On Matthew effects

Claer Barrett in the FT writes that “people with little cash to spare can nevertheless be hugely profitable for the financial services industry.” This is true. People who are short of money are often desperate to borrow and so willing to pay high interest rates to loan-sharks, payday lenders or car finance companies. If you lack negotiating power, you’ll get a bad deal.

This is an example of the Matthew effect:

 For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.

We see this effect in other contexts too:

 - The struggle to get by on a low income steals cognitive bandwidth and so makes people more likely to make mistakes, such as borrowing at too high an interest rate. Eldar Shafir says: “if you live in poverty, you’re more error prone and errors cost you more dearly — it’s hard to find a way out.”

 - Youth unemployment has a scarring effect: it reduces incomes even years later. A temporary misfortune early in life can therefore be a longlasting handicap.

 - The poor are often so desperate that they try to gamble their way out of poverty. Prospect theory tells us that people are risk-seeking when they’ve become short of cash. It’s no accident that there are so many bookmakers in poor areas. As Father Michael said in the brilliant Broken: “If you’ve only got a fiver to last you the rest of the week, it makes eminent sense to gamble it”. Bookies, he continued, are “feeding off our poverty.”

 - Rented property is means whereby cash is transferred from people who are capital- or credit-constrained and unable to get a mortgage towards people who are not so constrained.

 - Thomas Piketty’s famous r>g formula (that the return on wealth exceeds the growth rate) says that those that hath shall be given more, and so inequality will tend to increase, barring major disturbances.

 - The rich pass on advantages to their children. This isn’t simply because they pass on education and skills. Research by Paul Gregg and colleagues shows that intergenerational mobility in the UK and US is low even controlling for educational attainment.  

All of this means there’s some truth in the old cliché: the rich get richer, the poor stay poor.” Although the ONS says that the UK has a relatively low rate of persistent poverty, I suspect this is the result of people shifting to just above the poverty line rather than into great fortune. Other ONS evidence (pdf) shows that half of those who were in the bottom income quintile in 2010 were still there in 2014, and that a further quarter were in the next quintile, implying that only a quarter made it into the top 60%.

You might think all this is trivial. Maybe. But there’s another arena in which the Matthew effect operates: capital-labour relations. Exploitation, thought Marx, arises because the worker’s poverty puts him in a weak bargaining position. He “has no other commodity for sale” than his labour-power and in “bringing his own hide to market…has nothing to expect but — a hiding.” This is still, generally, true. Yes, there are some instances whereby labour can exploit capital (such as top-league footballers or chief executives) but these are rare exceptions. In most cases, it’s capital that has bargaining power and labour that doesn’t, and this gives us another Matthew effect.

Comments

[John]

Wonderful. You write with such clarity and conciseness.

[Dipper]

I observed in the city that quite a lot of traders had working class backgrounds (e.g. fathers doing manual work) but had by various means (STEM degrees at top universities, or getting a job in the back office and working their way to the front) got onto the trading desk and were making large amounts of money.

Needless to say, they all put their children in fee-paying schools. No point in seeing if lightening strikes twice when you can lock-in your luck for the next generation.

And of course all those public-school Labour politicians really hated all this. People such as Viscount's niece Harriet Harman found it an outrage that working class oiks could earn lots of money without her express approval.

[Blissex]

Good, but footballers and CEOs like lawyers or doctors are not merely workers: Most of their earnings come from capital. In the case of footballers their IP rights for television broadcast and for CEOs the "goodwill" of their position and network of complicities.

[Ahmed]

Actually, the Marxist position has it backwards.

Competition among businesses drives wages up, competition among workers drive wages down. As regards labor, businesses compete with businesses, labor competes with labor. The two have nothing to do with each other. The intersection of these two forces determines the wage rate.

This is why unions are formed, to restrict competition from other workers. It has nothing to do with bargaining power.

As regards worker exploitation, ask yourself this question: If workers at Walmart are being exploited by greedy capitalists, why does not some other slightly less greedy capitalists pay them a dollar more an hour and poach them away.

The fact that this doesn't happen tells us that they are earning their marginal product, as economic theory predicts.

[Endrew]

Genetic inheritance also important. IQ highly heritable and privative of many positive outcomes in life.

[Endrew]

Ahmed seems right about wages. Never fully understood Chris's "bargaining power" talk.

[Steven Clarke]

What about planning restrictions and the absence of land taxes?

A place becomes more productive, attracting workers. It benefits homeowner in the area and pushes up rents for everyone else.

[reason]

Ahmed,
why is the wage elasticity of low wage employment so low (i.e. why is evidence of employment effects of minimum wage changes so poor)?

Your fairy tale is nice but I sort of wonder if you ever actually had a job?

(P.S. the other slightly less greedy capitalists DO poach SOME of them away, but somehow there always seem to be more low end workers than low end jobs. And note - there are costs involved in looking for jobs. And ask yourself what exactly the central bank will do when wages start rising.)

[john]

Suggests labor representation in employment negotiations should be a public good.

[Oakchair]

Ahmed do you know what wage negotiations are and what unions do? It's as if you have no real world knowdge of the topic.

[Ahmed]

@Oakchair

I know exactly what unions do. They screw non-union workers.

Before the foreign automakers moved into the Southern right-to-work states, a union autoworker with a Grade 10 education was making $150k/yr ($50/hr in wages and $25/hr in pension and post-retirement benefits). By comparison, a tenured professor was making $90k/yr.

And do you know who bore the cost of those high union wages? It wasn't companies like GM, they just passed the costs along. It was your average Joe who was struggling to make ends meet and had to fork out more money for transportation.

But we're sticking to the man union workers said. No, they were sticking to the little guy, the little guy that Marxists are so fond of standing up for.

Unions are great for union workers, not so great for everyone else.

[Ahmed]

@reason

My first job was working as a dishwasher for what were very low wages ($2.25/hr) in around 1975. Despite that, I still don't support the minimum wage for economic reasons.

As regards Walmart, and assuming there is a never-ending pool of unskilled labor to draw from, why did not some other MORE greedy capitalists hire those workers at LOWER pay, charge lower prices, and drive Walmart out of business.

You see, the point can be argued either way.

[reason]

Ahmed
What share of Walmart's costs is labor (and in particular what part does low labor costs pay in their comparative advantage)?

P.S. I'm actually not pro-union, I think the best way to improve the bargaining power of workers (especially low pay workers) is a basic income.

[reason]

And the second best way is a more expansionary macro-economic policy setting.

[Martin]

Thank you for sharing)

[Ahmed]

@reason

I agree with both your points if I understand you correctly.

Workers earn their marginal product. There are some whose marginal product does not constitute a living page. In those cases, the government should step in with extra income to supplement their working income. What we should not do is threaten the first person who hires them that they should pay them above what they produce. That would just leave them unemployed.

As for your second point, there is never a reason for people to be unemployed. An issuer of fiat currency can always print and spend such that a country can achieve full employment. It is only ignorance of economics that leads people to believe that there is some sort of financial constraint for the government. The only constraint is real resources.

As for Walmart, I don't have a breakdown of their labor costs but past studies I've done show that Walmart workers, as compared to workers in other industries, capture the majority of the value that they produce. It's just that they don't produce much total value to begin with that produces their low wages. That's not a fault of whoever hires them.