Wages as social constructs

This passage from Paul Krugman has stirred controversy:

Conservatives — with the backing, I have to admit, of many economists — normally argue that the market for labor is like the market for anything else. The law of supply and demand, they say, determines the level of wages..

But labor economists have long questioned this view. Soylent Green — I mean, the labor force — is people. And because workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.

I fear, though, that both Krugman and David Henderson are making a false distinction here. It's possible to argue that wages depend upon social forces because those forces affect the position of supply and demand curves.

For example, a  wage of, say, $8ph might not attract much labour supply in western economies but the same wage (in PPP) terms would have applicants queuing for miles in a poor country. The labour supply curve in the west is to the left of that in poorer nations. Why?

A big reason is that, in the west, such a wage is regarded as derisory because it would not give us an acceptable standard of living. This is because our ideas of what's acceptable are socially conditioned and so are greater in rich countries than poorer ones. As Smith said:   

By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt.

Also, the position of demand curves depends upon social forces. Conservatives would agree that wages depend upon the value of the output created by a worker. But this value is subjective and our subjective valuations are conditioned by social forces. For example, at a wage of $10 million per year there is positive demand for chief executives but not for toilet cleaners. This is because hirers believe that CEOs can create at least $10m pa of value. I would argue that this belief is a contestable ideological one: it exists because boards believe not only that great men can transform company's fortunes but also that they have the ability to spot such men. Both beliefs are questionable. It takes no imagination to envisage a society in which CEOs are paid only moderately because managerialist ideology is weaker.

Here are some other examples:

 - IMF research shows that inequality has increased as trades union power has declined, because unions were a constraint upon bosses pay.

 - Wages are lower in feminized occupations, even for men - consistent with "women's work" having low perceived value. The fact that this is more true in the UK than Germany hints at a social and cultural basis for the difference.

 - A classic paper (pdf) by Kahneman Knetch and Thaler showed that perceptions of fairness are a cause of wage stickiness. For example, people think it fair for a firm to cut wages if it is making a loss, but not if there's mass unemployment in the area.

 - Power-biased technical change has contributed to wage inequality. Because low-skilled workers can now be monitored directly - through CCTV, containerization, electronic tills and suchlike - they no longer need to be paid efficiency wages to keep them honest. This means their relative pay has fallen.

All these cases show that Krugman is right to say that wages depend upon social forces and political power. However, this is not an alternative to standard price theory but a complement to it. Forces and power help explain how demand and supply curves are formed.

Now, you might think this agreement with Krugman leads me to sympathize with his call for higher minimum wages. Not necessarily. In a world in which customers and thus employers attach low value to cleaners and care home workers, a state-mandated rise in their pay (which as Bob Murphy says is a different thing from a voluntary pay rise) might well depress demand - especially in the absence of looser macroeconomic policy.

The problem here, though, isn't "natural" laws of economics, but a cultural and ideological climate which attaches low value to some types of work. If this climate were to change - and the demand curve for such labour were to shift outwards - higher wages for such workers would be entirely feasible.  

Comments

[Rhys]

Is Walmart not different to most employers, consider Walmart the monopsony employer is this a case where a firm may react less to supply and demand and more to changes in regulations, and by pre-emptivley raising the minimum wage they head off the govt raising it higher?

[Donald]

"The problem here, though, isn't "natural" laws of economics, but a cultural and ideological climate which attaches low value to some types of work. If this climate were to change - and the demand curve for such labour were to shift outwards - higher wages for such workers would be entirely feasible."

Minimum wages may, though, have a role to play in causing such a shift in demand.

[Deviation From The Mean]

"In a world in which customers and thus employers attach low value to cleaners and care home workers, a state-mandated rise in their pay (which as Bob Murphy says is a different thing from a voluntary pay rise) might well depress demand - especially in the absence of looser macroeconomic policy."

Cleaners, as an example, tend be part part of the associated labour costs that go into making a product, but other factors such as health and safety requirements, inspections etc may be variables you need to factor in. If the local restaurant stopped cleaning they may lose customers and if office workers were subjected to unhygienic conditions it may provoke a reaction. Not to mention the political fallout of less cleaning in hospitals.

To me you are a man of few variables, which is where you often go wrong.

[Steven Clarke]

Aren't all markets social constructs?

There are things that social norms prevent me from buying and selling (and laws to back that up).

Under feudalism, many goods and services weren't traded openly but were given or received by obligation of your (hereditary) position in society.

Markets are just people interacting. If you look far enough behind, they always depend on social force and political power. Where do you draw the line?

[An Alien Visitor]

"Markets are just people interacting."

or the equal treatment of unequal individuals and there is nothing more unequal than that!

