May 30, 2017

New macro-micro thinking about the labor market

Comment on Dean Baker on ‘Link Between Low Wages and Low Productivity Growth: High Wages Make Low Productivity Jobs Disappear’

Blog-Reference and Blog-Reference

Labor market theory has two aspects: macro and micro. The macroeconomic equation for the relationship between average wage rate and employment says that the average wage rate must rise in order to increase overall employment.#1

In the second step, differentiation comes in. Different productivities for different firms that sell on one market with one market clearing price means that the profit decreases from the highest productivity firm to the lowest productivity firm. Let us assume for the moment that the profit of the marginal firm is zero.#2

It is obviously not so smart to increase the wage rate in the marginal firm. So, what has to be achieved is to satisfy BOTH the macro condition of a rising average wage rate and the micro condition of not to push the marginal firm over the cliff.

To look, in good old Econ 101 manner, only at the marginal worker in the marginal firm prevents the solution of the employment problem.

Egmont Kakarot-Handtke

#1 See Wikimedia and ‘Full employment: thinking like the macro-boss
#2 For details see ‘Schumpeter and the Essence of Profit

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