Explaing the Basics of Finding a Job to Economists

[Author's note: this is a comment on an article that ran on FiveThirtyEight five years ago (how the time flies!). I just found the draft laying around in the back-end of this here blog and thought "yeah, might as well post it." Better late than never, and anyway, I don't think mainstream economists have gotten any smarter in the intervening half decade.]

A website ostensibly aimed at intelligent people ran this article the other day, entitled Out of Work, Out of Luck.

As Bill Black says, it's impossible to compete with unintentional self-parody:

Economists aren’t sure why being out of work for more than six months makes finding a new job so much harder.

Really?  How about this: 'cause having a big gap in your employment history looks shitty on your resume.  Who are these "economists" and what planet do they come from?  And when is the last time they actually had to participate in our earthly labor market?

Once they cross the six-month threshold, their odds of finding a job drop off dramatically.

Know why?  The "economists" probably can't figure it out but the obvious reason is that employers (like everyone else) uses rules of thumb.  Unemployed for a couple of months is one thing, but once the magic half-year mark is crossed that gap suddenly raises red flags.  I would guess that employers, like economists, have an unconscious cut-off for acceptable absence from employment at six months.  Just a guess.

In the present, it means the long-term unemployed are, for all practical purposes, no longer part of the job market; most of them aren’t going to find jobs even if the economy improves. That means there’s less “slack” in the job market — a concept my colleague Andrew Flowers explained in more detail on Wednesday — than we might otherwise think.4 It looks like the Federal Reserve has reached the same conclusion: The Fed has been pulling back on its efforts to stimulate the economy, despite continued high unemployment and low inflation, suggesting it thinks the long-term unemployed are gone for good.5

[snip]

“The lesson I take away,” Krueger said in an interview this week, “is try to prevent the short-term unemployed from becoming long-term unemployed.”

How about this for a lesson: we need to come up with something effective to help the long-term unemployed, especially since there are likely to be ever more of them/us in the future...maybe a bailout or access to the Fed's discount window.  Re-defining the structural unemployment rate upwards is obviously not a solution.

And apparently we define slack in the labor market not as the number of people who want a job, but the number of people we can reasonably expect to get hired.  Hmmm...dubious.  I think slack is everyone who wants employment but can't find it.  A Job Guarantee program would address this, but the Fed only creates unlimited funds for banks, not the unemployed.

The Paradox of Profit Pt. 3

Industry is carried on for the sake of business, and not conversely; and the progress and activity of industry are conditioned by the outlook of the market, which means the presumptive chance of business profits...[The] consequences for the theory of business make it necessary to keep the nature of this connection between business and industry in mind. The adjustments of industry take place through the mediation of pecuniary transactions, and these transactions take place at the hands of the business men and are carried on by them for business ends, not for industrial ends in the narrower meaning of the phrase.

The economic welfare of the community at large is best served by a facile and uninterrupted interplay of the various processes which make up the industrial system at large; but the pecuniary interests of the business men in whose hands lies the discretion in the matter are not necessarily best served by an unbroken maintenance of the industrial balance. Especially is this true as regards those greater business men whose interests are very extensive... Gain may come to them from a given disturbance of the system whether the disturbance makes for heightened facility or for widespread hardship, very much as a speculator in grain futures may be either a bull or a bear. To the business man who aims at a differential gain arising out of...disturbances of the industrial system, it is not a material question whether his operations have an immediate furthering or hindering effect upon the system at large. The end is pecuniary gain, the means is disturbance of the industrial system... so far as touches his transactions in this field it is, by and large, a matter of indifference to him whether his traffic affects the system advantageously or disastrously. His gains (or losses) are related to the magnitude of the disturbances that take place, rather than to their bearing upon the welfare of the community.

The outcome of this management of industrial affairs through pecuniary transactions, therefore, has been to dissociate the interests of those men who exercise the discretion from the interests of the community...Broadly, this class of business men have an interest in making the disturbances of the system large and frequent, since it is in the conjunctures of change that their gain emerges.

~Thorstein Veblen, from Theory of Business Enterprise

Economics is a Mankini

To steal a line I heard somewhere recently (don't quite remember where): economic theory is like a mankini: it shows you everything except what you actually want to see. A case in point comes from commenter MikeNY at the Naked Capitalism blog {waves}:

In theory, all else being equal, I can’t argue with the efficiency of comparative advantage (i.e., that the sum of output should be higher).

An analysis of this one sentence can reveal a lot of what's wrong with economic theory. 1) "all else being equal"--of course, all else is never equal in the real world. In the real world you have things like environmental damage (from intensive industries and long supply-chains), over-dependence on single industries (aka Banana Republics) and national security/sovereignty to worry about (import dependence limits political independence).

2) "efficiency"--economists define efficiency in a way that is far different than the normal understanding of the word, and rather naive from a purely technical standpoint. To wit, there is no place for ideas of sustainability in the economic usage of efficiency. Anything that increases the monetary value of the goods produced (amt. of goods X price of goods) is considered efficient, and therefore good, even if the method of increasing the value of goods is itself destructive and unsustainable. It would be like a driving instructor saying that anything that makes the car go faster is "efficient" (i.e. good), without consideration for things like sharp corners or pedestrians.

