Re: Piorot on Madrick

["John M. Legge" <jlegge@xxxxxxxxxxxxxx>]

James Galbraith's K/C/S classification of industries makes more sense than
the Akerlof argument that you summarise, with the particular advantage of
being solidly grounded in empirical research.

Factors such as value added per worker, and value at risk per worker, have a
stronger force than vague notions of "fairness", although these play a
secondary role. One shouldn't forget that the word "sabotage" was derived
from the practice of disgruntled workers throwing an old wooden shoe (sabot)
into the textile machinery.

Manove put this concept into economese fairly elegantly:

Manove, M. (1997), "Job responsibility, pay and promotion", Economic Journal
107(440, January), pp. 85 - 103.

A factor that Manove and apparently Akerlof missed is the need for
inter-worker cooperation and the resulting joint product: while it is easy
to establish value added and value at risk per worker statistically, it is
often impossible to assign it individually; not only is a uniform wage
"fair", it may be the best approximation to the economically optimal level.

JML



> -----Original Message-----
> From: pkt-owner@xxxxxxxxxxxxxxxx [mailto:pkt-owner@xxxxxxxxxxxxxxxx]On
> Behalf Of Ben Day
> Sent: Monday, 9 September 2002 5:43 AM
> To: Paul Davidson; pkt@xxxxxxxxxxxxxxxx
> Subject: Re: Piorot on Madrick
>
>
> At 01:01 PM 9/7/2002 -0500, Paul Davidson wrote:
> >MADRICK: Similarly, new classical economists argue that
> markets are so
> >efficient that unemployment is largely voluntary. For the
> most part, they
> >say, people who are out of work can find jobs if they are
> willing to work
> >for less. Government cannot really help them. Mr. Akerlof
> argues that in
> >real life, businesses often pay more than the market wage to
> retain good
> >workers, bolster morale or create incentives to work harder.
> >
> >PAUL: But if that is the case then increasing the money wage
> rate will
> >increase the productivity of workers by giving them an
> incentive to work
> >harder!!  Why should not the wage  per worker be raised to
> that paid the
> >CEO of the company?
>
> This is probably paraphrased from his Nobel address, but I'd guess it
> refers to Akerlof's and Yellen's "Fair Wage-Effort Hypothesis" (see
> Quarterly Journal of Economics 105 (May 1990): 255-283), just
> one of a
> bunch of so-called "efficiency wage" theories. They're not
> saying that
> there's anything like an elastic relationship between wages and
> productivity, such that there'd be proportional returns for
> paying workers
> CEO-level salaries, just that workers who feel that their wages are
> unfairly low compared to others' pay (regardless if they are
> paid at or
> above the market-clearing wage) will try to "get even" (their
> words) and
> reduce work effort. Akerlof and Yellen try to integrate this
> into labor
> market segmentation theory by showing that a large number of
> "segregated"
> firms (firms that hire only low-wage workers, and thus
> partially eliminate
> fairness as an issue for workers - at least so they claim),
> by increasing
> the demand for low-wage workers, will increase the fair-wage paid to
> workers in "integrated" firms (those with low and high-wage
> workers, where
> fairness becomes an issue and sub-fair wages will cost you).
> Or in other
> words, they try to use the relation between relative
> deprivation and work
> effort to explain the persistence of wage differentials between
> industries... Many parts of the hypothesis I don't find terribly
> compelling, though, due to the narrow horizon of relative
> deprivation they
> seem to focus on (in which it is primarily our co-workers in
> regards to
> whom we determine what is fair), the assumption that demand
> for low-wage
> labor generated by firms being "segregated" (hiring only
> low-wage workers)
> is actually significant in determining changes in total
> demand for low-wage
> labor - which we have to accept for the dynamic raising fair-wages in
> integrated firms to take place (although I don't know
> precisely why they
> rely on this dynamic), and beyond this ignoring many other important
> explanations for inter-industry wage divergences (e.g. how large
> "integrated" firms are also more likely to be "core firms"
> operating in
> oligopolistic industries with minimal price competition and
> higher and more
> stable returns, and very low exit-rates/minimal danger of insolvency).
>
> -----Ben
>