Labour skills and sticky wages: Is the problem worse now?

The mass unemployment in the 1930’s has sometimes been put down to “stick wages”. Fundamentally, the value of labour fell but the price didn’t – leading firms to cut back on employment at a faster rate than would have been socially optimal.

Since then, wage stickiness appears to have eased to some degree: Unions are less powerful than they were, and employees have a greater level of understanding about why firms may have to cut nominal wages – leading to less of a psychological impact (Note: These statements are just conjecture – if you don’t agree with them feel free to state in the comments, we could really do another post on it :) ).

However, does that mean that the underlying issue of labour market adjustment has abated? The short answer is no.

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Another sign that our labour market is surprising?

So the unemployment rate was on the low side of expectations. However, as I and others have said – hours worked collapsed, so surely this is the first sign of worse to come.

However, lets think about this a little more. Falling hours worked only really matter (in a welfare maximising sense) if people want to work more hours. Fundamentally, we need to see underemployment ticking up. But is that the case?

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Supermarket Brands: Killing in the name of?

I read with great interest that Progressive considering killing all of their supermakret brands and turning all of their stores into Countdowns.

Given that supermarkets typically differentiate their offerings via their different brands (e.g. Pack’n Save is cheap, New World is high quality etc..) this is quite an interesting move. If this does go ahead it will be quite interesting to see how they compete-will their be one generic offering or will we see “budget” Countdowns and “high end” Countdowns depending on the location and what rival supermarket is in the vicinity?

Time will tell.

Fiscal stimulus and leakage

On this fine Waitangi day, Marginal Revolution mentions that Ireland is actually cutting spending in the face of a deteriorating economic climate.

Tyler Cowen gives a few reasons why this may be the way to go for Ireland:

A few things are worth noting.  First, a small open economy has a harder time making fiscal stimulus work.  Second, a small open economy often has to worry more about its credit rating.  Third, a small open economy offers a tougher testing ground for macroeconomic “field experiments” because there are more confounding external factors

Looking solely at the first point, it is “harder to get the stimulus to work” because of “leakage”. Fundamentally, some of the stimulus will lead to an increase in production overseas (through rising imports) rather than greater production at home.

This matters because the purpose of the stimulus is to increase “domestic production” to increase employment to its natural rate.  If all the stimulus does is increase imports then it doesn’t do this.  (Although I would note that if it did solely increase imports, the exchange rate would depreciate, which should lead to some substitution from imports to domestic production)

For small open economies the idea of a fiscal stimulus may become a “prisoner’s dilemma” where all the countries are best off if everyone stimulates but there is the potential for an individual country to “free-ride” by taking the stimulus from overseas and not stimulating themselves.  In this case, each country will individually choose not to stimulate – and they will all end up in a situation where output is stuck below potential (this has been mentioned before by Paul Krugman etc – does anyone have the links, I can’t find them :( )