On the technical side, highway designers discovered long ago that a road operating at "maximum efficiency"--i.e. moving the greatest amount of cars/minute--was also extremely likely to experience a catastrophic breakdown (traffic jam) because when the highway is packed with traffic, just one person making a mistake can cause a huge pile up and completely stop traffic. If, OTOH, a road is functioning below it's max. capacity, someone can drive into the median divider and everyone else can just...go around. So "efficiency" actually turns out to be inefficient, in the real world. It all works great, until it doesn't work at all. This is a fundamental finding of complexity science, imho, and is widely applicable

3) "the sum of the output should be higher"--again, maximizing the value of Number of Goods (sold) X Price of Goods is not anything we should necessarily be concerned with. Numbers like GDP and trade volumes are nothing but proxies for what we are actually concerned with--which I would sum up as quality of life--but they are horrible proxies. It's like trying to gauge your health by looking at how much you're spending on health care (more money spent on health care means more health, no?) instead of looking at what you're resting heart-rate is or calculating your BMI.

 And that's before we even get to the question of distribution that MikeNY rightfully highlights in the next sentence of his comment.

These same logical inanities pop up again and again in mainstream economic theory...which, btw, is not even worthy of the name "theory," scientifically speaking. "To become a scientific theory, an idea must be thoroughly tested, and must be an accurate and predictive description of the natural world."

You're Doing it Wrong: Politics As If Democracy Mattered

Framework for a Grassroots, Transparent, Mobile Web-Based Politics

“...the Left needs to stop being a religion and become a tool in the hands of the people.”

~Iglesias, Podemos Party

Politics in this country, as in most others, is a complete clusterf**k. Despite the passionately contested battles between our legacy parties for political dominance every few years—and the venomous and vile attack ads that inevitably accompany them—most people I know, regardless of their political affiliation, don't seem to feel that they have much affect on national, or even state politics. There is an odd paradox between the heated pronouncements of our politicians, on the one side, and the icy disconnection most people feel toward electoral politics, on the other. The reaction of most folks to even their own party's candidate in any given election is more often than not a disaffected and noncommittal shrug. As we say on the interwebs, “meh.”

Inevitably, if the person is interested in politics at all—and most people are, at least a little bit—they'll give you the old saw about the lesser-of-two-evils. The “he's a bastard, but he's our bastard” mentality. This is actually a politically sophisticated view of things, in that it at least has the honesty to admit openly what our political system has become: evil...with bastards running the show.

The cynicism with which most people now greet campaign promises, knowing that all are inevitably negotiable and prone to change (depending on factors usually involving money and/or matters of personal convenience) just goes to show the utter lack of legitimacy our current political class has acquired in the eyes of most. Our elections have become essentially debates over which of the liars is going to lie the least about what's really going on — which corrupt official is the going to leave the most behind when he or she is done looting the country and selling off the best parts to their friends?

Given that this is the case, it's hardly surprising that the outcomes for most of us have been so bad. [1]

The point, however, isn't to belabor the brokenness and backwardness of the political system as it now exists—or to bemoan the perverse policies (and bailouts) this brokenness has led to—but rather to present another option for how we might organize ourselves politically that avoids entirely this whole morass of big money, special interests, and lesser-of-two-evils defeatism. The idea I would like to suggest we try is a simple one—one that should be familiar, at least in principle, to all Americans—it's called “democracy.” Perhaps you've heard of it...

Imagine a political party with no national platform—a party where local rank-and-file members select candidates from among themselves, and dictate the policies those candidates will support. [2] Imagine a political party whose candidates are transparent; one that guarantees every member an equal voice in shaping the actual policy proposals—and the votes—of their representatives. Imagine a political party whose focus is on empowering the rank-and-file members, instead of the charismatic con-artists we call politicians. Imagine a political party that runs on direct democracy, from bottom to top: open, transparent and accountable.

That, dear friends, is what I am suggesting.

Just a few years ago, this idea might not have been thinkable, but widespread adoption of mobile technology, even among people with lower incomes, makes creating a truly grassroots driven political party—without the need for big money or expensive political consultants—a real possibility.

First I'll describe the basic ideas behind this new structure, and then we'll get to the technological implementation.

In our party, the platforms of the local candidates will be decided by the members through face-to-face and on-line dialogue and discussion, and on-line voting. If someone has a policy proposal, they submit it for discussion, debate, and amendment; if the proposal gathers a preponderance of support from the members, it becomes a local policy position.

Candidates are nominated by the members in their district and have the obligation to submit and vote on legislation only in line with the positions of the local party chapter, once they are elected. In office, the job of the representative is to present and explain legislation up for vote to the members, and, in cases where the proper vote is not clear from the local positions, to have the local party vote on which way the representative should cast their vote in the legislature. Our party will not only allow, but encourage real-time interaction and meaningful participation from the members in the daily work of legislating. This will give members the chance to actually effect the votes of their representatives in a meaningful and transparent way.

The candidates in our party will be contractually obligated to represent only the preferences of their constituencies, regardless of their personal opinions or interests. Any candidate failing to do so will be recalled at the soonest possible time. In this way of doing politics, the political candidate is not the leader of the party, but merely the spokesperson for her or his constituents.

