Sunday, October 30, 2011

Determining Value

I have a soft spot in my heart for people who serve themselves. There is a woman in my employ, is attending courses at the local community college. Or, rather, remote learning at the local community college. It seems that lectures are over-rated, and so students take their lessons over the innertubes. Of course, this perversion of the Socratic Method tends to lead to testing for results, rather than teaching. In an effort to maximize the revenue of schools, look for a big increase in this form of "teaching" as schools begin to realize that they don't really need classrooms, just a series of recorded lectures and intertube delivered tests. You will be taught how to repeat the necessary responses at the appropriate time.

But parroting the words, rather than understanding the words, seems a waste of time.

For example, take a rather innocuous chart, referred to as Supply and Demand chart.

Found here.

As a snapshot, graphs like these are useful tools to help us understand things, like value of employment we should be able to attain for a market, all other things being equal. If we have employment at the intersection between the Demand for Labor, and the Supply of Labor, we have reached the moment when there is equilibrium in the market for Labor. Unfortunately, the statement that the equilibrium point is at the locus of w* for Wages and L* for labor doesn't mean anything. Nothing useful, or usable.

This doesn't stop people from talking about the Supply and Demand for labor. Or, using charts like this to defend or to attack someone's viewpoint on what normal or optimal wages should be. Or, the correct level of wages. Or, the morality of wages.

The graph suggests a couple of things, but really explains nothing. Why?

The function f(x) = Wages is too simple. If only wages were higher, more people would be willing to work. Therefore, the solution to low employment is...arrgh! The approach of the above graph presents only one possible determinant, Wages. But let's take a moment, and look at the values, or choices, that each point along the above curves represent.

Let's start with the Supply of Labor. Let's slide down to the left on the red line above.

What does that point on the curve tell us? The impulse is to say, "Well, at that wage rate, not many people would be employed." Again, the above supply curve equates the quantity of labor provided as simply the determinant of wages. There is a simple, singular, independent variable that determines employment. Wages. We're done here. Economic analysis is over.

Worse, the teaching is over.

The industrialization of education requires this type of thinking. Colleges put the facts before the students. Students are taught to testing, gaining the capacity to parrot the appropriate responses to test questions. Those with the greatest ability to respond appropriately are the educated. Taking the learning out of education reduces the risks that some students may fail. Burrowing into the subject requires us to learn more about the determinants of the labor supply. And it's best that we move along as quickly as possible, since a better understanding of what the supply curve for labor teaches and informs us can be disregarded. And, no longer regarded, discarded.

What determines the shape of the Supply Curve for Labour? Is it simply the level of wages? Or, are there other determinants that affect the shape of the curve? Do you need to work for someone else? Do you have a choice?

That is, work or starve. Either find suitable employment or fail to subsist. So, there is no choice. You must work for a wage, or die. But that isn't true, is it? There are alternatives to hiring out your labor to another. Gardening, fishing and hunting. Methods of avoiding hiring yourself out. Or better,thievery. Simply taking from others in order to provide for yourself. Do I need to work if I can steal? So, among the determinants of the supply of labour, should we not also suggest an ability to garden, hunt, fish and steal? What about the stay-at-home mom? At what wage rate might she consider giving up her time with her children, to pursue a wage? Clearly, wage rates alone are not the single determinant of persons willing to work for wages. If I am a thief, and feel badly about stealing for a living, and I'm willing to forgo thieving and instead agree to work for two dollars an hour, am I better off?

See, that's the whole thing about the Supply of Labor curve. From the lowest wages, on the lower left-hand side, to the highest wages, on the upper right-hand side, each individual is faced with making choices about his preferences; to garden, to hunt, or to steal. Is it worth two bucks an hour to give up stealing? Four bucks? And what do I gain by taking up wages and giving up theft?

