December 31, 2018

Wage rate and employment: the basics

Comment on Brad DeLong on ‘Would Small Minimum Wage Increases Raise or Have No Effect on Employment?’


There are three approaches to answer the fundamental question of economics about the relationship between wages and employment.

(i) “That is the current question ― would (small) minimum wage increases have no effect on employment because labor-supply curves are steep, or would they boost employment by curbing employers with monopsony power from pushing both wages and employment below their competitive equilibrium values?”

This mainstream/microfounded approach is false because no such things as supply curves, demand curves, and equilibria exist. These things are NONENTITIES like unicorns, the tooth fairy, or dancing-angels-on-a-pinpoint.

The representative economist, though, has not realized anything to this day. Accordingly, the answer to the questions is: one school finds that a higher wage reduces employment, the other finds little effect.

(ii) The second approach is to rely on some apparently qualified journalist: “… because a career spent working at the New York Times has drilled into him the idea that he must be ‘fair’, and ‘fairness’ means (a) finding a position usually attributed to Democrats, (b) finding a position usually attributed to Republicans, and (c) presenting them both even-handedly, without affect or winky-winky as to which is most likely to be correct.”

Again, the answer is inconclusive.

(iii) The third way is to forget all this incompetent blather and to do some serious scientific homework.#1 The outcome of a macrofounded analysis is the Employment Law.#2

From the non-behavioral, objective-systemic Employment Law follows: An increase in the factor cost ratio ρF≡W/PR leads to higher employment. So, as a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa. This is the OPPOSITE of what the economics textbooks say.

The Employment Law consists of measurable variables and is testable. Obviously, this is the scientifically correct way to definitively answer the question.

Right policy depends on true theory: “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)

After 200+ years, orthodox and heterodox economists do NOT have the true employment theory and get the most critical relationship of economics wrong.

Time to retire these incompetent folks.

Egmont Kakarot-Handtke

#1 Mass unemployment: The joint failure of orthodox and heterodox economics
#2 Wikimedia AXEC62  Employment Law
For details of the big picture see cross-references Employment/Phillips Curve.


REPLY to Vincent J. Geloso, Graydon, JEC on Jan 2

You are merely playing ping-pong with worn-out slogans.

It is incumbent upon me to inform you that the microfoundations approach is long dead and buried. Its incurable methodological defect is well known, it is the Fallacy of Composition. Only imbeciles still argue within the analytical framework of supply-demand-equilibrium or General Equilibrium.

Microfoundations have to be replaced by macrofoundations. This methodological operation is known as Paradigm Shift.

From the correct macrofoundations follows a POSITIVE relation between wage rate and employment for the economy as a whole.

False theory leads to false policy guidance. With their defective microfounded employment theory, economists bear for 150+ years the political responsibility for the social devastation of mass unemployment.

Twitter Feb 26, 2021