Compare that to both Democratic and Republican representatives, who spend most of their time on Capitol Hill schmoozing with lobbyists and dialing-for-dollars to fund their next campaign, when they'll do their darndest to convince enough voters that they are the lesser evil and to put them back in power for another term...which they plan to spend schmoozing with lobbyists and dailing-for-dollars.

There are two essential ingredients necessary for this plan to work: 1) the dissaffection of enough people with the maneuverings and continual disappointments of both major political parties, and their willingness to join a party that offers first and foremost, a direct voice in the political process, and; 2) the willingness of these people to put in the energy and effort to get as many people involved as possible. For reasons I'll explain a little later, the more people involved in the project, whatever their political views, the more successful this project—this party—will be.

Also, we'll need an app...maybe two. More in a little while.

To be continued....

[1] Full-time jobs are still below their pre-crisis peak, some six years after the crash; overall job numbers have caught up to and surpassed previous peaks only thanks to the BLS's habit of counting anyone working at least one hour of paid work per week as “employed.”

[2] Rather than the other way around, which is how we do things currently: i.e. the candidate selects the rank-and-file (D or R) and dictates the policies to support to them.

The Unquiet Conscience of a Master/Slave

 One of capitalism's greatest coups and most resounding victories has been the successful combination of both the master and slave mentalities within nearly every individual among the working classes of the population. Under the current capitalist system, each person has become their own master—has become their own slave.

Under the old system, the slave was made to work so that the master might have material abundance. The master had ample time to enjoy this abundance, since s/he did not have to spend her/his time working—that was the slaves' job. From the capitalist perspective, this type of system presents a problem in that the amount of goods the master and his/her household can consume is relatively limited, even in the most opulent cases. Additionally, resources devoted to the maintenance of slaves are unavailable for use by the capitalist.

Were there more masters to purchase goods from the capitalist, the slave system would not present such a problem—but more masters would also require more slaves to serve them which would, in turn, reduce the amount of resources available to the capitalist and impede his/her ability to take advantage of this larger market of masters. What to do?

The Capitalist system has solved this problem quite elegantly, by replacing the external, interpersonal master/slave division with an internal, intra-personal one. This has had the result of increasing the number masters, who can purchase the output of the capitalist process, without increasing the number of slaves needed to sustain them, thus leaving resources plentiful and inexpensive for capitalist exploitation.

While this solution has proven quite useful for the capitalists, the effects on the working classes have been less salubrious. Whereas, in the former system the master had ample time to enjoy the material abundance provided by his/her slaves, the new master/slave hybrid does not have the same luxury. Being also his/her own slave, this new type of person is expected to both work like a slave and to have material abundance, like a master. The abundance is in vain, however, as being also a slave, he/she lacks adequate time with which to enjoy the abundance that slavery produces.

The result for the working-class master/slave is an unquiet conscience. Whereas a mere slave knew better than to seek fulfillment in material possessions, the master/slave hybrid is imbued with no such wisdom. S/he has adopted the value system of the master and so seeks fulfillment in material wealth, but is unable to enjoy it due to the constant lashing of the slave aspect of the self—to drive it to work harder to provide more wealth for the master aspect. This disjointed self of the modern working-class human, enmeshed in capitalist society, far from representing an overcoming of the previous slave-based economy, is rather the pinnacle of its ascendancy.

Under the old system, the slaves would sometimes rebel against their masters, turning against their overseers and disrupting the entire system of wealth extraction. The new system is superior in this regard—at least from the point of view of the capitalists—in that revolt against one's own self is infinitely more difficult than rebellion against an external authority. Thus, disruptions are kept to a minimum in the new system of slavery, where every man is his own servant, every woman her own oppressor. 

Stuff of Memory

Each of us, 

eventually

will be nothing more

than memories.

The Earth will reclaim

our material bits

and our immaterial bits will return

to wherever it was they came from--before

they were us.

 Before they were the stuff 

of memory.

Leadership Good, Leaders Bad

Leadership is good.  Leaders are bad.  Cultivate leadership.  Do not seek to become a leader.

A leader is someone who thinks they are in a position to make decisions on behalf of a group.  Leadership is the quality of knowing how to help a group make a decision.

If a group has many leaders, they will accomplish nothing.  Each will want to make decisions for the group as a whole, and thus the whole group will be divided and diffuse and never carry out any of the decisions made.

If a group has many who display leadership, then the group will accomplish much.  They will find making decisions easy; they will move as one unit, one force.  They will discover their collective will and carry out their collective decisions.

Leadership is effective, leaders are a hindrance.  Cultivate leadership, and do not seek to become a leader.

Rebuilding Economics From the Ground Up (or "This Town Needs and Enema!")

The links page of the wonderful Naked Capitalism site today, included this one from VoxEU:

The mainstream economics curriculum needs an overhaul

Yves Smith, as she is prone to do, added her own pointed commentary on the piece: "How about “mainstream economics needs an overhaul”?"

