Friday, January 21, 2011

Is supply and demand for labor enough to cause wage increases following income tax increases?

Jack doesn't buy it:
"(Your follow up)  looks good as far as it goes but it's still based on the assumption that the labor market exists in a free market, supply and demand environment. This is not the case. 
The buying power of companies is disproportionate to the selling power of labor, particularly in an environment where there are few if any legal barriers to exporting jobs overseas. Rather than taxes affecting labor, oligopoly control of the labor market is the chief determinant. Companies keep a comfortable (to them) level of unemployment in order to convince labor that it should be grateful to have a job and therefore willing to accept a lower wage.
The correlation between taxes and wages, because of the invalid free market assumption, may be no more valid than the correlation of sun spot activity and the level of the stock market which held for quite a number of years. Just because things happen together does not mean they are related in a cause and effect relationship."
If I read this right, Jack asserts that because of the overwhelming dominance of business in our economy, there isn't a meaningful marketplace for labor in the US in which supply and demand forces interact to then respond to changes in tax policy, which is the basis of Hartmann's argument on raising taxes. The ability of companies to outsource labor takes away any bargaining power labor may have, even in response to pressure to get paid more if taxes were raised.
 
Hartmann argues that there is a marketplace for labor that influences wages, and he doesn't hedge it in the context of international labor competition or decreased unionism, as I did previously:
As economist David Ricardo pointed out in 1817 in the “On Wages” chapter of his book On the Principles of Political Economy and Taxation, take-home pay is also generally what a person will work for. Employers know this: Ricardo’s “Iron Law of Wages” is rooted in the notion that there is a “market” for labor, driven in part by supply and demand.
He continues with the points that I summarized in my original post on this topic, that if taxes are raised and they take a bigger bite of the paycheck, the worker will seek a raise, or possibly change jobs. The wage data support some relationship between taxation and wages in that within a year or two of tax increases, wages do start to increase. 

But what is the mechanism for this and will it work in today's job market as described by Jack?

Is there a way these supply and demand forces can work today, or must we wait for some other economic conditions to re-emerge before raising taxes could have any wage-raising effect like may have happened in the past?

We can consider a few basic things about the labor market:
  1. If there was no demand for labor, then there would be 100% unemployment. We are seeing a statistical 9.4% rate with a much higher actual rate when those who've given up looking are figured in. Yet even with those dismal numbers, some people can find jobs. Some employers are looking for help, or at least keeping their help. There is some domestic demand for labor now, even in the Great Recession.
  2. If there was no significant demand for labor, anyone who was even employed at all would be paid the federal minimum wage only and not much more. We do, however, see many workers paid more than minimum wage. They have better education, more specialized skills. So for some workers at least, there must be some domestic demand.
  3. Some jobs can't be outsourced. Most jobs in the US today are in the service sector. If you want to sell someone shoes in Boston, they could buy them online and take the chance they don't fit, or they could go to a local store, try them on and make sure they fit. That local store will need someone at least present to manage it and so a job that won't be outsourced to another nation. The Bureau of Labor Statistics says this sector is where most domestic job growth will come, suggesting continued demand for service labor here in the US.
  4. There is more demand for some workers than for others. Those with scarce skills, such as computer scientists, are needed badly in the US. We have to recruit from other countries to find enough to fill the available openings in the US.
  5. So, if income taxes were raised on US computer scientists and this caused them to seek better paying jobs to offset the bigger share of taxes, wage inflation would appear in that part of the labor market. So I would assert that even today, wage inflation could occur and then lead to wage increases, at least for portions of the labor market where there is enough demand.
We could reasonably say then that wage inflation could occur even in today's domestic labor market for at least in-demand workers, but is the labor market so bad now that upward pressure from higher taxation would not lead to offsetting wage increases in general? Would higher taxes only lead to wage increases for in-demand job sectors and just squeeze everyone else more? 

Consider this economic mechanism: Could higher taxes for all lead to wage inflation for in-demand workers, who would then spend more and so generally increase consumer demand and then increase the need for more workers in less in-demand sectors and then hiring/job changing would follow in those sectors leading to across the board wage increases? (Real trickle-down economics..?)

Perhaps this is the mechanism through which "Ricardo's Iron Law" functions and which also explains the lag in raising wages after a rise in taxation. In-demand labor gets raises first, then their consumer demand rises (these middle-class workers spend their raises vs the wealthy who save income increases, see Hartmann's article) and consumer demand rises, hiring/job changing increases, demand for labor goes up and then wages rise, even for less in-demand workers.

We know from the economy we see before us that lowering taxes does not raise wages or create consumer demand, nor create incentive to invest in jobs by the investor class, or automatically create jobs. Faced with this ongoing realty, vs "common sense" assumptions about tax reduction and prosperity that are not holding up, I think that eventually more people will become willing to give progressively raising taxes a chance, to see what happens. 

I would not be surprised if it leads to wage growth and increased demand. It would lead to less wealth for the rich, so they would oppose it (and continue to do everything they can to make sure no one even considers this idea) but if enough people are willing to risk it, we could see all of; better incomes for working people, better funding of good government, such as public schools and colleges, a reduced budget deficit and a reduced national debt as well. 

We would have a better America for everyone, including the rich.

What matters most for me is having hope for seeing improvement in the quality of life for my kids in the future USA. This is what I think our current leaders are frittering away with their tax cutting, gutting of reasonable and needed government and endless war spending.

What do you think kind reader? 

Send comments to jtcorey(at)gmail.com, or comment below.


- U.

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