Sure. I definitely believe government policy contributes to some wage rigidity (e.g., privileged unions).
My question, I guess, is this: doesn’t wage rigidity (for non-governmental reasons) disprove Mises’ claim that involuntary unemployment is impossible?
Maybe a dose of reality will do the trick. The following is absolute nonsense:
If the fall in AD is a continuous problem (exacerbated perhaps by high unemployment) unemployment will remain high during the decrease in AD. The change in AD confuses their expectations, and so workers don’t respond efficiently (in the neoclassical sense). Wages are sticky as long as AD is lessening.
People who are involuntary unemployed cannot and will not remain unemployed unless the government forbids them to get a job at a lower wage and condemns them to poverty (or welfare benefits).
Let me make sure I’m clear on this with an example: Absent of any welfare/unemployment benefits or any other anti-labor regulations, an engineer making 80K/year will apply for the local $7.50/h at McDonalds if he has to. HE will NOT STAY UNEMPLOYED and starve himself and his family to death! HE will either accept the pay cut, or crawl back after a week and accept even a lower pay cut after he gets a dose of the new reality for about a week or so.
If he has adequate savings to buy him some more time before he demotes himself, then he is temporarily voluntarily unemployed since he rejects 5%, 10%, or even 30% pay cut.
Prices are sticky downward only in the fictional world of the economists with tenure, who frankly have never had a real job.
Again: what is the time frame? I know neo classicals have a problem with incorporating time - and heterogeneity, calculation, etc. for that matter - but without a time frame ‘stickyness’ is an empty concept.
Wages will not shift on a day to day basis, but given time; they will adjust to levels that are acceptable. If wages stay too high, business will go bankrupt and they lower thàt way. So the whole ‘stickyness’ depens on the timeframe.
Jonathan gives 3 good examples why they ‘stick’ on a day to day basis, but wages can, in fact, lower - in real terms and nominal terms - if the necessity arrises. They have before and there is no real reason why it can’t. The threat of getting fired (if there is no real alternative option) or the firm going bankrupt are real good incentives. (And, obviously, losing your job is the ultimate 'downwards’moving direction.)
Coase,
I understand the argument, but still hold that this is not an example of sticky wages. Unemployment itself does not cause sticky wages, which is what Alchian is essentially arguing. High wages cause unemployment. So, the fact that individual X is now unemployed because of high real wages does not mean that wages are sticky because of that particular fact. Wages are sticky because of other reasons. Alchian is confusing causality.
Yeah? Ya think?
Let me quote Murray N. Rothbard (you may have heard of him), “Generally, wage rates can only be kept above full-employment rates through coercion by governments, unions, or both. Occasionally, however, the wage rates are maintained by voluntary choice (although the choice is usually ignorant of the consequences) or by coercion supplemented by voluntary choice. It may happen, for example, that either business firms or the workers themselves may become persuaded that maintaining wage rates artificially high is their bounden duty. Such persuasion has actually been at the root of much of the unemployment of our time, and this was particularly true in the 1929 depression.”
Neoclassical, Excellent observation. Mises’ claim that all unemployment, in an absolutely free market, is absurd if taken literally, but I think Mises was speaking in generalities and perhaps assuming the lack of cyclical unemployment (or a lack of the business cycle in general). I actually have an article on unemployment coming out at some point in the future (although, it deals more with the claim that long-term cyclical unemployment can turn structural, and therefore become permanent [which is a non-sequitor]), that disputes Mises’ claim in a couple of sentences. I essentially argue two reasons why involuntary unemployment can exist:1. Cyclical unemployment. Markets do not move back towards equilibrium smoothly and perfectly, so it’s reasonable to assume that there will be an undefined period of time in which the labor market will be in disequilibrium.
Regarding the first point, I don’t think the free market would rid itself of business cycles. I believe that it will only isolate them, and as such would be much smaller and much more geographically limited. On the second point, this is explicitely Austrian (I know that at least Rothbard, and therefore his students, agree that equilibrium does not occur) and is actually argued by Jesús Huerta de Soto in his book The Austrian School.
Neoclassical,
Those people who chose to remain unemployed for some time are doing so voluntarily. Perhaps you didn’t get that distinction: voluntary vs. involuntary. I really don’t care for the government statistics on unemployment.
Jonathan M. F. Catalán, I am not going to engage in an argument about it, but do you believe business cycles are explained by the Austrian theory? (I was curious since you believed they would still exist in a free market.)
DD5,
While I agree that the paragraph you quote doesn’t say much of anything useful, I also find this true of the following,
People who are involuntary unemployed cannot and will not remain unemployed unless the government forbids them to get a job at a lower wage and condemns them to poverty (or welfare benefits).
I think this is a confusion of the topic we are discussing. We are not talking about unemployment per sé, but of sticky wages. Minimum wage, of course, is an example of government-enforced sticky wages, but unemployment itself does not say much about sticky wages (except that the labor market is in disequilibrium).
My point is that the above sentence does not disprove sticky wages. Sticky wages, instead, suggest that employers will retain high wages (whether government-enforced or voluntarily), and I list three possible free-market reasons why employers might decide to do so. Also, neoclassical illustrates the case with the Great Depression, where prior to the minimum wage much of industry decided to retain high wages due to the notion that this would in turn motivate workers to retain productivity (they were, of course, wrong).
