
Supply and Demand Does a Poor Job of Explaining Depressed Wages - thisisit
https://www.bloomberg.com/view/articles/2018-04-05/supply-and-demand-does-a-poor-job-of-explaining-depressed-wages
======
randomdata
_> Supply-and-demand theory once made sense. That was before employers gained
so much power._

Except power itself is determined by supply and demand. Employers have gained
more power precisely _because_ of the increased labor supply (more women, more
robots, more foreign workers) that is also responsible for stagnant wages.

The power, of course, comes from the need for others to have association with
that person/business. In the current market, if one employee doesn't like the
terms and conditions of the job, there are many others who will be quite happy
to take their spot. This gives the employer leverage as employees want to be
employed.

However, if there were actually more employers than employees, then the
reverse would be true. Employees would be free to treat employers however they
wanted, and force them to pay more money, without repercussion since if the
employer walks away, there would be many more willing to take the worker. This
gives the leverage to the employees as employers want employees.

~~~
dougmany
My summary of the article would be:

If supply and demand were working, a minimum wage increase would cause a loss
of jobs. We studies minimum wage increases and jobs were not loss. The
conclusion was therefore that Supply and demand were broken.

Then then want on to say how they found a link between having a small number
of employers in a field and lower wages.

~~~
randomdata
_> The conclusion was therefore that Supply and demand were broken._

Which seems like a rather bizarre conclusion. Minimum wage is a form of supply
management. You do not have to lose any jobs, but you have eliminated the
competition, at least on factors of price, as it is illegal for someone else
to do the job for less. With a smaller labor supply, effectively speaking,
price is able to rise.

~~~
TheCoelacanth
That's a rather bizarre interpretation of supply and demand. A minimum wage
would not decrease labor supply. No one is going to say "I was willing to work
for $6/hour but not for $7/hour". If anything you would expect more people to
be willing to work at $7/hour than at $6/hour.

You would expect it to decrease labor _demand_ because people who would be
willing to pay $6/hour for a certain job might not be willing to pay $7/hour.
Lower demand for labor should lead to fewer jobs, if it doesn't that indicates
that there are more factors at play than a monotonic supply and demand curve.

~~~
randomdata
_> No one is going to say "I was willing to work for $6/hour but not for
$7/hour"._

I am not sure this is a correct interpretation of what supply actually means.
For all intents and purposes, supply is the people willing to do job _for
less_. If minimum wage is $7/hour, there is nobody going to say "I will do it
for $6". If you, a business owner, want to pay less than $7/hour in this
scenario, what supply do you think you are turning to? _There isn 't any!_ You
have already hit equilibrium (where supply meets demand) at the level of
minimum wage.

Someone who wants $12/hr. for a minimum wage job is not supply in that market.
Supply isn't all people who are willing to work just as demand isn't all
people who want something. If you have $100 in your pocket and say you want to
buy a new Ferrari with it does not mean you demand a Ferrari. Demand requires
that you be willing and able to offer a price that actually gets what you
want.

 _> You would expect it to decrease labor demand because people who would be
willing to pay $6/hour for a certain job might not be willing to pay $7/hour._

That can be true, but minimum wage work is often providing an inelastic
service. People aren't going to stop eating because minimum wage for
agricultural workers went up. They'll just accept the higher price. What
choice do they really have? Eating is somewhat essential.