To which I say, indeed. And more than an overhaul even--this rig is due for an entire rebuild, from the ground up.  Here's what I mean by that:

I just finished reading a wonderful little book, Michael Lebowitz's Build it Now! Socialism for the Twenty-First Century.  Highly recommended.  Lebowitz's main contention is that the problem with capitalism--and I would say also with economics--is that is concerned solely with the creation of more capital.  Socialism, on the other hand, is concerned with ensuring that each individual is allowed the possibility of fulfilling their highest potential.  Capitalism, as well as mainstream economics, is concerned exclusively with the production of financial wealth (I might add "and material goods" to that sentence, except that material goods are only considered "good" if they can be turned into financial wealth, else they are seen as waste or loss).  Socialism, by contrast, is concerned with the development of human potential.

Number and money, on the one hand; human development on the other.  Unless and until our economy is based around the latter, we will continue to suffer, as a species.  Unless and until economics as a discipline places human development and the study of how best to achieve it at the heart of its enterprise, our thinking about life will continue to suffer (and the whole planet along with us).

Predictably, and sadly, the suggestions being put forth for changing the mainstream economics curriculum, as presented in the Vox EU article by Diane Coyle, the "Managing Director of Enlightenment Economics" (a job title that should, perhaps, give us pause) include only the following:

• Emphasising dynamics, instability, institutions, and environmental questions; and
• Integrating new results and empirical evidence.

• More exposure to economic history and the history of thought;
• More practical hands-on experience with data;
• Better teaching of communication skills; and
• Some exposure to new developments in economic research. 

• Some economic history, which could be integrated into existing courses, especially macroeconomics;
• An introduction to other disciplinary approaches;
• Possibly ‘tasters’ of the frontiers of academic economic research with potential policy application, such as behavioural economics, institutional economics, and post-crisis developments in financial economics;
• Awareness of some of the methodological debates in economics;

I will leave it to you, dear reader, to guess what "some" and "more" will entail in practice ("More economic history,"..."some methodological issues"), but notice that all of the proposals stay firmly within the framework of measuring (and therefore judging) all parts of our economy on the basis of the same things that the mainstream currently judges them on: namely, GDP, unemployment statistics, interest rates, inflation/deflation, spending and investment...i.e. numbers and money.

A new economics, if anyone is interested in such, must start from the premise that our economic system exists to promote the fulfilment of human potential--to ensure each has the opportunity to develop to their highest possibilities, however they happen to define them.  Numbers and money are means to an end--possible tools that we can use to better accomplish our goal of human development--but once they become seen as the ends in themselves, our thinking veers wildly off track.  The results of such thinking we see around us everyday, in the homeless and jobless, the stressed and unhealthy, as well as in those with wealth who still manage to suffer, despite having "made it."

Lebowitz's book is definitely worth the read, and much cheaper--and more to the point--than a lot of other econ texts currently available. Read it, share it, talk about it, and above all build it.  We need to rebuild economics from the ground up, and this is one place (maybe the one place) to start.

(Mis)Understanding Buddhism and Poverty

The UC Berkeley News Center has an article up now on the university's new course on "Buddhist Economics."  While I welcome any addition to the economics course curriculum that addresses the intersection of economics and ethics, I think the limitation of the course to Buddhism is somewhat faddish and needlessly limiting.

That aside, I also found some curious sentiments being expressed by the course's instructor, one Claire Brown.  Professor Brown has apparently been studying Buddhism (whatever we take that to mean) for six years.  Despite the fact that Prof. Brown is teaching a course on Buddhism and Economics, she does not seem to have actually understood the issues that arise.  Perhaps it is a defect of the journalism and Brown's views have been somehow misrepresented, but I find this unlikely since the views that Brown appears to hold are quite common among Western Buddhists (and liberals generally).

Take this quote that appears directly after the Don't Spend, Be Happy subhead which lays out a number of cogent (and potent) questions that Buddhist thought poses for economic theory and practice:

“In the traditional economic model, it makes sense to go shopping if you are feeling pain, because buying things makes you feel better,” Brown wrote in her class syllabus. “Yet, we know from experience that consuming more does not relieve pain. What if we lived in a society that did not put consumption at its center? What if we follow instead the Buddhist mandate to minimize suffering, and are driven by compassion rather than desire?”

This is a hopeful start; Prof. Brown is, in my opinion, asking the right questions here.  But a throw-away line that ends the article makes me think that she might not have figured out what the solutions to these questions might look like.

Brown assured her students that Buddhist economics wouldn’t require a vow of poverty. “Buddha tried to live in poverty for seven years,” but “it didn’t work,” she said.

Uh…actually the historical Buddha tried extreme asceticism and wrote that off as a blind alley. Asceticism: as in bodily mortification, extended fasting, etc. After Buddha gave up that route (still a popular one on the Indian sub-continent, btw) and adopted the “middle-path,” he and his disciples still spent time every day begging for alms: even in ancient India, that was a sure sign of poverty.

Here’s the thing: if you consume only that which you actually need, restrain yourself from activities that harm other life, and devote your life to easing the suffering of others, you will necessarily be considered poor. You will have given your excess wealth away to those poorer than you, your dwelling will be simple, your lifestyle spare. Not because you’re an ascetic, but because you have your priorities in line.

