Sunday, October 5, 2014

The Wage Growth Puzzle --What Puzzle?

The NY Times is a great source for articles about economic facts that seem to be written by folks who don't have any real understanding of economics. Today's article by Justin Wolfers, "Jobs Report Highlights the Wage Growth Puzzle" is only the latest illustration of these bizarre articles.

The "puzzle," according to Wolfers, is why wages are not growing even though the demand for labor seems to be growing.  The confusion is that Wolfers doesn't seem to understand that the price of labor is not the wage rate.  The price of labor is the wage rate plus all the other costs associated with hiring an additional employee.

The price of labor has, in fact, skyrocketed.  But wages are, increasingly, only a fraction of the price of labor.

The economics is simple: as the demand for labor goes up, it's price rises.  What could be simpler than that?  And that is true.  Look at the data.

If you require mandates on employers, those become part of the price of labor whether the employee receives any benefit or not.  Things as simple as "family leave" mandates raise the price of labor, but they do not raise wages.  In fact, all things the same, they lower wages.

No session of Congress goes by without a proposal to impose additional mandates on employers who have employees.  Many of these pass -- unnoticed, by and large, by folks who write newspaper articles about the lack of wage growth.

Big enchiladas, like mandated health care coverage, directly impact the price of labor and substantially reduce wage rates.  Employers aren't really paying for these mandates.  Employees pay for these mandates with wages becoming a decreasing fraction of the price of labor.

Why is this hard to understand?  An employer could care less what the wage rate is.  It is the price of labor that matters to an employer.  Mandates raise that price.  Absent a growth in labor productivity, then wages have to be lowered to maintain the same price of labor.

Surprise! Surprise.  The price of labor is rising, but wages are going nowhere.  That's not going to get any better in the future, because mandates like health care costs are going to become increasingly more expensive.

Puzzle resolved.

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