Evidence Review Part I

Reviving stabilization-relevant macroeconomics, a principal objective of the GEM Project, requires innovative modeling that is both rooted in the neoclassical tenets of optimization and equilibrium and consistent with the broad range of relevant evidence, This Blog has focused on the first task, demonstrating that the generalization of price-mediated exchange from the marketplace to workplaces restricted by information asymmetries is the singular model up to the task. The case has largely been theoretical, showcasing the GEM theory’s rationality governed by general decision-rule equilibrium. This post and the several that follow shifts attention to an in-depth consideration of the relevant evidence. The story is compelling.

What follows draws from a variety of disciplines and over a substantial period of time. No attempt is made to be comprehensive, a task rendered impractical by the exceptionally large pool of pertinent data. Coverage problems, however, are mitigated by the consistency of the evidence. Mainstream theorists have long had sufficient facts to support policy-relevant descriptions of macrodynamic behavior. What have been missing are axiomatic, coherent theories that help us understand what is already known.

The broad time range is especially important, given the suppressing effect of increasingly broad acceptance of friction-augmented general market equilibrium (GME) modeling on the empirical analysis of the workplace. More fundamentally, Greenwald and Stiglitz (1993, p.24) have argued for richer testing protocols, persuasively criticized the generous standards that economists use to evaluate modern GME macro models. “Statistical analyses based on variances and covariances of the principle aggregate time series simply do not have enough power to distinguish among many of the alternative theories. Good macro theories should do more. A host of other facts clamor to be explained; for instance, good macro theories must explain why variations in the number of hours worked should take the form of layoffs rather than work-sharing; why layoffs tend to be concentrated among certain parts of the labor force; why investment in general, and inventories and construction in particular, should be so volatile; and more. Beyond that, the microfoundations from which the aggregate behavior is derived can often be tested directly. A rejection of the underlying micro-hypotheses should suffice to cast doubt on the validity of the derived macro theory.”

Testable TVGE characteristics.  The GEM model class alters the standard textbook specification of employees’ preferences, incorporating a deeply-rooted axiomatic desire for fair treatment by employees, replacing the discredited assumption of worker utility always decreasing in his/her cooperative effort. Also rejected, for large establishments offering Class-I jobs, is the ubiquitous technological assumption of 1-1 mapping of worker hours onto production. Axiomatic technological heterogeneities, preserved by the refusal to aggregate large and small establishments, bifurcate optimizing labor price/use decision rules, associated constraints, and mechanisms of exchange. Rationally unbundled on-the-job behavior (Ź_j), derived from the nature of large, specialized corporations, is associated with routinized jobs, generates cyclical downward wage rigidity, produces chronic time-varying wage rents, rations good jobs, and implies long LEV employee tenure. W_j and Ź_j are simultaneously optimized in large-firm workplaces. By contrast, bundled Ź_j occurs whenever firms are small or jobs are Class-II, suppressing discretionary OJB in support of nonmarket reference standards and resulting in market-wage taking and unstable job tenure.

Evidence consistent with GEM preference and technical innovations is abundant, broadly documenting for LEV employees (i) revealed preferences for fair treatment as well as tit-for-tat strategic behavior, (ii) workers’ active dissatisfaction with rewards (W_j) that are perceived to be inequitable, (iii) endogenous productivity variation under different compensation regimes, and (iv) employers’ belief that employee dissatisfaction is harmful to productivity.

GEM theory generates a substantial set of outcomes that can be assessed against available data and practitioner recognition. LEV evidence supportive of generalized-exchange modeling includes large establishments paying market-equivalent labor higher wages than do their small counterparts, long job tenure, reliance on catch-up to inflation that has already occurred (diminishing the role of inflation expectations) in the periodic adjustment of nominal wages, and extensive firm investment in workplace (equity-based) mechanisms of exchange. Furthermore, rational intertemporal behavior of the LEV reference wage maximizes expected discounted wage income over employees’ desired tenure in the labor force, subject to the expected paths of pure profit (И_j) and the associated incidence of job downsizing (ω^T_j).

Blog Type: Wonkish Saint Joseph, Michigan