…But it is true that USA unemployment benefit rules create strong disincentives to take jobs. Especially, the rule that even one week of employment permanently removes eligibility for future unemployment benefits means that taking a job involves risking a loss of up to around $50k (under the 99 week extension).

The colonial system looks to low wages, necessarily followed by an inability to devote time to intellectual improvement. Protection looks to high wages that enable the labourer to improve his mind, and educate his children. The English child, transferred to this country, becomes an educated and responsible being. If he remain at home, he remains in brutish ignorance. To increase the productiveness of labour, education is necessary. Protection tends to the diffusion of education, and the elevation of the condition of the laborer….

If we desire to raise the intellectual standard of man throughout the world, our object can be accomplished only by raising the value of man… throughout the world. Every man brought here is raised, and every man so brought tends to diminish the supposed surplus of men elsewhere. Men come when the reward of labour is high, as they did between 1844 and 1848. They return disappointed when the reward of labour is small, as is now the case. Protection tends to increase the reward of labour, and to improve the intellectual condition of man.

Henry Carey.

I have only recently noticed Keynes defense of protectionism, but it’s worth looking at.

Which is one explanation for Germany’s dominance of the machine tooling industry.

Just as a matter of microeconomics, that’s not true, either. It is not necessarily a zero-sum game, of course, but even more important, it isn’t just a wage rate, which is being negotiated, but a set of contingencies, which distribute risk over time. The distribution of risk mirrors the distribution of income, and when the labor input isn’t the continuous flow of labor services, which the marginalists imagine, but, instead, labor is staffing a control function, it’s risk, which is the “incentive” that matters in shaping (strategic) behavior.

So, for example, the “efficiency wage hypothesis” suggests that the ability of a labor union to press against management’s inclination to slack, and use a low wage to enable a lazy management to waste labor resources, can improve efficiency and raise wages.

Certainly not. They are also negotiating over expectations and even business process. Costco management claim that their higher than retail norm salaries are responsible for lower turnover costs and higher employee productivity. Considering their high profit rate, one might ask why that theory is not adopted by other retailers. And it should not escape your notice that management are also employees, but currently seem to be escaping the common downward pressure on salaries – worldwide.

I love algebra.

Yes, which is why the corridor hypothesis seems like an effective gambit. The cooridor hypothesis says that the economy moves in a cooridor along the Solow Growth path, and within that cooridor, markets can adjust as they do, and these adjustments will add up to something like a move toward the one true, general equilibrium. The Market God is appeased.

But, if a “shock” takes the economy outside the cooridor, and markets are far from equilibrium, the adjustments in individual markets might not work to bring the economy toward a full-employment “general equilibrium”.

Ultimately, though, I think the Friedmanite idea that the economy seems stable because it is an emergent, natural order moving toward an optimal equilibrium is pernicious and false. The Solow growth path is, itself, a silly idea, which obscures the essential dynamics and central conflicts of the economy.

In my view, if the economy seems reasonably stable for a period of time, it is due to a kind of dynamic stability, like the gyroscopic stability of a bicycle in forward motion, due to the success of a scheme of institutional containment.

It’s sometimes true, sometimes not.

An increase in wages has the following effects:

1. Higher consumption (given a higher marginal propensity to consume out of wages than profits; this is generally, but not absolutely always, true).

2. Lower profit share; lower profit margins assuming productivity fixed (which is a safe assumption int eh short run).

3. An indeterminate effect on investment, given 1 and 2. In general, we think investment is a function of both demand (or capacity utilization) and profitability. Capitalists will add to the capital stock only when (a) increasing output is sufficiently profitable; (b) increasing output requires larger K (i.e. the current capital stock is fully utilized); and (c) investment can be financed out of the current flow of income available to them. Higher wages help on (b) but hurt on (a) and (c), tho the latter effect is also mediated by the financial system.

4. An indeterminate effect on total demand, given 1 and 3. Obviously if both desired consumption and desired investment rise, total demand will rise, but if consumption demand rises and investment demand falls, total demand may go either way.

5. An indeterminate effect on real output. Whatever the change in demand under point 4, this will be reflected in a change in both output and the price level. The fraction that shows up as each will depend how far the current level of output is from full capacity (a fuzzy but not meaningless concept), how flexible are prices, and how elastic are expectations (of future income by households, and of the return on assets for firms) with respect to current output.

6. An indeterminate effect on the profit rate, given all of the above. A lower profit share is always negative; higher demand — if it results! — is positive. Also, the more open the economy is to trade, the more likely higher wages are to reduce profits, since the lower profit margins are the same but the boost to demand is less, the more of the higher consumption falls on imports.

This would be a lot easier to show with algebra, but Bruce W. doesn’t like algebra. :-)

So the statement “higher wages mean lower profits” is wrong. The statement “higher wages don’t mean lower profits” is also wrong. It depends — but not in a fuzzy, obscurantist everything-depends-on-everything-else way. It depends on a specific set of factors. In general, we would expect higher wages to be good (or less bad) for profits when: the economy is operating far from capacity; there is a sharp sociological divide between the wage-receiving and profit-receiving classes; the credit system is highly elastic; the economy is relatively closed; investment is currently low; and profits are currently high. We would expect higher wages to be bad for profits when those conditions don’t apply.

For the US today, I think the argument that higher wages would not be bad for profits and growth is reasonably strong, though far from certain. I think it was almost certainly correct in the 1930s. But I think the opposite case — higher wages mean lower profits and growth — has also been true at various times and place historically.