Useful new video from the FT showing the increase in China’s wages and how they are catching up with those in the developed world. China’s labour force as a whole, hourly wage is around 70 per cent of the level in weaker eurozone countries, according to data from Euromonitor International. Has China reached the Lewis Point where the abundance of cheap labour has dried up as workers return to the rural areas? Could be used for the A2 Developing Economies topic.
I posted on this issue last year when Kim Hill (Radio NZ) interviewed Paul Mason – author of Post Capitalism (now out in paperback). Mason makes the point that we are going to live through a long transition from capitalism – the state and the market to post capitalism which is the state, the market and the shared collaborative economy. With technology taking a lot of the jobs in traditional industries in the UK he states that further development in this sector is not the way of creating new jobs. He talks about delinking work from wages by just paying people to actually exist – rather than tax to exist.
Liam Dann (NZ Herald) wrote a piece about Amin Toufani’s presentation at SingualrityU summit in Christchurch where he talked about people in the labour force having to learn, unlearn, and learn again – unlearning should be core competency. However as there maybe many people who will struggle with this concept Toufani believes that a universal basic income (UBI) may need to be adopted – see RSA video below.
Recent events – UBI
- Switzerland held a referendum on a basic income in June this year but it was comprehensively turned down.
- Finland is going to run a U.B.I. experiment in 2018
- Y-Combinator, a Silicon Valley incubator firm, is sponsoring a similar test in Oakland USA.
Why has the UBI become such a popular talking point?
- The automation of a lot of jobs has left people very concerned about redundancy.
- The modern economy can’t be expected to provide jobs for everyone
- The UBI is easy to administer and it avoids paternalism of social-welfare programmes that tell people what they can and can’t do with the money they receive from the government.
- Potentially drives up wages and employees will compare their wages with the UBI.
- Easier for people to take risks with their job knowing there is the UBI to fall back on.
- It takes away the incentive to work and lowers GDP
- UBI – not cheap to administer and would likely cost 13% of GDP in the US
- In the Canadian province of Manitoba where the UBI was trialled, working hours for men dropped by just 1%.
- The UBI would make it easier for people to think twice about taking unrewarding jobs which is a good consequence.
- In the developing world direct-cash grant programs are used very effectively – Columbian economist Chris Blattman.
- In New Jersey young people with UBI were more likely to stay in education
If the U.B.I. comes to be seen as a kind of insurance against a radically changing job market, rather than simply as a handout, the politics around it will change. When this happens, it’s easy to imagine a basic income going overnight from completely improbable to totally necessary.
James Surowiecki – New Yorker – 20th June 2016
A colleague alerted me to the Hays Global Skills Index. It is a complex, statistically-based report designed to assess the dynamics of skilled labour markets across 33 countries.
Seven indicators make up the Hays Global Skills Index
- Education flexibility – this indicator relates to how flexible the education system is to meet the changing demands of the labour market. Low score = more likely.
- Labour market participation – greater participation means more potential workers. Low score = larger pool of workers
- Labour market flexibility – this relates to government regulations around employing people. Low score = less red tape
- Talent mismatch – do the skills of the labour force match those of the jobs that are in the market place? Low score = employers find it easier to get labour with appropriate skills
- Overall wage pressure – skills shortages are an issue if wages are growing faster than the cost of living. Low score = wages are not rising quickly.
- Wage pressure in high-skill industries – Some industries require higher‑skilled staff and makes them more vulnerable to skills shortages. Low score = wages in high-skill industries are growing slower than wages in low-skill industries.
- Wage pressure in high-skill occupations – a rise is wages of high-skilled occupations means that there is a shortage. Low score = wages for high-skilled occupations are rising more slowly than those in low-skill occupations.
In looking at the figure below seven indicators above are given equal weight when calculating the overall Index score for each country. Each indicator measures how much pressure different factors are exerting on the local labour market.
Higher scores mean that a country is experiencing more pressure than has historically been the case.
Lower scores mean that a country is experiencing less pressure than has historically been the case.
Skilled labour market conditions vary markedly in different parts of the world. Grouped into large overarching regions, however, it is possible to discern some headline patterns. The overall Index score increased slightly from 2015, as changes in skilled labour market conditions in Europe and the Middle East (EME) more than offset a very slight loosening in the Americas and Asia Pacific. The annual change in Index scores should not mask the overall position that suggests skilled labour markets in the Americas and EME remain tight relative to the past, while Asia Pacific remains little changed from historic trends. Source: Hays Index
In 1894 New Zealand made history by being the first developed nation to introduce a minimum wage. The Economist had an article on minimum wages and the fact that they might in fact be good for an economy. Most economists believe that a higher minimum wages = the artificial increase in labour costs and therefore lower demand for labour.
Some economists have suggested that minimum wages can increase employment and obviously pay. However if employees have monopsony power as buyers of labour and are able to influence wages they can keep the wages lower below its competitive rate – see graph below.
