace, actually. So at a certain point of lowering wages, workers are just going to go full-bore on the government welfare rather than accept the poverty wage plus some government welfare.

I don't ever recall seeing such advertisements within Walmart.

That's because you have not applied to Walmart for work. Its handed out with the employment packet... though since they got bad media on it, I believe information is given more verbally and with references to general government websites for information.

Although we do know that the government actively advertises the "free" money they hand out to people to get more people signed up, so perhaps those ads were forced into Walmarts. The problem is the welfare system, not the businesses. If the government would stop handing out limitless "free" money to people, then those people would either demand more money or work somewhere else. And now, Obamacare has actually made the low wages problem worse by outlining exactly what businesses have to do to avoid providing health care: work no more than 30 hours a week to not be penalized, which also drives down wages. Walmart, and all the other businesses that do the exact same thing yet aren't hated, aren't the cause of these problems; the crony government being perpetually involved in business is the problem.

It would be nice if you actually studied some facts before presenting your lauded theories.

See, reality disagrees with your presentation of ideas. In particular, if you think Obamacare did anything additional in outlining how business can avoid healthcare, then you are deluding yourself seriously. Obamacare was designed to NOT solve the healthcare problem, but it does move us toward better coverage than most of us had before.

[PLAYER57832]

Besides, Walmart is doing quite well on their own of driving away customers because of their refusal to schedule enough workers to keep cash registers flowing and shelves stocked. That had started even before I left, but only appears to have become much more pronounced.

I have to admit this is one part of their strategy I've not understood. I realize that customer service hasn't really been a part of their business model since probably Sam Walton left the company, but this doesn't make sense to me. As tremendous as their logistics system is (and it is), if they would simply apply those exact same methodologies to their staffing, this wouldn't even be an issue AND they'd be just as money-making (due to accessing more of their customers money more quickly).

Its like the old joke about running from a bear -- you don't have to outrun the bear, just the other guy.

[The Voice]

...As wages fell, employers could hire more total workers...

Yes, in the theoretical world of economics text books. I suspect that a real-world business, in the situation described (falling wages due to increased unemployment), would still only need 500,000 employees (they got by with that number before), but would simply expect the same amount of work, for lower wages.

Here's a scenario for us to consider:

Business owner/manager: "Hey, people are only demanding $1200 for labour, when they used to demand $2000. That's great! Now we can ____________________________________________."

fill in the blank:

a) "hire a bunch of new people, give all employees shorter work weeks, and still make the same amount of money."

b) "save $800 per employee, and give ourselves bonuses for cutting expenses so well."


If you've ever worked in an actual business, you'll know which answer is more likely.

You forgot this very real/comical scenario:

c) hire illegal immigrants: http://www.cbsnews.com/2100-201_162-681593.html

I also doubt this guy would be able to tell me how Wal-Mart's discrimination of female workers adds to how it's one of the best things for our economy.

I was just in one of their "super" centers yesterday. Their beans section was almost entirely empty. I had to go to this small grocery store to pick some up. WTF?

Meijer is where it's at

[BigBallinStalin]

It is a waste of time for the Wal-Mart critics to worry about average wages falling too low. Average nominal wages on an economy-wide basis will always tend towards the level of full employment. If average wages go higher or lower than this point, the market automatically works to bring them back to this level.

At any given time, there is a certain quantity of total dollars of demand for labor services by all employers in the entire economic system. Average wages at full employment will be at the level of the total amount of monetary demand for labor services divided by the total number of people who choose to sell their labor services. When the average wage rate is forced above the full employment level there is not enough total monetary demand for labor to pay all those who want to work at this higher average. If, for example, in a hypothetical small economy, the total monetary demand for labor is $1 billion, and the total number of workers seeking employment is one million, the average wage must be $1,000 to reach full employment. If the average wage is forced higher than this point — say to $2,000 — then employers could only hire 500,000 workers. Without artificial interference with average wages, such as minimum wage laws or labor union coercion, unemployed workers would outcompete the employed by accepting lower wages. If the average wage was $2,000, an unemployed person could outcompete an employed person by offering his services for $1,500. The next unemployed person could get a job by accepting $1,400. As wages fell, employers could hire more total workers. This would happen throughout the economic system until the average wage rate was back at $1,000, at which point there would be enough total monetary demand to hire all one million workers. Freedom in the labor market is all that is required to reach full employment.

