Chapter 5 of Steve Keen’s Debunking Economics takes a look at labour market economics, an area where I feel there are almost too many different criticisms to know where to start. Keen spends a relatively short amount of time on this chapter, and though his expositions are sufficient to question many of the standard stories economists tell us about labour, I feel he misses some low hanging fruit.
Keen primarily builds on his earlier approach to demand-supply analysis. He first notes that the relatively uncontroversial backward bending labour supply curve, when aggregated, can mean a labour supply curve can have any shape at all – this aggregation issue is not fully explored on economics courses. He then applies his earlier analysis of demand curves, which implies the same for labour demand. The definitive PHD textbook , Mas-Collell, has also noted the latter, but assumes it away by supposing that:
…there is a benevolent central authority, perhaps, that redistributes wealth in order to maximise social welfare…
Naturally, this assumption isn’t true in reality, and since it’s a domain assumption – for which conclusions only follow as long as it applies (more on this in a later post) – we can safely ignore it. The result is that there may be any number of equilibrium points in a labour market.
On top of this, there are many more points that make the clear cut story of a single equilibrium highly questionable:
- The intertwined nature of work and leisure – the latter relying on the former if, as Keen puts it, you want to do anything more than sleep.
- The existence of nominal debt contracts.
- Keynes’ argument at the beginning of TGT, which is that workers cannot control their real wages, as it is dependent on price, which are controlled by their employers. Keen weaves around this argument at the beginning of the chapter but never states it explicitly.
- The fact that wages are an essential component of aggregate demand, and, similarly, that the labour market is so broadly defined that treating demand and supply as independent is not possible.
- The fact that, since markets do not approximate perfect competition, even standard neoclassical analysis teaches that minimum wages and unionisation can be beneficial to combat market power.
Clearly, there are a multitude of reasons that ‘interfering’ with wages through demand management, legislation and unionisation is not obviously a bad thing.
This is actually fairly uncontroversial stuff, and most neoclassical economists would endorse some of it. Having said that, many still think real wages should fall, so clearly haven’t fully thought the implications through.
But maybe Keen should have been more controversial. For me his criticisms don’t go deep enough – he repeatedly refers to reasons that “workers will not be paid their marginal productivity”, without questioning the concept itself.
As I have noted before, labour only has productivity when combined with capital. Shops assistants need a shop, tills, hangers and bags; builders need tools, machinery and materials. Furthermore, some labourers only have productivity when combined with other labourers, too. Two people carrying a heavy box cannot be said to have a discernible individual productivity. The productivity of a McDonald’s relies on the cooks, the till operators and the supervisors combined – take away a cook and what’s the point in having an extra till operator when the cooks can’t keep up with the orders?
The result is that productivity can only be said to be a result of combined, rather than individual, factors. The relative shares are then determined by bargaining power.
I consider this argument a strong one, and it also fits quite nicely with many of the Sraffian arguments throughout the book: that firms do not hold capital fixed and employ more labour – they need to employ both simultaneously; that much of neoclassical analysis cannot take place independent of income distribution, which is dependent on political power (more on this in a later chapter). For these reasons I’m guessing Keen is unaware of this particular criticism, rather than rejects it – it would significantly strengthen his critique, which, though sufficient to complicate the neoclassical story, does not completely ‘debunk’ it.