Two economists (David Carr & Kruegger) found out in New Jersey that when the minimum wage was raised employment in fast-food restaurants actually increased. The Economist suggests that if firms are not reducing the number of their employees with higher minimum wages they must be employing a number of strategies such as raising prices of their goods/services or saving money from reduced revenue. The IMF state that a moderate minimum wage (30-40% of the median wage – see graph) doesn’t have a significant negative effect on employment numbers and may do some good.
Monopsony in the Labour Market
A monopsony occurs in the labour market when there is a single or dominant buyer of labour. The buyer therefore is able to determine the price at which is paid for services. Unlike other examples we have looked at, in this situation we are now dealing with an imperfect rather than a perfectly competitive market. The monopsonist will hire workers where:
Marginal Cost of labour (MCL) = Marginal Revenue product of labour (MRPL)
From the perspective of the monopsonist firm facing the supply curve directly, if at any point it wants to hire more labour, it has to offer a higher wage to encourage more workers to join the market – after all, this is what the ACL curve tells it. However, the firm would then have to pay that higher wage to all its workers so the marginal cost of hiring the extra worker is not just the wage paid to that worker, but the increased wage paid to all workers as well. So the marginal cost of labour curve (MCL) can be added to the diagram.
If the monopsonist firm wants to maximise profit, it will hire labour up to the point where the marginal cost of labour is equal to the marginal revenue product of labour. Therefore it will use labour up to level of Eq which is where MCL=MRPL. In order to entice workers to supply this amount of labour, the firm need pay only the wage Wq. (Remember that ACL is the supply of labour). You can see, therefore, that a profit-maximising monopsonist will use less labour, and pay a lower wage, than a firm operating under perfect competition.
In this situation the power of the employer in the labour market is of overriding importance and the employer can set a low wage because of this buying power.
Germany, the greenest of green countries, and probably the world’s most enthusiastic investor in renewable energy, is finding it very hard to breakaway from coal fired plants. The German government were all set to impose a levy on the coal industry but instead gave a subsidy of 1.6 billion euros to mothball eight coal-fired plants and shut them down permanently by 2023. The main cause of this change of policy was that there was significant pressure from labour unions and local governments in the coal industry. The resistance in the greenest of green countries is indicative of workers and retirees, local economies and communities still depend on coal.
So from Germany to India, strategies to increase the share of renewable energy in the power mix have relied on a coal base. Although governments worldwide are focused on cleaning up energy sources that cause significant emissions, there needs to be some regard for displaced workers from traditional energy sources like the coal industry. Coal miners skills will hardly be transferable to other occupations – structural unemployment.
Nevertheless, coal remains one of the easiest and cheapest form of energy and this is very apparent in India where usage is about 62% of energy needs. India is the second largest consumer after China and ahead of the USA. Also coal consumption is growing about 7 percent a year to power the country’s economic catch-up. As China is going through a growth period similar to Europe many years earlier, their argument will be that European countries polluted the environment by a similar amount
Climate change activists have highlighted concerns of rising temperatures by 2100, however are rising temperatures as significant when you consider the long-term implications of much higher unemployment?
Source: New York Times – 30th August 2016
Currently covering Labour Markets with my A2 level classes and put together an exercise which tests them on calculating MCL, MRPL etc and also showing why MCL = MRPL is the number of workers a firm should employ. There is an exercise for both Perfect and Imperfect Labour markets – see ‘Word’ document. The excel document is a model answer showing the data in a table and a graphical format. Hope it is of use.
Amongst the extensive coverage of the Olympic Games from Rio, the start of the Football season in Europe has slipped under the radar. Michael Cameron’s blog post on footballer salaries was timely and in particular his discussion around the difference between the superstar and tournament effects.
Superstar effects – this is where a player is rewarded with a higher salary than his/her team mates for generating higher revenues for their club.
Tournament effects – this is the situation where wage differences are based NOT on marginal productivity but instead upon relative differences between the individuals. Ultimately each player only needs to be a little bit better than the second best player in order to ‘win’ the tournament.
Michael Cameron looks at the salaries of Ronaldo and Messi and states that it is unlikely that either of these players would generate more than twice as much value as the others on the graph below. Therefore the difference in salaries must be generated by something other than just superstar effects; that is, tournament effects.
In contrast, the difference in average salaries in England between Premier League footballers (£1.7 million) and League Two footballers (£40,350) is likely to be a mix of superstar effects (Premier League footballers generate more value for their employers than League Two footballers) and tournament effects (there’s a limited number of places for Premier League footballers, so slightly worse players end up in lower divisions paying less). See graph below.
One last point: It’s been argued (I saw this argument first in Tim Harford’s book The Logic of Life) that the size of the ‘prize’ for a tournament will be larger the more luck is involved. That is, if the difference between the tournament ‘winner’ and the others is mostly luck, the size of the bonus for working hard to win the tournament must be high in order to sufficiently incentivise the worker to work hard. So, if you buy that the difference in the graph above is mostly a tournament effect, does that mean that the earnings difference between Ronaldo and Messi at the top, and Neymar in third, is mostly down to luck?
Source: Michael Cameron