Buddhism is appealing to Americans largely, I think, because it doesn’t seem to demand any material sacrifice on the practitioner’s part. Americans like Buddhism because they’ve (mis)interpreted its message to be it’s ok to have lots of stuff, just so long as you aren’t attached to it.

For instance, there is a Marriott Hotel heiress living not 50 miles from me that has gained the title of “Lama Tsomo,” despite being a multi-billionaire (I’m looking at you, Linda). Supposedly, she’s trying to become a bodhisattva, whose mission on earth is to end the suffering of all sentient beings. Apparently, however, no one has hipped her to the fact that her 4.1 billion dollars could ease a whole lot of suffering, if only she could find the strength to let it go. But no, she prefers to teach meditation classes since, you know, all suffering is psychological and you just need to be detached and whatnot. Convenient, that.

Western Buddhism’s focus on personal non-attachment and psychological ‘growth’ all too often turns into a “blame the victim” mindset. What’s that you say? You’ve just been laid-off from your job and diagnosed with cancer? You don’t know where your next meal is coming from and you can’t afford to see a doctor? You should try meditation and detachment: nothing is good or bad but thinking makes it so. Your suffering is all in your mind!  Don't blame the government or their corporate overlords for your misery, it's just your karma, embrace it…..which is way easier than actually trying to help someone improve their situation. Also it makes you feel superior, since you’re so much more wiser than those suffering sots.

The problem, of course, isn’t with Buddhism, but rather with academics like Brown who try to sugar-coat it for Western consumption, although I assume they do this unwittingly.

The deal with any religion is this: if you take it seriously as the most important thing in your life, you won’t worry about material possessions and you won’t need to take a vow of poverty. Prioritizing your spiritual development will make it easy to not notice, or care, if you become officially poor. As material wealth is not your goal, so too its absence will not be defeat. But Buddhists like Brown think that you can have your cake and eat it too: the material wealth as well as the (mostly BS) non-attachment to it.

The facts of the matter are that if you are not attached to wealth, wealth will not attach itself to you. If you prioritize your spiritual development, this will not cause you consternation.

De-Coding Economic Propaganda

Raising the minimum wage is in the news again, and with it, lots of economists disagreeing  about what the effects will be.  For every study showing a minor negative effect on employment, another is presented another showing a minor positive effect.  Into the fray has stepped the Employment Policies Institute (EPI) with a dedicated website devoted to educating people about the horror that raising the minimum wage will apparently be.

The top of the website displays a picture of Bill Gates with the caption "why isn't the President listening to this guy?"--not a good start.  Reading further, it only gets worse:

Employees that earn the minimum wage tend to be young, and work in businesses that keep a few cents of each sales dollar after expenses. When the minimum wage goes up, these employers are forced to either pass costs on to consumers in the form of higher prices, or cut costs elsewhere–leading to less full-service and more customer self-service. As a result, fewer hours and jobs are available for less-skilled and less-experienced employees.

Many businesses that pay at or near minimum wage do, actually, have decent profit margins and claiming that increasing wages "forces" businesses to pass on the costs to consumers or reduce staffing is simply ridiculous.  A business could also reduce pay-levels of upper management, decrease dividend payouts, stop buying back their own stock, etc.  The framing also seems worded to encourage the reader to think of a small business, when in fact most people work for large corporations, who are sitting on mountains of cash right now, btw.

Minimum wage increases do not help reduce poverty. Award winning research looked at states that raised their minimum wage between 2003 and 2007 and found no evidence to suggest these higher minimum wages reduced poverty rates. While the few employees who earn a wage increase might benefit from a wage hike, those that lose their job are noticeably worse off.

Notice that it is not mentioned which award this research won or who was giving it out.  And then, of course, winning an award (even a prestigious one that you would feel comfortable mentioning by name) doesn't guarantee the accuracy of your work.  Barack O'bomba, for example, received a Nobel Peace Prize...so I think you see my point.

And as Prof. Sprigs discusses at 6:58 in the video below, studies of the effects of minimum wage have by-and-large either shown no effect or little effect on employment; sometimes that minor effect is positive and sometimes it's negative.  Often, it is statistically insignificant.  Which is what you would expect when looking for the effect of a single variable in a complex, densely inter-twingled system like our economy.

Employees who start at the minimum wage aren’t stuck there. Research found that the majority of employees who start at the minimum wage, move to a higher wage in their first year on the job.

Again, they don't say specifically what research they are referring to, nor do they provide a link to it so that a reader can consider it on its own merits.  It's also worth keeping in mind that most economic "research" was calling for smooth sailing into the indefinite future...right up until the entire financial system imploded.  One should always take economic research with a grain of salt--numbers are easy to manipulate, and perfectly legitimate mathematical operations can provide you with totally illegitimate conclusions.  The numbers, as my old college adviser used to say, never speak for themselves.

Also, having extensive experience in the low-wage sector, I can give you a little hint for understanding that last claim about most workers moving to a higher wage within a year.  Some years back I got a job as a nursing-home housekeeper.  Starting wage--$7.25/hr.  My raise after six months of, by all accounts, stellar job performance--$0.10/hr. 

Just an educated guess here, but I bet the research this website is referring to would claim that my extra dime per hour was "moving to a higher wage."