[Dinero]

maybe its just that Walmart wanted more and different job applicants and/or longer employee retention times .

[An Alien Visitor]

"maybe its just that Walmart wanted more and different job applicants and/or longer employee retention times ."

Yeah right.

https://hbr.org/2006/12/the-high-cost-of-low-wages

[UnlearningEcon]

"It's possible to argue that wages depend upon social forces because those forces affect the position of supply and demand curves."

You could, but this would render the concepts even more unfalsifiable than they are already. Why must we assume demand-supply 'underlies' everything? Is there any scope for abandoning it? The rest of your post is fine without any appeals to demand or supply.

[Luis Enrique]

UE,

you are now unlearning economics at the graduate level aren't you? So you should know that supply and demand curves merely represent answers to the questions how much would people demand or supply at different prices. This means they reflect social forces and whatever else explains how much people want things, or are willing to supply them. I do not think economists have ever sought to restrict where preferences come from to non-social forces.

And what do you want to falsify? Supply and demand are ways of thinking about how markets work, you can use them to formulate falsifiable hypotheses but you can no more falsify them than you can falsify "institutional economics". The question is whether it is a useful approach. So, why assume supply and demand underlies everything? I am not sure about everything, but I reckon it is hard to explain the relationships between prices and what people choose to supply and purchase, without use of these concepts. For example, could you explain what is happening in the market for solar panels without talking about how long run supply curves slope downwards because of learning by doing or increasing returns, and about how demand is a function of prices (relative to other energy sources)?

[Icarus Green]

I suppose to take an extreme example, white restaraunt owners in the Deep South in the early 20th century were unwilling to serve black clientele no matter how much the demand was relative to supply.

Politics is central to the labour market. Probably not the lawnmower market, or the test tube one though. Any market where whats being offered has the ability to affect people's lives substantially - arms dealing, financial products, healthcare is subject to substantive political influences and its corresponding corrective mechanism, regulation.

We dont just regulate markets for market inefficiences, we also regulate to deter abuse of political power.

[WVO House]

You continue to insist on a completely wrong and/or incomplete theory on CEO compensation.

It's just plainly not true that people think CEOs create $10 million or $100 million of value.

In part, those compensations are set the way prizes for sports tournaments are set: with the payouts for the top spot significantly higher than the payouts for any other position.

This is done because it creates huge incentives for people who think they can one day win that top spot to work extremely hard without the company having to actually pay them an amount commensurate with their efforts.

In other words, people who ultimately end up being CEOs tend to be UNDERPAID earlier in their career when they are working like mad to win that CEO position even though they are only getting paid the same amount as all the other Financial Analysts in the company, and overpaid later in their career, after they have won the job.

Edward Lazaer and many of did the work on this subject 20/30 years ago.

Then of course there are issues of firm scale, politics, Board capture, and other things (some of which you covered).

But please stop misleading people by acting as if economists and "conservatives" are somehow convinced that CEO compensation = value of the CEO's current labor.

[lower middle class]

"In other words, people who ultimately end up being CEOs tend to be UNDERPAID earlier in their career when they are working like mad to win that CEO..."

Pardon me while I cry a river.

[Luis Enrique]

Wvo you might be an overpaid exec working hard to become an outrageously overpaid ceo

[ChurmRincewind]

"Wages are lower in feminized occupations, even for men - consistent with "women's work" having low perceived value. The fact that this is more true in the UK than Germany hints at a social and cultural basis for the difference."

Well, I've said it before, but I'll say it again. As long as Chris thinks that a post about football and the Bayes Theorem is best illustrated by a picture of a woman with big tits, and which overlooks her business success in favour of the tenuous link that her stepfather was a football fan (page 3 caption or what?), then no wonder women's work is disrespected.

[Kaleberg]

You are completely right that there are still supply and demand curves even if they are shaped by social forces, but once you accept that the supply and demand curves are social constructs, it gets hard to argue that they are about efficiency rather than about the enforcement of social norms.

(An interesting example is the Nazi wage system in which wages were explicitly weighted by race. A Dane would be paid what a German was paid, but a Frenchman would get 70%, a Slav maybe 30% and so on down to Jews and the like who would be paid 0%. There was definitely a real labor market, but it is hard to argue that clearing the market produced an optimal economic output. The entire goal was to produce an optimal racial allocation of resources.)

[Min]

"In a world in which customers and thus employers attach low value to cleaners and care home workers, a state-mandated rise in their pay (which as Bob Murphy says is a different thing from a voluntary pay rise) might well depress demand"

It might also induce customers and employers to attach a higher value to cleaners and home care workers. (See cognitive dissonance.)