It is true that the definition of demand says that all else equal, a higher
price results in less demand, but in the real world not else is equal when the
price rises due to minimum wage increases. A higher price does not always mean
less demand.

~~~
TheCoelacanth
> It is true that the definition of demand says that all else equal, a higher
> price results in less demand, but in the real world not else is equal when
> the price rises due to minimum wage increases. A higher price does not
> always mean less demand.

That is exactly the point I was trying to make and I think the article was
trying to do the same. Unless you make the assumption that demand for labor is
perfectly inelastic or is one of the very rare goods, like Veblen goods, that
have a positive price elasticity of demand, raising the minimum wage would be
expected to decrease the amount of labor demanded. If it doesn't, then one of
those assumptions must be incorrect. Either labor has perfect or positive
elasticity of demand (unlikely because very few things do, even things that
most people would describe as absolute necessities) or there are more factors
at play than just the law of demand.

------
sprash
Supply and demand does a great job of explaining depressed wages. We had two
kinds supply shocks in the recent history in the labor market. One is women
entering the workforce and the second is mass immigration.

Both coincided at the end of the 60s and 70s. Exactly since then wages are not
correlated to productivity anymore and are basically stagnating.

~~~
Frondo
You blame women and immigrants, but a much more likely explanation is the
decline of union participation in the private American workforce. They've been
on the decline since the 1970s, and the more they've declined, the more that
productivity has been captured by upper management and shareholders.

~~~
randomdata
That is still explained by supply and demand though. A union works by
artificially constraining the labor pool, reducing the employer to buying from
(typically) one seller (the union) instead of many (each employee
individually). Unionized workers are usually able to make more money than they
would in a non-unionized market because of that smaller supply of sellers
relative to the demand.

However, as a Canadian who saw peak unionization in the mid-80s, long after
wages also started stagnating in our country, and a country that still has
relatively strong unionization even today (especially compared to the
significant decline seen in the USA), I'm not sure that this explanation
holds.

~~~
EliRivers
_A union works by artificially constraining the labor pool, reducing the
employer to buying from (typically) one seller (the union) instead of many
(each employee individually)._

Closed-shop unions, you say? Do they still exist? I work in the UK, and I've
worked in many workplaces where there were active unions, and the very idea
that you'd have to be a member of the union to work there was laughable and,
if I recall correctly, illegal.

In my experience, a union does _not_ work by artificially constraining the
labor pool. In every job I've ever had in which I could have joined a union, I
only had the opportunity to join the union _after_ I was employed. Before I
was employed, I didn't even know there was a union there.

~~~
randomdata
Closed-shop unions are typical where I live. My mistake on them being typical
across the world.

However, even in an open shop, the collective bargaining is still limiting the
employer to a single vendor with respect to those it wants to hire that are
engaged with the union. The only other supply is those who want to bargain on
their own, and even then you're probably not going to find too many who are
willing to severely undercut the union, unless the union is on the brink of
collapse anyway.

The supply is still constrained. Although perhaps not to level it is in a
closed shop.

~~~
EliRivers
_However, even in an open shop, the collective bargaining is still limiting
the employer to a single vendor with respect to those it wants to hire that
are engaged with the union._

Even that is another interesting thing; the idea that one of my employers,
past and present, might actively seek out union members to employ, is so
strange to me (and completely unworkable; I think it might even be illegal).
The supply was in no way affected by the union.

In jobs I've had in the past, any benefits or agreement the union negotiates
applied to all employees, regardless of union membership status, and were
placed into contracts without any reference to unions at all. Collective
bargaining by the union for improved conditions and pay existed; every
employee benefited, union and non-union alike.

I suppose the moral of this is just that unions work very differently where
you live to where I live.

~~~
randomdata
_> In jobs I've had in the past, any benefits or agreement the union
negotiates applied to all employees_

Exactly. This means there is effectively _one_ seller. A greater supply would
mean that there are people lining up to do the job for less.

Supply doesn't mean all people who want to work. means those who are willing
to compete. Someone who wants way more conditions than even the union was able
to negotiate at this place of business is not supply.

~~~
EliRivers
I think I'm happy with this. Sounds a lot better than the race to the bottom I
see in some countries.