Here is a much more realistic discussion of the likely effects of raising the minimum wage:

A simple model of monetary stimulus

When the Federal Reserve decides that it wants to increase the amount of currency in circulation, in order to stimulate the economy, its method of accomplishing this is to buy securities from its “primary dealer” banks (normally US Treasury bonds, and recently MBS or mortgage-backed securities). This has the effect of increasing the cash reserves of those banks, who are expected to then lend it out into the economy. In short, whenever new currency is created, it is first used to purchase assets from a private bank, which will then, it is hoped, lend it out into the economy for productive purposes.

This method of economic stimulus, however, has the paradoxical and quite harmful effect of concentrating wealth in the financial sector while depriving the real economy (i.e. the people and businesses that actually make things) of income. The simple reason for this is that all loans made by a bank must be repaid with interest. To the extent that a loan is not entirely repaid, there will generally be a forfeiture of property to the bank to cover their financial losses. In spite of the occasional bad loan, the net effect of adding currency to the economy through interest-bearing loans is to transfer financial assets from real-economy actors to financial-sector actors. A simple model will make plain why this is the case.

Imagine that we have an economy composed of three sectors: the productive sector (real economy), the financial sector (banks), and the government sector. We can imagine the productive sector as itself composed of households and businesses, with currency circulating continually between the two: households buy goods and services from businesses who, in turn, pay wages back to households.

Now, let us suppose that the productive sector of the economy has a monthly GDP of $1000. This means that every month, businesses pay households $1000 in wages which households then spend at businesses, providing the businesses with the revenue to pay out in wages at the beginning of the next monthly cycle. For simplicity, we assume that households spend all of their income every month and that businesses use all revenue for wages. Essentially, in our model businesses and households are simply passing $1000 back and forth between themselves.

Now let's suppose that the population of our economy grows and additional households are created. In the absence of any action from the government (which is the only sector that can add additional currency to the productive sector), the income per household in the productive sector must necessarily decline. If we previously had 10 households receiving $100 a piece per month, and now we have 11 households, each household will now only receive $90.90 per month. If the government desires to maintain wage levels at $100 per month, it will need to add an additional $100 to the amount of currency currently circulating in the productive sector.

In order to do this, the government gives $100 to the financial sector to lend into the economy. Assuming the bank lends the entire amount into the economy, in the month that the government increases the amount of currency, the GDP of the economy will increase by $100 to $1100 (as households borrow and spend the $100 into circulation), providing enough currency for each household to once again receive $100 per month. However, his return to normalcy is short-lived.

Assuming that all loans get repaid, with interest at the beginning of the next monthly cycle, during the next month the GDP of our little economy will have to decrease by $110 (assuming 10% monthly interest, for ease of calculation), in order to repay the $100 principal plus $10 in interest. This means that at the start of the following cycle, the amount of currency will be once again too low to allow incomes to remain at $100 per month. Only now, the situation will be worse than before the government's “monetary stimulus,” since the economy's real GDP will have gone from $1000 to $1100 to $990, giving an average household salary of $90—90 cents less than before the currency increase.  The apparent surge in economic activity and household prosperity is followed quickly by decline for households and businesses alike.

Now, the only way for the household sector to maintain it's level of income and consumption is to once again borrow from the financial sector. Only now, instead of borrowing $100, households must borrow $110 in total from the financial sector to maintain their income levels (which, remember, are determined by levels of spending; businesses can't pay wages to households until households first buy from them). This, of course, only further worsens the problem as $121 must now be repaid to the financial sector at the beginning of the following cycle, leaving only enough money left in the real economy to provide households with a $79.90 monthly average salary.

It should be easy enough to understand why it is that an economic stimulus program that depends on private banks lending new currency into the real economy at interest is a self-defeating and perverse policy choice (unless, of course, one happens to work in the financial sector). The only way to add wealth to the household sector through lending would be to offer the loans at a negative interest rate: that is, loan $100 and only require $90 back. In the above example the government would give the financial sector $1000 to loan into the economy at a negative 10% interest rate, leaving an extra $100 in the economy after the loans had been repaid.

If the goal of monetary stimulus is to increase the average household wage, negative interest loans make far more sense than positive interest loans. Positive interest loans, in fact, make no sense at all.

A brief history of social uplift in Montana...

The first successful uplift movement in Montana was conceived and accomplished by the Vigilantes. Crude in plan and rude in perfomance, there was an uprising which destroyed the last doubt in lawless minds with respect to the efficiency of government “of the people, by the people, for the people”. It demonstrated that absence of law afforded no excuse for crime and gave security to life and property without increase of taxation. In some of the valleys where the Vigilantes rode, less than half a century ago, land now has a market value of as much as one thousand dollars per acre for orchard home uses, but the most profitable crop which ever hung from Montana trees was in the gruesome forms of dead outlaws. Then and there was implanted a respect for the penalties of wrong-doing and a regard for the rights of others which has endured against the insidious influence of wholesale corruption and the most subtle encroachments upon the powers of government, to the present time. It is today more dangerous in the state of Montana to steal a horse than to loot a bank or to bribe a legislative majority, chiefly because the Vigilantes failed to furnish a precedent in justice for bank-looting and legislative corruption as they did for horse thieving; while later administrators of justice, in the approved manner of courts, have regarded precedent and form and ceremony above the purpose of the law and the effect of justice.