It is in the self-interest of employers to keep wages from falling below the point of full employment because any lower wage would cause a shortage of labor services for employers. The lower average wage would allow employers who couldn't previously obtain employees to be able to afford them. This would leave many employers who were willing and able to pay higher wages without the employees they desired. In response to this imbalance, the employers who needed more labor services, and were willing and able to pay higher wages, would simply offer higher wages and outbid the employers who weren't able to pay the higher wages. This would happen throughout the economic system until the average wage was back up at the point of full employment.

Now I'm far from an economics authority, but this passage seems to me like it should have enough asterisks appended to make a small galaxy.

Agreed, but then most people would lose interest. Ever wonder why politicians love the neoclassical economics? It assumes the nitty-gritty away so that public policy becomes so 'clairvoyant'!

My main qualm is that aggregating Labor into one market--as they do in their example--fails to describe what actually happens in the labor market, which as we know is heterogeneous, not homogeneous (but that inconvenient fact doesn't stop nearly all econometricians from being silly).

First thing that pops in mind: Isn't this assuming wages are completely elastic?

Well, the price of labor (a wage) can't be either elastic or inelastic. The demand and supply of labor can only vary in their elasticity.

E.g. If the demand for labor was very elastic, then a small change in price (wage) would "cause" a large change in the quantity demanded for labor--assuming that the supply of labor remains constant (ceteris parabis). If the demand was very inelastic, then a small change in price would hardly affect the quantity demanded for labor.

And, it depends on the market clearing price* of labor, which is... what exactly? (Hint: no one knows).

• *the price at which both demand and supply attain equilibrium. Oooo! <waves hands>. So, at that point there would be neither shortage (perfectly full employment) nor abundance (unemployment) of labor, which sounds impossible, right? (Right).
  
  • In reality, equilibrium is constantly in flux, but that makes graphing it so difficult! So let's don our neoclassical econ. hats and assume it's static!* *Lootifer may go on about dynamic stochastic general equilibrium, but that's still static--even if it's superficially called "dynamic").

The underlying assumptions behind the kind of economic reasoning as seen in the OP would be disturbing to expose. Labor isn't homogenous, so the explanation can never be so simple. I'll explain more about this while answering your following questions.

Is there not a minimum wage level under which people are unwilling to go regardless of the employment situation (because, for instance, going lower would mean they starve)?

Would all people work at such low wages? Well, it depends on how each person defines (a) their best perceived benefits of their most valuable opportunity, and (b) their opportunity cost, which is the second-most valued activity that person would rather be doing--if (a) was chosen. For example, "should I take the shit job @ $3.00 per hour, or would it be more profitable for me to simply live on the land and grow my own food"?*

• *Some call that "subsistence agriculture." . Also, interns work at such low rates on average because they expect to earn higher later, so we have to keep in mind that individuals and their expected future streams of income can change over time.

Anyway, with the above quoted question in mind ($3.00 v. farming), when we think about this, not everyone is like that. Different people are willing to work different jobs at different wages. When we realize this, then the reasoning behind that article becomes silly (because it implicitly assumes such a fact is not true--it homogenizes the Labor market. Without assuming homogeneity, then the article would have nothing 'factual' to say about the labor market).

So I'm ripping on the basic econ. here, but basic econ. is useful in that it provides concepts which help us understand the world around us. We're exposing the limits of these concepts correctly because as we draw out its logical consistency, it frays at the edges. Nevertheless, if we were to disaggregate the labor market to more finer parts, then the same concepts would have relatively more factually 'correct' claims to make about the specific kinds of labor markets in various places. (This is why Hayek goes on about "the circumstances of time and place.")

