Friday, 23 January 2015

Adair Turner criticises labour market flexibility.

I normally agree with Turner, but not with this article of his entitled “Have we become too flexible?”

His basic point (set out essentially in his final four paragraphs) is that labor market flexibility depresses wages, and lower wages is the last thing we need right now, what with inadequate aggregate demand. OK, let’s think about this.

First, let’s assume that when the labor market becomes more flexible, it also becomes more efficient: that is, output per head rises. Obviously there are possible circumstances where the latter does not obtain: for example if the rules governing the labour market were changed to those that govern a slave labor market – i.e. employers could order employees to do absolutely anything on pain of being flogged – then that would improve flexibility. However, a slave labor market would doubtless not bring all round benefits and probably wouldn’t raise output per head.

Now the INITIAL EFFECT of improved flexibility can easily be that employers pay less to employees for a given type of work. E.g. trade unions have often tried to insist that particular types of work be carried out only by fully qualified employees – union members to boot and at the union wage. And if employers can scrub that union imposed rule and employ unskilled employees instead, then the wage paid for the type of work concerned will fall. And it’s doubtless that point that induces Turner to think that more flexibility equals falling wages.

But that’s actually nonsense and for the following reasons. Suppose EVERYONE’S wage (including the “wage” of employers) is halved. Does that mean anyone is worse off? Clearly not: there’s no affect whatever on the REAL WAGE. The fall in money wages is exactly compensated for by a doubling in the value of money. Everyone is back where they started.

And the same point applies to a cut in money wages for a specific group or groups of employees: the net result is a decline in the AVERAGE money wage paid to everyone. But there’s no reason to assume a change in the AVERAGE REAL WAGE.

So, more flexibility improves output per head. And that output will clearly be shared between employers and employees.

Now let’s make the very reasonable assumption that the EXACT WAY that additional output is split between employers and employees does not change just because a group of employers manage to impose greater flexibility. For an example of a “way” in that additional output is split, the labor market might work in some sort of optimal way: i.e. additional output might be split in a way that maximises GDP. Alternatively employers might have some sort of market power and might be able to grab the lion’s share of that increased output.

Whichever of the latter two scenarios obtains, there is no reason to think that WAY additional output is split is going to change just because there’s an improvement in labor market flexibility.

In short, improved labor market flexibility brings increased output (despite the fact that the INITIAL effect can be a drop in money wages for SPECIFIC groups of employees). And that increased output will inevitably be shared somehow or other between employers and employees.

And there’s nothing inherently wrong with that. To repeat, there may be SPECIFIC CASES where employers (or employees) grab more than their fair share of increased output. But that’s a separate point. It doesn’t alter the fact that increased output stemming from increased flexibility is basically desirable.

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