~Jere C. Murphy; The Comical History of Montana: A Serious Story for Free People (1912)

The History of Absentee Bosses in Montana

I’ve been reading A Comical History of Montana: A Serious Story for Free People, by Jere C. Murphy (pub. 1912). Here is what Murphy had to say about the situation in Montana at that time, after describing how all of the mines, reduction works, public utilities, courts and politicians of “the Treasure State” were brought under monopoly control:

All this by the power of lawless corporate combination and the thimble-rigging of high finance, exercised by absentee bosses who have gained possession of this inestimable wealth and control of these stupendous influences without honest investment, honest purpose, or honest accounting whatsoever.

Who are these absentee bosses?
The constitute a small group among the conspicuous confidence operators of Wall Street.
How did they get this enormous wealth and these tremendous powers?
They bought some of it from the owners of the property and some of it from law-makers and other officials employed by the public.
Where did they get the money?
That, also, they got from the public.
What did the public get?
The public got watered stock in a generously assorted variety of mining, smelting, water power and public utility companies.
Do the operators pay dividends on these watered stocks?
Only when it suits their convenience and promotes their efforts to unload more watered stocks.

The more things change...

Cooperatives Counteract Contemporary Caste System.

The Western democratic-capitalist system that is now extending its reach to every corner of the globe is often presented, by its apologists, as a humanitarian advance over earlier social systems¹. Unlike, for instance, the Hindu caste system or the European feudal system, democratic-capitalism allows for the social mobility of individuals. The (at least theoretic) ability of people to effect their own social status is claimed to be a major advance in equality over earlier systems of hereditary status determination.

However, our democratic-capitalist system has more in common with the systems that it has replaced than its proponents would like to admit. Let us take the Hindu caste system as an example and see if we can't tease out some of these deep similarities.

Traditionally, Hindu society was divided into four castes², each with a particular role to fill in society. These castes are:

• Brahmin—the priestly caste, responsible for performing religious rituals and perpetuating religious thought.
• Kshatriya—the warrior and kingly caste, responsible for all military matters and for the administration/rule of society.
• Vaishya—originally farmers and cattle-raisers, but now normally associated with trade and money-lending
• Shudra—the working class; their traditional duty is described as serving the other three castes.

In our contemporary democratic-capitalist system, we also have brahmins and kshatriyas, vaishyas and shudras. The names have changed but much else has remained the same. Our contemporary brahmins are the academics and lawyers, those who are given the task of abstract thought and of aligning human action with abstract principle (concepts of “justice” and “equality” having taken the place of “divine will” and statutory law replacing ritual and doctrinal texts). Our kshatriyas are the political class: elected politicians and appointed administrators of the civil service. Vaishyas have been replaced by businessmen and women, bankers and financiers. And our equivalent of the shudra caste, of course, is the working class; which is to say, most of us.

Just as in the old Hindu caste system, our present social system prescribes and proscribes particular types of behavior for each class of people. While the rules regarding what types of activity are permitted to each social class are not made as explicit in our system as they were in the old caste system, they are, nonetheless, there³.

Specifically, only the top three groups are allowed to think. The bottom group, the workers, are not permitted to think but only to act. Of course, this proscription on thought is rarely spelled out so bluntly, but that is message that is given over and over again by the media and society in general: only the thinking of “experts” holds any weight.

Working class people are not expected to have their own thoughts about philosophic or academic topics; if anything, they are expected to parrot the pronouncements of respectable academics and professional intellectuals. In order for a person's intellectual pursuits and conclusions to be taken seriously, they must have a string of fancy letters behind their name. The plumber or baker who holds forth on intellectual topics is roundly ignored, if not laughed out of the room. Legitimacy is reserved for those of the intellectual, academic class.

Working class people are also not expected to have political ideas...unless, of course, they coincide with the reigning ideology of respectable politicians⁴. And working class people are definitely not encouraged to have ideas about how to run a business or a bank. Only the managers and owners of business enterprises are considered to be up to that task.

This is why the co-op movement, therefore, poses an existential threat to the current system on multiple levels. The co-op movement undermines academic economics by placing cooperation instead competition at the heart of it's economic model. It undermines the political class by expanding democracy and democratic practice to everyday life, instead of confining it to biannual elections, as the politicians would have us do (if people experience real democracy at work, they might start demanding it in other areas too!). And the co-op movement directly undermines businesspeople by implementing alternative management and ownership arrangements that eliminate the need for outside owners, investors and managers.

The co-operative movement is the working class daring to think for itself, and that thought has the potential to upset many powerful vested interests. We shouldn't be surprised, then, when the powers-that-be push back against this dangerous idea. Witness the hamstringing of health insurance co-operatives by Obamacare (as detailed in a recent Washington Post article here) as well as the current push in Congress to revoke credit unions' tax-exempt status. When those at the bottom of society's hierarchy begin to encroach on what have been the sole prerogatives of those further up the ladder, those at the top can be expected to do whatever they can to stop that encroachment.