Under the assumption the article is making would it not be possible for the "full employment wage" to be something way below the poverty line?

Sure, but what kind of Labor market are we talking about here? Because obviously not everyone works the same job at the same wage. We're talking about a Labor market which we've invented in our heads. The same happens when people speak about "unemployment" and "GDP" in the economy. It's very imaginary--yet "real"--stuff.

No one really knows what the market clearing price for various labor markets is. It's just different buyers (employers) and sellers (laborers) exchanging in different markets, but if you pay me $5000 to draw up a "economic impact" report, then Hey, forget all which I've said, and let me razzle-dazzle you with all kinds of econ. alchemy.

Second thing: This passage seems to be assuming there is only one possible equilibrium point, as if the "total demand for labour services" is some kind of cosmic constant value. In reality, aren't all these values intertwined in a complex cycle? Yes. Is it not possible, for instance, that having higher wages means people have more leisure money to spend and so there are more business opportunities to pursue to satisfy these needs and therefore more "total demand of labour services" ? It's possible.

Check out the big brain on Haggis!

Spoiler

So, with equilibrium, you've got various explanations about this phenomenon. Remember that in reality we're talking about individuals here, and each perceives their profit and opportunity cost (OC) subjectively. And this interpretation of profit and OC is influenced by many factors external to the individual, but each individual also filters and creates more or less his own interpretation, thus influencing that which surrounds him. So, it's a reciprocal process. People respond to prices, but they also search for a particular price among the myriad of prices (e.g. think of yourself while you shop for different items).

With that in mind, there's two basic ways to explain (dis)equilibrium:

Lachmann theorizes that within various markets, people already tend toward equilibrium, yet disequilibrium happens due to entrepreneurial activities. For example, suppose the market clearing price for alcohol is $5.00 per six pack in market A. But in market B, those bastards are selling at $7.00 per pack! We need to buy from market A and sell in market B! (arbitrage opportunity). This act of arbitrage, (a.k.a. entrepreneurship, or ability to find profitable opportunities), causes a disequilibrium among the Total Market of Alcohol.

In other words, if we were to aggregate both markets of alcohol, then we would notice a 'disturbance in the force' as some individuals engage in arbitrage. The prices and quantities in each market were fine before, but those dastardly entrepreneurs are messing it all up.

Most economists posit that it's the other way around. Entrepreneurs are the guys who correct the disequilibrium. So, before the entrepreneurs in the alcohol markets began their arbitrage, these economists would say, "those markets are in disequilibrium for there is profit to be made." The buying in market A drives up the price from $5.00 and the additional selling in market B drives down the price from $7.00 (ceteris paribus--holding all other things constant). With the prices changing, they'd say that the demanders and suppliers are tending toward the market clearing price--where demand = supply, or rather "equilibrium."

(I don't agree with Lachmann, but he's got some extremely interesting ideas).

Is it not possible, for instance, that having higher wages means people have more leisure money to spend and so there are more business opportunities to pursue to satisfy these needs and therefore more "total demand of labour services" ? It's possible.

Right. How do people substitute between leisure and labor? Who knows. It's different for each individual. Some people hit some optimal balance between the two, and many fluctuate on that balance. It's like asking, "at what point do people reach equilibrium in regard to work and non-work?" [resinsert stuff about heterogeneity].

And sure, it's all connected, but it depends on how one 'spends' one's time. If one requires trading their earned income for leisurely goods, then there's this increased demand for more goods. If one does not require such trading, then there's no change in the demand for goods.* Then, with this increased demand for goods, the sellers need to produce more, so they'll pay for an additional mix between labor and capital.

• *(Assuming that there's only one demander in the whole world. I'm just picking him out to show that it depends what those with more leisure do and how that affects the demand for more labor).

I think that passage suffers from a severe case of physics envy. Unfortunately, I don't think economics will ever be that clear cut. But I'd be happy to be proved wrong.

