Wage-Rent Criticality

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In generalized-exchange modeling, pure wage rent is a chronic outcome of optimizing employer-employee interaction in workplaces restricted by asymmetric information and routinized jobs. PWR is consequential, playing roles in economic phenomena including involuntary job loss, persistent cyclical unemployment, good and bad jobs, pure profit, labor-supply elasticity, stagflation, downsizing, hold-up problems, firm revenue distribution among factors of production, and the determination of consumption and investment. It is difficult to reconcile that remarkable list and the inattention paid to wage rent in today’s macro academy. What follows pays attention, providing a thumbnail sketch of each consequence.

Involuntary job loss. IJL has long been the most important characteristic of macro instability periodically experienced by highly specialized economies. That forced unemployment cannot be rationally accommodated by mainstream friction-augmented general-market-equilibrium (FGME) theory is indicative of the failure of New Keynesian hegemony in macroeconomics. The root problem no mystery, i.e. the inability of Keynesian market-centric theorists to microfound meaningful wage rigidity (MWR), defined by its capacity to rationally suppress wage recontracting in the circumstances of aggregate demand disturbances. PWR plays an intuitively integral role in involuntary job loss. Think about it. Absent wage rent, all job separation is inherently voluntary.

Persistent cyclical joblessness.  This characteristic of recessions and early recoveries also cannot be accommodated in NK market-centric analysis. Absent rent, workers experiencing job separation quickly find acceptable alternative employment paying the same (market) wage as their previous job. PWR rationally derived in GEM modeling easily explains both unemployment persistence and eventual reemployment at a lower wage.

Good jobs. The most powerful characteristic of good jobs is that they pay a significant premium relative to the employee’s alternatives – pretty much the definition of pure wage rent.

Pure Profit. This is the residual claim by the owners of a firm’s existing capital after payment of all inputs necessary for production. In FGME modeling, Wicksell & Wicksteed long ago demonstrated that such payment – absent scale economies – exhaust firm revenues. Textbook market-centric analysis almost always eliminates pure profit. Given its central role in investment outlays , that’s bad news,. It is a key attribute of generalized-exchange theory that chronic wage rent restores both the existence pure profit and evidence-consistent investment decision-making.

Labor-supply elasticity. Endowing such elasticity with chronic, time-variable wage rent allows estimation exercises to produce much more evidence-consistent results.

Stagflation. One of the most critical characteristic of the stagflation decade that began in the early 1970s is the blowing apart of the previously stable interindustry wage structure. LEV workers successfully resisted the huge early 1970s terms-of-trade shifts against labor that their SEV counterparts had to absorb. The chronic existence of LEV variable PWR is a keystone condition of stagflation dynamics. Its absence in NK modeling helps explain the macro academy’s inability to make sense out of the damaging, prolonged 1970s market failure.

Downsizing. The great downsizing, especially of iconic heavy industries, concentrated in the 1980s and popularly associated with the advent of the midwestern rust-belt resulted the permanent loss of millions of good jobs. That broad market failure was the third most costly macro crisis of the 20th century, yet it has always been ignored by mainstream macro theorists.  Their inattention is convenient. A central cause of the timing and existence of the downsizing debacle was sharply rising PWR that FGME thinking cannot accommodate.

Hold-up problems. Hold-up problems are inherently influenced by chronic wage rent and consequently are typically ignored in the NK literature.

Factor-income distribution. PWR destroys the FGME literature on continuous-market-equilibrium distribution of factor income. Adequate macro theory needs an adequate distribution theory. Adequacy requires being informed by PWR.

Determinants of investment. This post has already noted the role of chronic wage rent in the existence of pure profit. Expected PP then replaces interest rates as the most powerful determinant of investment outlays. Once again, the rational introduction of chronic wage rent aligns an important macro model with the available evidence.

Determinants of consumption. Mainstream FGME analysis of consumption assigns the central role to interest rates. Barro and … (1974) demonstrated that the existence of rational, time-varying wage rents reassigns central causality to household income, microfounding the venerable Keynesian consumption function.

Blog Type: New Keynesians Saint Joseph, Michigan


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