May 1, 2018

The set screws of overall and individual employment

Comment on Sandwichman on ‘Job Guarantee versus Work Time Regulation’

Blog-Reference and Blog-Reference

To this day, economists do not know how the price- and profit-mechanism works. Supply-demand-equilibrium is merely a brain-dead proto-scientific joke. By implication, the theory of employment is false.#1 By consequence, economists’ policy proposals never had a sound scientific foundation.#2 This applies to all political camps.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Economists do not have the true theory. And this is why the whole discussion about the Job Guarantee, the minimum wage, or other employment measures moves in circles.

So, let us first get the basics straight. The elementary version of the axiomatically correct (objective, systemic, behavior-free, macrofounded#3) Employment Law is shown on Wikimedia.#4

From this equation follows:
(i) An increase of the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates a household sector budget deficit = dissaving = credit expansion, a ratio ρE less than 1 indicates a household sector budget surplus = saving = credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, the public sector, and foreign trade. Note that the Employment Law consists exclusively of measurable variables and is therefore directly testable.

The macroeconomic Profit Law for the elementary investment economy reads Qm=I−Sm=I−(Yw−C)=(ρIE−1)Yw. Legend: Qm monetary profit/loss, Sm monetary saving/dissaving. Macroeconomic profit is given as the difference between business sector investment and household sector saving.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio ρF as defined in (iii) embodies the macroeconomic price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is beyond the horizon of the micro-brained micro-economist.

With regard to an increase of average productivity then follows (under the initial condition of I given and ρE=1) that overall employment L DECLINES. In order to prevent this and to keep employment at the given level, the factor cost ratio ρF=W/PR has to be kept constant. So, either the average wage rate W has to rise in lockstep with productivity or the average price P has to fall. In order to keep the price constant, the wage rate has always to move in lockstep with productivity.

So, as a matter of principle, the economic system can be held stable at any level of employment with no inflation/deflation. How this can be institutionalized is a separate question.

The employment L in the Employment Law is the sum of individual labor times as shown on Wikimedia.#5
Legend: L total employment per period/year in hours, U legal norm time, e.g. hours per day/week/year, lit individual factor for the i-th employee, i.e. lit less than 1 is part-time, lit greater than 1 is overtime, n number of employees.

If n is fixed at full employment (however specified), then a reduction of overall labor time L can be achieved either by a general reduction of the legal norm time U or a reduction of the individual factor lit or a combination of the two.

So, the macroeconomic Employment Law gives one all the set screws (aggregate demand, macroeconomic price mechanism, labor time setting) to realize any level of overall economic activity in the monetary economy.

The at any time possible stabilization of employment at a level that has to be determined by the legitimate sovereign makes the whole blather about the minimum wage, buffer stocks, and reserve armies superfluous.#6

Egmont Kakarot-Handtke

#1 Mass unemployment: The joint failure of orthodox and heterodox economics
#2 For details of the big picture see cross-references Employment
#3 The macrofoundations approach starts with three systemic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. For a start it holds X=O.
#4 Wikimedia, Employment Law
#5 Wikimedia, Employment, differentiated labor input
#6 The minimum wage debate: a showpiece of economists’ hereditary idiocy

COMMENT on Ralph Musgrave on May 1

Employment theory is macro. Your electrician example is micro. You are completely lost in the supply-demand-equilibrium woods.