I can subsist and I can take pride in my individual choice to be something more than a thief. By no longer relying upon harming others, I can develop self-esteem. I am a better man when I'm not stealing. Obviously, people like me better. I have more friends. I'm able to be trusted. Maybe, even valued. And as I work, I learn about my work, increasing the value of my Human Capital. And the guy down the street comes up one day and offers to double my wages, if I go to work for him.

The thing that's lost in most discussions of the Labour Curve, is the meaning of the curve, from point-to-point. The aggregate Supply Curve describes the number of persons willing to work at a buck, as well as those willing to work for two-bucks, then three-bucks, etc. The amount of aggregate wages paid is the sum of those wages. So, the total of wages paid is equal to the area under the curve, from the lowest wage, to the highest wage paid. Not everyone is being paid at the equilibrium or clearing wage rate. As employers move marginally offer higher wages, where the value of wage rates as a determinant of whether or not to supply labor exceeds all the combined values of the other determinants of whether or not to accept employment, at those values, the last incremental increase in employment will occur.

Of course, none of us really know where that moment is. Or when it occurs. In fact, markets have a funny habit of moving up and down, both in terms of supply and of demand, attempting to maximize the returns offered to both buyers and sellers of labour. And we have yet to offer another glaring hole in this static analysis of labour markets; the wages of the specialist.

If you go to the website where I grabbed the graph, (SWCollege) you'll find that there are a set of assumptions given, in order to, I suppose, avoid the terrible hash of determinants that are expressed as preferences by persons choosing to either enter or leave the labour market. They are:

" the labor market is perfectly competitive,
" the minimum wage covers all workers, and
"worker productivity is unaffected by the wage rate."


    It's no wonder discussions about the effects of the minimum wage get so confused.

    We began with this chart:

    Found here.

    This chart was constructed with the above "assumptions." Here's my cut and paste chart that show what will actually happen:

    The area below and to the left of L(new) will be those workers who will no longer be able to compete for employment. Additionally,

    those above the red line, and to the left of L(s), the area cross-hatched, are those that are being overpaid. The funny thing is, the area described to those who are being overpaid is smaller than the area of those who would be willing to accept lower wages.

    All of the models presume that the lowest paid employees will be beneficiaries of minimum wage standards, imposed by the state. Why would anyone, with a minimum wage imposed upon them, hire the least talented workers for jobs that would be filled with the best talented available for the same price? The number of employees being hired is the same for the first diagram, as for the last. The wages, or nominal income of workers, is the same. Those who would only choose to offer their labour at the highest rate (Wmin) are being hired. Those between L(new) and L* are being hired. The only change is that of those below the preference curve for seeking work, from Lnew to Ls are being overpaid. All of those workers to the left of Lnew are unable to find work.

    Let's briefly examine the assumptions of the Minimum Wage Model.

    "The labor market is perfectly competitive."

    What that means, is that buyers have the ability to choose which employee they hire, without impediment. If this is true, then what separates those willing to work for a dollar or two an hour, from those who desire at least minimum wage? We looked at a few of those determinants. A willingness to give up hunting and fishing and thievery. A willingness to let a child float into daycare, in order to pick up a few bucks, or, get a life. Whatever it is, an employer is going to be looking at the best candidates for the lowest possible bucks. No high school diploma? Ehhhh. No appreciable skills? Ehhhh. No math skills? Ehhhh. Earrings and tattoos? Ehhhh. Nice, normal people, with a modicum of skills, behaviours and abilities will be preferable to those without said qualities. That doesn't mean that those who fail to meet this bar don't deserve to find employment. It just means that the State has imposed barriers on employers that benefit those with greater Human Capital, than those without the benefits of Human Capital. Education, training, manners, sensibility.

    "The minimum wage covers all workers."