It is also noteworthy (this is a general observation), that in such a case unemployment may not increase due to sticky wages. Rather, the company may prefer to take a hit in profits. Of course, this only leads to greater unemployment down the road.
Neoclassical,
Yes, I am a firm believer in Austrian capital theory.
DD5, I never made an issue of voluntary choices versus involuntary choices. The point was that wages are not at a market-clearing level, hence there would necessarily be involuntary unemployment.
DD5,
The problem is one of information costs and uncertainty. The unemployed don’t realize that AD has fallen. Given what they know (which is false) it is rational for them to keep searching for a job rather than accept a wage cut because a better job might be just around the corner.
Jonathan,
The high wages are caused by the lack of accurate information held by employees regarding the fall in AD. This, not unemployment, is what causes the high wages. The unemployment does however generate a vicious cycle where workers think that a better job is just around the corner and refuse to accept a wage cut, not realizing that AD has fallen, not demand in some specific industry.
Rereading my explanation, it doesn’t do a very good job of emphasizing the information costs and uncertainty, which is the key issue, not the unemployment per se. My bad.
Coase,
I’m not sure how I can put this any clearer: employees do not ultimately decide the wages employers will pay them. Just because a wage-earner wants a high wage does not mean that the employer will retain that high wage. Indeed, if the employer lays the wage-earner off it goes to show that in this particular instance wages are not sticky.
I must not understand what is meant by sticky wages, or you’re using the term in an odd manner. Yes, an unemployed person is being paid nothing, so wages have fallen in that sense, but that doesn’t really address the concern of sticky wages, which is that wages in industry remain high when the efficient outcome is for wages in industry to have dropped, not for unemployment to be generated. The unemployment during the Great Depression would be an example. Sure, wages fell–people got paid nothing. But wages for employment should have fallen and did not–hence “sticky wages.” “Sticky wages” as I understand it might not be a fully accurate description of events in a technical sense but it isn’t supposed to be. I suppose one could come up with a better term that means exactly the same thing, but I don’t think you’re using the term in the normal sense. If that’s my misunderstanding, I apologize.
“The problem is one of information costs and uncertainty. The unemployed don’t realize that AD has fallen. Given what they know (which is false) it is rational for them to keep searching for a job rather than accept a wage cut because a better job might be just around the corner.”
Perhaps you missed the main idea behind what I said. I’ll reiterate yet again.
If it is rational for them to keep searching, then they are voluntarily unemployed. A person who values his leisure over labor (no matter how temporary it is and how the government considers you in its statistics) cannot possibly constitute a problem of sticky wages downward.
If your logic was correct, then prices are sticky downward forever since there are always people who are rationally unemployed permanently and voluntarily because they won’t move out of their Mama’s couch for less then $100/h.
Coase,
Our definition of sticky wages is the same. I am questioning how the fact that wage-earner X wants income Y, but doesn’t get it, causes sticky wages. This is why I claim that your causality is wrong. The fact that wage-earner X wants income Y, but doesn’t get it, does not cause sticky wages. In other words, the decision to retain high wages is not made by the employee, but by the employer, and so what employee X wants is irrelevant to whether or not wages will fall.
DD5,
I don’t use “sticky wages” to refer to a situation where prices literally don’t adjust–obviously that is ridiculous. I think that may be the source of the confusion. It is used to describe a situation where output falls instead of prices even though prices should have fallen if an efficient outcome is to be achieved.
Jonathan,
Argh, you all write too quickly. Anyway, the employer wants to lower wages but he can’t because employees refuse to accept it. They do so because of a lack of knowledge.
Coase,
Unless the employer has contractual obligation to keep his employees, then I don’t see why that would cause sticky wages. If there is contractual obligation it’s the contract, not the employee, which retains sticky-wages. Without contractual obligation, the employer simply fires the old wage-earner and hires a new one, for a lower price.
Now, on a general note (for all those involved), it’s interesting that in a market beset by relatively long-term employment contracts, employers usually opt to introduce new labor contracts for new hires, where the contract effectively expires within a shorter period of time. This is, for example, the case in Spain. As such, in a free market we could see very short labor contracts, which would essentially nullify relatively long-term sticky wages of this sort.
Coase,
Prices have to fall in the short run. And in the long run they must also fall unless wages cannot be adjusted downward, and only then there may be a situation where the output may fall instead of prices.
Many economists err when they claim that price need not necessarily fall. They have to unless the seller voluntarily takes them out of the market, which is rare. But even then, it would be wrong to say that prices should have fallen to achieve a more efficient outcome. Efficient for who? obviously not for the seller who prefers to hoard or consume himself his output. The seller is also part of the transaction. Many economists tend to forget that the seller is the 2nd party in the exchange.
Jonathan,
The employer, in Alchian’s model, would like to fire his workers and hire new ones at a lower price, but he can’t because potential employees think they are worth more than the lower price offers them, not recognizing that AD has fallen. They will search for better offers elsewhere instead of accepting the lower price.
DD5,
Sellers of labor, in Alchian’s model, are making a cost/benefit analysis on faulty data. If they knew that AD has fallen, they would sell their services at a lower price rather than remain unemployed. Employers and employees are worse off.