The Left and wages

Matt Yglesias has a post about the left and wages that I think makes a number of errors. Here's the intro:

The left is rightly concerned about the real wages and incomes of ordinary working people. But the left fallaciously analogizes from a bargaining dynamic at a single firm to the entire economy.

Well, I think many people do make errors of this type ("The government is like a household" being the most common). But I don't think that the Left is doing this when it comes to wages. Let's see what Matt thinks the Left is doing. He continues:

The way a given worker or class of workers improves his real wages is by persuading his boss to give him a nominal raise that outpaces the growth in the cost of living. But the way the economy as a whole works is that my income is your cost of living. If Slate doubled my salary, I'd be thrilled. But if everyone's boss doubled everyone's salary starting on Monday, we'd just have one-off inflation. As it happens, a little inflation would do the macroeconomy some good at the moment. But the point still holds that while "you get a raise" is the way to raise your living standards, "everyone gets a raise" is not the way to raise everyone's living standards.

The first error I see here is the idea that wages = incomes. Only about 55% of Americans' income comes from "labor". The rest comes from "capital" - land rents, corporate profits, and interest income. It is true that the sum of all expenditures across an economy equals the sum of all incomes. It is not true that the sum of all expenditures across an economy equals the sum of all wages. Thus, it is possible to raise every wage-earner's wage at the same time. This would simply result in an increase in labor's share of national real income, and a decrease in the share allocated to capital. In other words, it would be the exact reverse of what has happened to our economy since (at least) 2001:



The second error I think Matt makes is that he talks about the mean, while the Left generally cares about the median (or some lower percentile). It is possible for median real wages to increase even while mean real wages stay flat. This would mean a more equal distribution of income...in other words, the reverse of what has happened over the past three decades:



(Source: The Atlantic)

Matt goes on:

To raise real wages across the economy...what you need to do is make things cheaper. And that generally entails an accumulated series of events that make selected groups of people's nominal incomes lower. If everyone could be chauffered around cheaply by autonomous cars, then the people who currently earn a living driving cabs and buses and trucks will lose out. If computers take over routine diagnostic work, then doctors will lose out. If online courses that serve tens of thousands of students displace community colleges, then community college instructors will lose out.

This is just not right. The process that Matt describes need not reduce nominal incomes. Suppose, first of all, that everyone had to stay in the same line of work forever (which is not true, but which is a necessary assumption if you want to use phrases like "cab drivers will lose out"). Now an industry-specific productivity shock comes along - someone invents a latte machine that makes better-tasting lattes, twice as fast, while using only half the milk. The real price (i.e. the relative price) of lattes will fall. The quantity of lattes sold will rise. The income of latte-makers (the # of whom, remember, is fixed!) equals the price of lattes sold multiplied by the quantity of lattes sold.

Will this income go up or down? Well, you can see for yourself, with a bit of Econ 101. Draw a supply-demand graph for the latte market. Model the productivity improvement as a rightward shift in the supply curve. Take the derivative of equilibrium income with respect to some level parameter of the supply curve. You will find that whether latte-makers' incomes go up or down depends on the elasticities of demand and supply for lattes. In particular, if demand for lattes is very elastic, then the incomes of latte-makers will go up. (This result will also hold in general equilibrium.)

Now, those are real incomes, and Matt did say "nominal". But if the latte market is small compared to the overall market - in other words, if the change in the price of lattes is not enough to change the aggregate price level much - then real and nominal are approximately equal. So it's easily possible for latte-makers' nominal incomes to go up when their productivity improves, even if latte-makers are unable to shift to other jobs.

(Note that "latte-makers' incomes" includes the wages of latte-making workers and the capital income of latte-making firms. Who pockets more of the increase depends on other stuff, including workers' bargaining power.)

So I see Matt making some econ mistakes here. But anyway, what is the takeaway? Well, it's not clear what Matt thinks the Left is trying to do at the national level. If he sees the Left as a bunch of Luddites, trying to block the implementation of new technology, then his case would be strengthened by the points I made above.

But I do not see the Left as a bunch of Luddites. I see them as trying to increase the bargaining power of workers relative to capital owners, by any means available. That rarely involves Luddism; in fact, I can't really recall seeing any American Leftist types trying to block the spread of new technology. On the contrary, labor advocates like Dean Baker routinely trumpet advances in productivity; rather than trying to halt these advances, they decry the fact that too much of the surplus from the advances is flowing to owners rather than workers.

So I guess I don't see what specific mistaken thing Matt thinks the Left is actually doing.

Now this is a bit beside the point, but I personally do see the Left making some mistakes. I think the Left probably tends to overstate the effect of politics (e.g. union-friendly laws) relative to structural changes (especially globalization) in eroding workers' power. I think they often overestimate the degree to which American trade policies can affect the process of globalization. And I think they see immigration as more of a threat to native-born workers than it really is.

But I don't think any of these things has to do with a mistaken analogy between a single firm and the entire nation. The Left wants to increase labor's share of income, and decrease the skewness of the wage distribution. How to do that is an open question, but those goals seem perfectly reasonable to me.