I think also we see a lot less union activity than you do. I couldn't tell you
who was in the union. The most prominent thing they do is put up some posters
reminding people of employment law. I never saw them make wage negotiations
and to a large extent, that's not what they do. So far as I could tell, they
principally exist to provide another channel for enforcing employment law and
ensuring safety standards in the workplace were being met, and in the even of
unfair treatment provide an employee with support and legal representation.
Maybe if they were heavily into negotiating wages and so on, it would be
different (I think in some industries maybe they still do that), but I've
never seen them do that in any company for which I've worked. Seems that
unions do very different things in our respective countries; I expect them to
protect me from illegal activity on the part of the powerful, rather than win
anything for me.

------
readams
It should be pointed out that studies of small increases of minimum wage that
show modest harm do not immediately tell us that huge increases of minimum
wage will not cause greater harm. Remember that $15/hour is more than the
_median_ wage in much of the country.

~~~
andy_ppp
These jobs that are worth less than $15 per hour are going to be the first to
be replaced by machines so whatever happens we need a solution to give people
at the bottom high(er) quality lives.

~~~
toomuchtodo
> we need a solution to give people at the bottom high(er) quality lives.

Training and safety nets, funded through tax revenues.

Keep in mind, the national minimum wage in Australia is currently $18.29. The
entire US has been getting a discount on minimum wage labor for decades, and
everyone is kicking and screaming now that those workers are having their
wages ratcheted up to what they should be making when accounting for inflation
[1] [2].

[1] [http://www.pewresearch.org/fact-tank/2017/01/04/5-facts-
abou...](http://www.pewresearch.org/fact-tank/2017/01/04/5-facts-about-the-
minimum-wage/)

[2] [https://www.cnbc.com/2016/07/21/adjusted-for-inflation-
the-f...](https://www.cnbc.com/2016/07/21/adjusted-for-inflation-the-federal-
minimum-wage-is-worth-less-than-50-years-ago.html)

~~~
comstar
Not to discredit anything you've said, as on the whole I agree with you. But
movie tickets are nearly twice as expensive in Australia. [0] [1]

And a popular videogame can be wildly more expensive. MLB The Show 2018 for
instance is $60 in the US and $100 in AU. These prices are outside that which
is explained by the current exchange rate.

Yes, you are being paid more. The price of living is also drastically higher
there. I think there are better case-studies than Australia.

[0] [https://www.screenaustralia.gov.au/fact-
finders/cinema/indus...](https://www.screenaustralia.gov.au/fact-
finders/cinema/industry-trends/box-office/ticket-prices)

[1] [https://www.statista.com/statistics/187091/average-ticket-
pr...](https://www.statista.com/statistics/187091/average-ticket-price-at-
north-american-movie-theaters-since-2001/)

~~~
toomuchtodo
It should be noted that Australia has a healthcare system substantially more
equitable than the US, making the price of discretionary goods and services
less of an issue. Real estate, education, and healthcare inflation is a thing
(despite the price of TVs and tech coming down year after year) in the US
(although I am aware of the steep cost of real estate in AU and NZ due to
foreign buyers).

"Australia has a one of the strongest economies in the developed world. It
survived the recent recession unscathed and hasn’t had a real recession in 20
years. And as Australian academics have noted, "Australia and New Zealand,
with among the highest minimum wages in the world, have both low levels of
unemployment and significantly lower levels of low paid employees.

 _Bankruptcies due to medical costs, which accounted for 60 percent of U.S.
bankruptcies before the Affordable Care Act, are completely unknown there._ "

[https://www.usnews.com/opinion/blogs/laura-
chapin/2014/12/09...](https://www.usnews.com/opinion/blogs/laura-
chapin/2014/12/09/australia-bests-america-when-it-comes-to-minimum-wage-and-
paid-leave)

------
drabiega
More minimum wage studies are certainly welcome, but the fact that supply and
demand models are remarkably poor matches for the labor market is certainly
not new. Anyone with more familiarity with Labor Economics than your typical
news show talking head should be aware of this.

------
crabasa
One thing worth noting is that one of the clearest paths to earning higher
wages and being more successful in a career lies in networking and learning
how to leverage that network. In theory, the dominant tool for this should be
LinkedIn.