    That is, no one is free to decide for themselves what the minimums are. Choice, as in the determinants of how the preference curve for those willing to find employment, will be ignored. Whether or not you are willing to work for a lower wage is unimportant. The determinants of whether or not you "should" provide yourself for employment at wages lower than the minimum wage have been taken from you. You are no longer free to choose for yourself whether or not you should take a low-paying job. This has been done so that you have dignity, and protection from a job that offers less than a living-wage. The fact that you'll never get a job under this system is unimportant. The System will make sure that, under the banner of Social Justice, you receive just as much money as the rest of us.

    And finally, "Worker productivity is unaffected by the wage rate."

    Not only do they deprive both sellers and buyers of labour from the values of choice, they establish that the parameters of choice are unimportant. "Worker productivity is unaffected by the wage rate?" What planet do you live on? Worker productivity has never been affected by wage rate. Wage rate has always been determined by worker productivity.

     Worker wages = f(x) = Worker Productivity.

    How else to state this? A worker's wages don't depend on the productivity of the individual worker? Alice Through the Looking Glass? Of course worker productivity is unaffected by wage rate. Everyone to the left of the red Supply line in the above graph is getting paid more than they would demand. Every one at the last, marginal moment, is getting paid exactly what they would need to be paid. (If anyone is getting screwed, it's the last employee hired!)

    It's funny, but there was a study conducted of the effects on unemployment and the minimum wage, here in Oregon, a few years ago. It found that minimum wages didn't affect unemployment. I can totally see how that can happen, given the current state of accepted science. All I'm asking you to ask yourself is, given that only a limited number of people will be hired, due to a minimum wage law, do you think that it is fair to create a permanent class of unemployable, under the banner of legislating the determinants that would allow the individual to go to work at a lower rate? Is the Legislature actually creating a prophylactic against self-denigration, in the name of protecting the worker's dignity? And how can a Legislature make choices for the individual better than the individual? If our job was to increase the total income of the citizens of the state, wouldn't that be easier to do without the minimum wage? The area under the Supply curve of permanently unemployed is certainly larger than the area of the over-paid.

    And all this talk about the minimum wage really has nothing to do with employment. There are always key people whose wages have, and will exceed the minimums authorized by the state. So, looking at the graphs on the effects of legislation on employment really have nothing to do with who is, or isn't employed. If you have attributes that employers value, whether you're a surgeon or basketball player, the rules of micro-economic, or macro-economic analysis probably don't affect you. If you are Kobe Bryant, you're lucky. There is only one of you. But if you're 18 or 19 years old, with nothing more to show than a high school or college diploma, or worse, chances are you are entering the job market without the skills or attitude that entitle you to anything but a, to your opinion, drastically low wage. You may be able to subsist off your parents and friends for a while, but at a certain point your parents will either kick you out, or die. You do not have to accept the fact that you have no usable skills, and that given the alternative, even with minimum wage guarantees, you will probably never find suitable employment. I'm just not sure you understand what the alternatives are. Unless, and until, you recognize that your choices are being conditioned by a set of determinants that are currently holding you harmless as a result of government guarantees, will you be willing to come to your senses, and demand real change.

    If you are young and unemployed, your choice to remain unemployed may be the result of mandates from the State. It may seem to be your choice, because you "won't" take any job that is beneath your personal dignity. Well, Precious, chances are you don't know what subsistence is, yet. You will. But it may be after the money runs out; either Federal, State or Daddy's.

    Let's increase the bottom-line income of our state's residents. Isn't it time we quit worrying about mandating the conditions for personal dignity, and allow all our citizens to determine for themselves, what work they're willing to do, and what price?

    1 comment:

    MAX Redline said...

    Everyone to the left of the red Supply line in the above graph is getting paid more than they would demand.

    They are managers.

    One important component omitted from the analysis involves job satisfaction, as it isn't all about wages in many cases. Personally, I'd rather have a job in which my knowledge and skills are perceived by me as respected than accept a higher-paying position in, say, government.

    As is the case in many human endeavors, a simple graph, the cause and effect, is insufficient to describe the whole.