Realist, not conformist analysis of the latest financial, business and political news

Always Ask Sowell’s Question – Compared To What?

The problem, generally, is staying in a home, not finding one

That hotbed of logical and economic understanding, Salon, asks us to consider the idea of there being a labour shortage in the US at present. In which they say that it can;t be unemployment benefits instead it could be low wages.

Which is to fail to ask Sowell’s question – compared to what? That is, wages are low compared to what? Or, alternatively, unemployment benefits are high compared to what?

That report details an approximate 71% drop in job growth paired with a slight hike in unemployment, falling far below analyst expectations of a month-over-month boom. This prompted many “mainstream” or conservative pundits, along with Republican elected officials, to point toward a prime suspect: unemployment insurance.

Their logic is simple: if people are getting paid to do nothing, they have no incentive to do anything. But Democrats have argued that the reality is far too complicated to chalk up to one factor. Treasury Secretary Janet Yellen attributed the disappointing jobs report to a lack of proper child care and lingering fears about the pandemic. Others have pinned the blame on employers, citing low wages and poor working conditions as reasons why Americans might be more hesitant to rejoin the workforce.

There is that technical bit which is that if someone is being counted as unemployed then they are in the workforce, that’s what the word means. Those available for work.

The background concept here is the “reservation wage”. Work is, of course, a cost to us, the benefit is the wage we get from it. Humans tend to do less of those things which are more expensive. Not because they or we ought to, it’s just an observation.

The wage we get from going to work is the income we get minus the income we would have had if we didn’t go to work. The incentive to put on the suit and tie is thus the marginal or extra income from work. Or, looking at it the other way around, what’s the reservation wage? How much do we need to be paid for get off the couch and go do something?

This is where the compared comes in. If unemployment benefits are high then the reservation wage is. And also so then are some wages on offer in the economy low. Because the net income from work declines either way – wages are low or benefits are high, it’s the same thing.

So the logic being deployed there is that it can’t be high unemployment benefits which are causing the slow job uptake, it’s because unemployment pay is high that there’s a slow job uptake.

Well done to Salon there, eh?

Within a matter of days, at least 16 state governors — including such nationally prominent Republicans as Kristi Noem of South Dakota, Doug Ducey of Arizona and Brian Kemp of Georgia — seized the opportunity to slash or eliminate aid to the jobless, even as the U.S. struggles to recover from the effects of a global pandemic.

Ah, but this is to miss a trick. This is, in fact, excellent:

This is where the joy of 18 states leaving the federal system comes in. Now, we’ll have two sets of unemployment insurance policies operating in an economy in which all other policies and conditions (the growth and interest rates, the money supply, fiscal policy, and so on) are the same. It should be reasonably easy to then tease out, over the next few months, the effects of the different unemployment insurance policies. Expanded and increased unemployment insurance increases unemployment, or it doesn’t. One way or the other, answers are coming.

We will have done an important experiment, we will have tested the two hypotheses, and then, we will know.

Quite so, we’ll find out whether it’s high unemployment benefits causing the problem or high unemployment benefits causing the problem.

5 4 votes
Article Rating
Total
0
Shares
Subscribe
Notify of
guest
9 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
The Mole
The Mole
1 month ago

“report to a lack of proper child care and lingering fears about the pandemic. Others have pinned the blame on employers, citing low wages and poor working conditions” “The wage we get from going to work is the income we get minus the income we would have had if we didn’t go to work. ” I think your definition is being over simplistic here. Firstly it should be utility considered not just raw money. Some people will go to work for nothing as unpaid interns or volunteers because they know the experience they gain will help them get a better paid… Read more »

Last edited 1 month ago by The Mole
Spike
Spike
1 month ago
Reply to  The Mole

The arithmetic is “over simplistic” and in fact the recipient doesn’t exactly calculate whether he would be better off going back to work and enduring Zoë in Human Resources. But he does know those checks from the United States Treasury will cease—that weekly loot you can squander without guilt because it’s pre-stolen.

Spike
Spike
1 month ago

“Slash aid to the jobless” is Salon’s way of misstating that the 18 Neanderthal governors merely reverted to the prior system where their states paid unemployment compensation. My state just withdrew from the federal $300/wk bonus (effective in 30 days, as the Covid “Rescue” Act states).

Spike
Spike
1 month ago
Reply to  Spike

PS—As we are doing Compared To What, let’s not forget that it was $600/wk under Trump.

Boganboy
Boganboy
1 month ago

One does assume that if the jobs are essential and unemployment benefits remain at the present level, wages will rise. Then so will prices and the value of money will drop. However in the present circumstances, one imagines that those who want a job will drift to the red states and those who wish to dole-bludge to the blue. Industries over time will also drift red, and the howl to tax the turds good and hard will grow louder and louder. The obvious question is, ‘Will this happen before Biden is re-elected?’ I understand a similar phenomenon appeared when the… Read more »

Spike
Spike
1 month ago
Reply to  Boganboy

No, wages are limited by the value of the work to the business. Any job where the boss has to pay more than that for any reason will go automated or self-service. Restaurants are already apologizing to customers for not running at 100%. And higher prices from this don’t cause inflation. We would have to cut back elsewhere (lowering prices) if it weren’t for all that Biden Free New Money.

Spike
Spike
1 month ago
Reply to  Boganboy

PS—Trump once famously vowed to deposit the illegals in self-declared Sanctuary Cities. I’m not sure he actually did so; he got in plenty of legal trouble merely for the simultaneous attempt to curtail federal grants to cities that opposed his policies.

John B
John B
1 month ago

‘… That report details an approximate 71% drop in job growth…’ That has nothing to do with wages or child care, it has to do with the circumstances of those running businesses who were not immune from the economic disaster forced upon everyone by those in charge. Evidently having wound down their businesses, it will take them time to build them up. Some may simply have closed their doors. It also has to do with consumption. People staying at home, working from home, saving instead of spending means lower demand for goods = lower demand for workers. ‘… falling far… Read more »

Last edited 1 month ago by John B
Spike
Spike
1 month ago
Reply to  John B

There are many things going on here, all of which are at odds with job growth. The national lockdown was disastrous. I’ve read that many people near retirement found that jump less harrowing than rebooting their companies. Your final statement is true: If you are in hospitality, sports, or tourism and you were shut down, your employees fended for themselves. You don’t just tell them Never Mind, but must assemble a new staff. Now, everyone believes taxes will be much higher next year, and Biden is trying like hell to kill the gig economy thru the “PRO Act” as California… Read more »

9
0
Would love your thoughts, please comment.x
()
x