But LinkedIn decided early on that serving professionals was less lucrative
than serving companies. So the vast majority of products and capabilities that
LinkedIn has shipped over the years has been to serve the needs and interests
of companies. Sometimes at the expense of professionals (InMail spam).

There really isn't a tool out there that workers can use that addresses the
power and knowledge asymmetries that exist today.

~~~
andrewla
I feel comfortable saying, without evidence, that LinkedIn is unlikely to be
useful for workers living at the border of the minimum wage, or in general
workers who would be likely to be affected directly by a change in the minimum
wage.

~~~
crabasa
I agree with you about the current iteration of LinkedIn. But that doesn't
mean a different kind of product, focused on professional development, career
management and networking couldn't be useful for folks.

I imagine that many people simply leverage Facebook, Twitter and other social
networks for this today, in the absence of something for purpose-built.

~~~
nightski
This probably won't be a popular viewpoint, but I personally prefer the
decentralized messy version of networking we mostly experience today vs. one
big monolith that facilitates all relationships.

------
coldtea
The world is not driven by economics (and its simplistic assumptions), it's
driven by power relations and human nature.

Supply and demand is not the only thing to influence the job market -- power
and knowledge asymmetries can do the same thing just as well.

~~~
andrewla
I think this is getting into map vs. territory issues. This is certainly the
domain of economics -- the particular simplifying model used by many
economists does not appear to paint a complete picture.

By analogy, adapting a James Morrow quote: "Economics does have all the
answers. The problem is that we don’t have all the economics".

Power and knowledge asymmetries are well within the domain that economics
tries to encompass.

~~~
iovrthoughtthis
Great use of map vs territory.

------
JamesLeonis
I am reminded of this tweet from one of the Federal Bank guys [1]

> We were at maximum employment. We are now at maximumer employment.

> I thought the "tongue-in-cheekiness" of my tweet would be obvious. Allow me
> to translate: We keep saying we are at max employment and then all these
> people choose to work. It suggests we weren't really at max employment.

[1]:
[https://twitter.com/neelkashkari/status/972142317162369024](https://twitter.com/neelkashkari/status/972142317162369024)

And more recent [2]

> 1\. Yes it matters 2. Even more important is that we should now recognize
> our gauge of labor market slack is broken

>> What metric would you suggest instead?

> A combination of factors: prime age LFP and EPOP. Most importantly: when
> assessing supply and demand in a market, start by looking at the price. Wage
> growth has been surprisingly slow. Suggests more slack.

[2]:
[https://twitter.com/neelkashkari/status/978041558342791176](https://twitter.com/neelkashkari/status/978041558342791176)

------
CryoLogic
Is it possible that low skill jobs are simply less valuable to the economy
than before?

~~~
mar77i
It is possible that low skill jobs are simply less valued to the economy.
Because life must be made hard for those down, so it can be made easy for...
urm... those who already have enough.

Point in case shows once more that that isn't even true.

------
moorhosj
Traditional supply and demand economics implies open and equal information for
buyer (employer) and seller (employee). For goods and services, there is
transparency in the price of a product. In the labor relationship, the buyer
(employer) holds almost all of the information that impacts price (wages).

\- Employers know how many candidates they have for a position.

\- Employers know what they have paid for that position in the past.

\- Employers can often afford to wait longer to decide.

It should also be noted that the US taxes wages at a higher rate than
investment or dividend earnings. This may distort the market as certain income
streams are incentivized over others.

------
RcouF1uZ4gsC
There was this study that actually studied a minimum wage increase in Seattle
that did not paint such a easy picture of wage hikes.

