In addition to the intermarket linkages retained from mainstream SVGE modeling, including relative prices and elasticities that allocate various demands and supplies, the workplace and marketplace venues are connected, largely via three mechanisms. First is the dominance of LEV labor pricing and use, generating powerful constraints on decision-rule optimization in both venues. Those restraints are rooted in the necessary rationing of both rent-receiving employment and hours worked in high-wage jobs. Second is Harris-Todaro (1970) inter-venue labor transfer (also named Lewis Transfer) that is rationally mediated by LEV wage premiums and job prospects. (Chapter 3) In 2011, this was selected as one of the twenty most important articles appearing in the first 100 years of the American Economic Review. The most rigorous modeling of the Harris-Todaro linkage, developed independently, can be found in Annable (1971). Third is Baumol’s (1967) “cost disease” that helps reconcile sectoral unbalanced productivity growth.
Large establishments populate the dominant venue, i.e., the locus of workplaces governed by decision rules, constraints, and exchange mechanisms that rationally prices market-homogeneous labor higher than remaining (SEV) firms. The existence of LEV wages powerfully constrains the optimization of marketplace decision rules. Because job rationing must follow from the payment of wage rents, SEV workers are forced to exchange hours on the job at less preferred terms than comparable LEV employees, who are themselves frustrated by the rationed workweeks in their rent-paying jobs. (Chapter 2) That inter-venue constraint on market optimization enables the simultaneous existence of continuous general decision-rule equilibrium, the failure of markets to clear, periodic involuntary job loss, income-driven consumption, and profit-driven investment.
The venerable Harris-Todaro model, despite the twenty-best honor, remains an underappreciated contribution to economic thinking that links dominant and subordinate venues via labor transfer motivated by the rational assessment of relative opportunities. The inability of many job-seekers to find work at the going (relatively high) LEV wage, despite being qualified for such jobs, is indicative of chronic market failure. Newspaper reports during the 2007-09 recession describe persons “… working two or three jobs as they looked for a good one.” (New York Times, November 22, 2009, p.30) Such behavior, broadly accepted as unexceptional, only makes sense in the context of persistent wage rents, rationed high-wage jobs, and plentiful low-wage employment.
The remaining mechanism was identified in Baumol’s insightful analysis of the dynamic interaction of two sectors with strictly different labor-productivity growth. He restricts his model to competitive wages and concludes that relative unit costs increase without limit in the low-productivity sector, pushing up its relative price and, within a normal range of demand elasticities, shrinking its relative size. TVGE modeling generalizes Baumol’s conclusions, demonstrating that axiomatic preferences and technology produce labor rents that restrict the growth of the high-productivity sector. More general “cost-disease” problems are implicated in the generalized-exchange class of market inefficiencies, including restricted consumption, arbitrary wage inequality, chronic joblessness, and socioeconomic disruptions resulting from periodic downsizing of good jobs.
Blog Type: Wonkish Saint Joseph, Michigan