Shit yeah, but I'm hesitant to assume that of the author. He's just using basic economics. If he were to stop himself everyone few lines, people would lose interest, so you gotta start somewhere. The problem is that hardly anyone gets around to explaining/understanding the myriad of problems with economics, which leads to greater problems:

• People believing in the political rhetoric about restoring jobs in the economy. The federal reserve is going to save us from ourselves. Deflation is terrible because hurr durr. Herp a derp derp.

In economics, there are no constants. None. Imagine trying to find the force of gravity between two bodies without plank's constant. That's what real economics is like; it's a messy social science. Now, most econometricians and neoclassical/mainstream economists will assume this dirty problem away by simplifying things to a point where they're no longer talking about the real world, but rather a world which they've invented within their minds. They're free to play in it, but it gets others hurt because politicians and public officials (mis)use it.

Can economics ever be as clear as physics? I doubt it, but who knows what the future holds for us. However, imagine trying to gather data on every exchange of labor each day for a year. But then, as soon as you aggregate it (average it), and talk about "average wage level" and "the labor market," then you're fooling yourself. Different people work different jobs at different wages, and with this in mind, nothing about economics can be so clear, but it doesn't stop people from talking about "the economy." So, on some points, I see some improvement, but with basic problems, there's a ceiling which can't be lifted.

[BigBallinStalin]

It seems the author is trying to make the point that cheap crap is good. And I think this is a valid point, at least in a vacuum -- the whole point of economic progress is to be able to do the same thing for less input resources. All of the problems that are generated because of that, like global warming and political injustices resulting from economic inequality, are kind of external to the point being made by the author. I guess you just have to really be drinking the Kool-Aid to hope that if we just let the market do its thing, that it will magically correct things -- even though classical economic theory tells us that the market just won't do a good job dealing with externalities (e.g. greenhouse gas emissions).

You do realize that the market and politics are intertwined, right?

And that, because of this, we have today's outcomes, right?


Which theory? And which one posits that the government would do a better job?

[BigBallinStalin]

Blergh my eyes glazed over pretty quickly; and im an economist (sorta). How did you find that any more accessible than the usual crap?

Anyhoo. My opinion on the matter is more fundamental:

I am a critic of walmart (and similar places: our local ones are called "The Warehouse" and "Mitre10 Mega"), but not just because they pay low wages.

The real issue here is why they are paying low wages. That reason, I think, is what they are selling. Instead of locally sourced, high quality items, they are churning out asian sourced low quality items.

While for the consumer the decision is quite easy: Buy item X from walmart for $5 or buy it from the locally owned and operated shop for $25? Simple really. But economically its essentially adding straight into your balance of trade deficit (the difference between how much your country buys vs what it sells - privately, lets not worry about government spending here) and making that pool of $$$ available for all employees in the economy smaller.

The reason why walmart wages are shit? Because we are addicted to cheap crap.

Really? Who's "we", white man? Sounds like you're aggregating a bit too much here.

Is it really just about the relatively lesser quality of wal-mart's products? Perhaps those shoppers wish to spend the cost-savings on things they deem more important. Why judge them for that?

Then, why judge some poorer people with less disposable income? If you'd like, you can have them purchase more local stuff at higher prices because that'll be helpful to them... (we know how well total autarky works too!).

[BigBallinStalin]

First thing that pops in mind: Isn't this assuming wages are completely elastic? Is there not a minimum wage level under which people are unwilling to go regardless of the employment situation (because, for instance, going lower would mean they starve)?

I don't follow. If your choice is between having no money and starving, or having a little money and starving a little less, aren't you going to choose the latter?

If it's not enough money to maintain some minimum standard of living you're presumably gonna choose option C: riot, start stealing, etc.

Or you'll lower your standard of living, and be as content as a Buddhist about it.

Many in Greece didn't like that prospect, so they broke people's stuff and demanded more from government, which is funny because that's what led them to those problems in the first place. It's a disgusting, sad sight of humanity.