[https://www.seattletimes.com/business/uw-study-finds-
seattle...](https://www.seattletimes.com/business/uw-study-finds-seattles-
minimum-wage-is-costing-jobs/)

------
bbimbop
Of course. The fact that wages are suppressed is known and expected. The
author fails to mention the theory of sticky wages. Why? The author is making
a political statement about wage policy. In doing so lets you assume that
wages should be related to supply and demand, but they are not. Wage levels
are sticky and lag behind changes in the supply and demand for labor. Good
news is that you can expect wages to increase in the relatively short-run,
from which it seems the author (and most everyone) would benefit.

[https://www.investopedia.com/terms/s/sticky-wage-
theory.asp](https://www.investopedia.com/terms/s/sticky-wage-theory.asp)

------
peoplewindow
This doesn't seem like a very good analysis.

For one, it makes sweeping generalisations about the economy. It is not true
that employers always have market power and employees don't. There are lots of
areas where it's inverted. The most obvious example right now is AI
researchers but software in general is and has been for a long time an
employees market. By the same logic that this author uses to justify minimum
wages because it's hard for employees to find new jobs in some sectors, you
could justify maximum wages because it's hard for employers to find new
employees in some sectors. But nobody would support that - it'd be absurd.

------
pedro_hab
This is an interesting topic, but it is sad to see how people react to it.

A lot of comments here saying the whole system is broken.

An average poor man in the US probably lives better than kings lived in the
past.

Food, water, food, hospitals, AC, heaters and such. These evil
employers/entrepreneurs are the one creating it.

Life by every metric is getting better, can it be better? Maybe.

Now we could discuss how to improve the system, and its flaws, but this level
of cynicism is hard to handle.

I guess by coming from a really poor reality it skews my view of the world.

~~~
aylmao
> An average poor man in the US probably lives better than kings lived in the
> past.

IMO very far from truth.

An average poor man today _has more valuable stuff_ than a king in the past,
but this doesn't translate into _living better_ because having a smartphone
wont save me from the stress of disliking my boss, having cheap access to
varied foods doesn't necessarily mean I have more significant relationships,
the fact hospitals exist doesn't mean I can afford getting sick any more than
a king, and nothing really changes the fact that I'm still poor relative to
the people of today, which matters.

That being said, if we compare poverty today to poverty in the past, things
are perhaps better now, sure.

~~~
pedro_hab
> things are perhaps better now, sure

I really think you are forcing here, I said:

> probably lives better than kings

And I do conceded that I have not studied kings lives to know, so I am
guessing, but the poor of the past for sure lived way worse then the current
poor. No question. The world is a much better place to live, MUCH.

Now we can argue if should be better, based on distribution (rich are richer,
than poor should also be richer) or inflation.

But people used to have dozens of kids and only a couple would live, that
alone is enough to justify.

My grandparents had 7 kids in the middle of nowhere and none died.

------
datamingle
Discussing wages with supply & demand and not taking into account the
worldwide labor supply. At some point, it is more profitable for companies to
move overseas.

------
defertoreptar
> find that in areas where there are fewer employers in an industry, workers
> in that industry earn lower wages.

> [...]

> Together with the evidence on minimum wage, this new evidence suggests that
> the competitive supply-and-demand model of labor markets is fundamentally
> broken.

How does that contradict supply and demand? Less employers = less supply of
jobs = oversupply of workers = downward pressure on salaries.

------
purplezooey
One thing I've learned is that the right wing will always tons more money and
resources than the left in the US. This is an example of how effective the
right wing message machine can be, having been a loud opponent of minimum wage
increases for what are increasingly bogus reasons.

------
ChuckMcM
I miss the times when I thought Supply and Demand could explain wages. In a
fully globalized economy I expect it would be more useful to do comparative
GDP studies to understand the use of labor capital and its ability to fund
production.

~~~
awat
Exactly, supply and demand is pretty easy for people to grep (including
myself) when explained in a simple cartoon or econ 1010 class. It’s current
application in a globalized market is anything but transparent, which makes it
even harder to properly identify manipulative forces in the market.

------
grecy
That's because depressed wages are caused by the drive for ever increasing
profits.

