Saturday, March 13, 2010

Jobs and Surplus

The caption in the Washington Post reads “Obama calls for White House summit on job creation.” [WP 11/13/09] The article reports the summit will be an attempt to signal his concern about the growing ranks of the unemployed and to focus on longer term strategies to improve the job market.

It is a worthy goal but reducing the unemployment rate and the number of unemployed is not the same as creating more jobs. That is because a majority of Americans live in families that make job decisions that depend on their spouse and the circumstance of other family members.

Economists often act as though individuals make independent decisions when it is time to enter the labor force and become part of the labor supply. Instead one person losing their job will often mean that two people start looking for work.

To see why suppose the mister in the Smith family has a job as a tool and die maker working in manufacturing. Tool and die maker is one of America’s better paid production occupations with a median wage reported at $22.32 an hour or $46,430 a year for 2008, and a 90th percentile wage of $34.76 an hour or $72,300 a year. As a family they might earn $60 to $80 thousand dollars.

The Bureau of Labor Statistics reports jobs as tool and die maker in decline every year since the late 1990’s. With a broad base of manufacturing also in decline it is easy to imagine a layoff for Mr. Smith. Economists argue and predict people will work less at lower wages and work more at higher wages so unless Mr. Smith can find work at his tool and die maker wage economists expect him to work less after a layoff than before.

Economists do not base their predictions on interviews, observation or data. Instead they rely on conjecture about preferences. Leisure they argue is valuable and will be traded for work in the personal preferences of individuals. Therefore, at higher wages leisure time is more expensive because it means giving up those higher wages, and people with standard preferences want less of what is more expensive. Conversely, at lower wages leisure time is less expensive because it means giving up lower wages, and people will devote more to leisure when it’s less expensive.

Those less devoted to the economist’s way think the Smith’s will do whatever they can to pay the bills and maintain their economic status. Mr. Smith will take a job in maintenance or construction or whatever he can find at lower wages if necessary, and a second job working evenings or weekends, but we can expect that Mrs. Smith will also enter the workforce looking for work. Together the Smith’s work more hours at lower wages to keep up, just as they might work less if their wage was higher. People like the Smiths assure that lower wages add to the surplus of labor.

Business owners and economists will be invited to the above mentioned summit. Too often job summits end up sounding the great cry: get some training. We will hope they recognize that low pay helps create a surplus of labor that makes more jobs a necessary but not sufficient condition to ease America’s employment problems. Recognizing something new is a lot to hope, but it’s a start.

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