~~~
sp332
Yes but the workers have a drive for increasing profits too, and there are
more of them. So that's not really a good explanation.

~~~
toomuchtodo
Workers have less power to increase wages than corporations have to increase
revenue and profits.

This has occurred, arguably, because of right to work laws and the reduction
in organized labor (which previously negotiated wages with more power).

~~~
aantix
Is that true? A corporation that relies on 50,000+ employees to deliver a
service or product, and those employees collectively stop working?

~~~
toomuchtodo
I don't entirely grok your question, but it sometimes does take walkouts to
exert force to obtain wage concessions (teacher strikes, pilot strikes, etc).

Teachers striking in several states are exerting enough force to obtain
meaningful wage increases.

[http://nymag.com/daily/intelligencer/2018/04/the-teachers-
st...](http://nymag.com/daily/intelligencer/2018/04/the-teachers-strikes-have-
exposed-the-gops-achilles-heel.html)

[https://www.wsj.com/articles/why-teachers-strikes-are-
becomi...](https://www.wsj.com/articles/why-teachers-strikes-are-becoming-a-
nationwide-movement-1522584001)

------
otakucode
Introducing any very significant productivity increasing tools seems to result
in depressed wages. It happened when we moved to factory production, resulting
in entire families working 16 hour days 6 days a week to barely earn a
subsistence living. And it's happening with computers.

When your employees produce 8% more each year, it's easy to justify giving
them 5% raises. What happens when your employees produce 80% more every year?
You can't stomach the idea of giving them raises commensurate with that, so
you just tell yourself 'its the machine doing the real work, they don't
deserve anything' and raises stop.

------
raintrees
I do not think that any theory that does not include the distorting effects of
central banks and governmental regulation will provide the answers they are
looking for...

------
ogn3rd
Greed explains it well.

------
howard941
tl;dr Depressed wages are better explained by employers' ever more powerful
bargaining position

~~~
randyrand
....which is dictated my the supply of employers

thanks for the tldr.

~~~
cortesoft
Except it isn’t, it because of the way labor and employers have different
costs when an employee leaves, meaning each side has a different equation for
how important it is to not sever the employment arrangement.

If an employee loses their job, they lose 100% of their income, and for many
they are unable to survive this. If an employer loses an employee, they only
lose 1/n of their production, where n is the number of employees they have.
They can handle that reduction while they look for a new employee way more
than the employee can.

That is what prevents the market from being efficient.

~~~
js8
> That is what prevents the market from being efficient

The problem is, nobody really wants labor markets to be efficient. Efficient
labor markets mean that we would pay workers the subsistence wages, because,
why they should be paid more?

That's the thing, labor is not like other commodities, say apples or
computers. You want to make the price of other commodities to be as low as
possible, and everybody (all humans in society) wins. But for price of labor
this is not true.

~~~
cortesoft
That isn’t true; an efficient market doesn’t imply that we will pay workers
subsistence wages. Market rate has nothing to do with what a person needs to
survive.

The rate would be set based on competition with other employers for employees;
you pay enough to keep a worker from getting a job at another employer.

So the answer to the question, “why would you pay more?” is, “so they don’t
start working for someone else instead”

Now, the market system doesn’t work for employment because of the reason I
stated in my original comment, but it isn’t related to the ‘minimum wages
needed to survive’

------
js8
Supply and demand does a poor job at explaining anything. The price changed..
why? Was it because it moved toward an equilibrium, from the equilibrium, has
the demand curve shifted, has the supply curve shifted?

The problems of general equilibrium approach are quite succinctly described in
Keen: Debunking Economics. And compared to approach in Blatt: Dynamic Economic
Systems, it's a disaster - too many parameters and assumptions for too little
explaining power. It was a pretty decent way to describe the world when Walras
came up with it; but it should have been obsoleted years ago.