Despite their best efforts, however, the encroachment shall continue.

~~~

There is one other caste that we must not forget to mention: the Dalits, or 'untouchables⁵.” In India, until recently, these people were utterly shunned, confined to live in slums and to perform only the most dirty and demeaning work.

Our Dalits, our 'untouchables', are the homeless. The homeless also are not allowed to think, to theorize, to organize. They are there to remind us shudras that there is always another rung further down the ladder that we could be pushed to. They are there to make us grateful for our place in the scheme of things, lowly though it may be. But just as the existence of an 'untouchable' caste is the shame of the Hindu caste system, and evidence of its corruption and moral vacuity, so the existence of homeless women and men, homeless children and homeless families is the proof that our system is similarly corrupted and morally vacuous.

The caste system in Hinduism has been officially abandoned, although it maintains its hold on many minds. Similarly, our current democratic capitalist system must also ultimately be abandoned. Abandoned for what? For a society that places democracy and cooperation at the center of its ideology and its daily life, instead of wealth accumulation and competition.

1. It might well be argued that our current social system is neither democratic nor, strictly speaking, capitalist. However, lacking better terminology I will refer in this essay to our present social system by the misnomer favored by its proponents.

2. There is much debate about how the caste system actually functioned at various times and places on the Indian subcontinent. Here I present an admittedly simplified version. A summary of the debate can be found here.

3. That the pre- and proscriptions for each class are not made explicit in our society only makes them more pernicious, as they are harder to identify and therefore to resist.

4. Practically an oxymoron these days, it seems like.

5. Historically, the Dalits are a late addition to the caste system and are not mentioned in the classical texts.

Problems with Business Ethics Discourse

I just had my attention drawn to this recent paper by Michael Luca and Georios Zervas, of Harvard B-school and Boston U, respectively, about review fraud on Yelp.com. The conclusions of the authors are rather curious to me and appear to display a deep misunderstanding of ethics and what exactly they are.

 Fake It Till You Make It: Reputation, Competition and Yelp Review Fraud

Conclusion:

As crowdsourced information becomes increasingly prevalent, so do incentives for businesses to game the system. In this paper, we have empirically analyzed review fraud on the popular review website Yelp - both documenting the problem and investigating the conditions under which it is most likely to occur. We show that the problem is widespread - nearly one out of fi ve reviews marked as fake, by Yelp's algorithm. These reviews tend to be more extreme than other reviews, and are written by reviewers with less established reputations.

Our findings suggest that unethical decision making is a function of incentives, rather than of unethical businesses. Organizations are more likely to game the system when they are facing increased competition and when they have poor or less established reputations. For managers, policymakers, and even end-users investigating review fraud, this sheds light on the situations where reviews are most likely to be fraudulent. More generally, this casts light on the economic incentives that lead organizations to violate ethical norms. [emphasis added]

I find the first sentence of their concluding paragraph extremely problematic. First off, what could possibly be meant by "unethical businesses"? A business is a legal structure, a set of relations, i.e. an abstract entity. A business does not make decisions, actual flesh-and-blood people do. An owner or manager makes a decision "on behalf" of the business, but it is still the owner or manager who has made the decision and who is ethically culpable for it. Confusing agency in this way is indicative of the sloppy use of language and poor philosophic reasoning in economics generally.

 Secondly, the existence of incentives to engage in unethical actions does nothing to remove ethical culpability from the agent who engages in those actions. Sure, a restaurateur facing stiff competition has an incentive to leave negative reviews for his competitors, but he also has an incentive to fire bomb their establishments. In neither case does the existence of incentives mitigate the unethical nature of the act. If ethics is to mean anything, it must mean acting on the basis of something other than individual incentives (whether financial, social, etc.).

All businesses have an incentive to game the system in whatever way they can (in this case, leaving fake reviews on Yelp), but only some of them actually do it. The people who choose not to game the system, despite the presence of incentives to do so, are the ones we call "ethical". A person who chooses to game the system and violate the trust of others because of those incentives is someone we call "unethical."

No wonder the state of "business ethics" is in such a shambles: the "experts" don't even know what ethics means.

NSA 2053

[I don't usually write fiction, but the recent revelations of Ed Snowden and others about the massive surveillance apparatus of the National Security Agency, sparked an idea for this dystopian short-story.  The scenario I present below is, perhaps, one response to those who do not think that a blanket spying program poses any problems.]


“Send the young man in.”

The General's voice was gruff but warm, his tone cheerful. He always looked forward to these initial meetings, they were a bit like first dates. But whereas his actual first dates had almost universally ended in uncomfortable silence and thinly veiled rejection, these political 'first dates' never failed to reach a happy conclusion. He had yet to suffer rejection in his official capacity.

The man who was shown into the office was tall and text-book handsome. He had a strong jaw, a full head of chestnut brown hair and intensely blue eyes. He strode into the General's office confidently, as if he owned not only the office but the whole building. His face bore unmistakable signs of irritation. The General smiled and motioned for the man to sit down.

“Please Mr. President, have a seat.”

The President did not have a seat. He glared at the General in silence for a few moments and then erupted.

“You better have a damn good reason for this Mitchell! I've got a million things to do at the moment and I don't have time to be taking bullshit social calls! Unless you want to start a war this evening, I can't imagine what on earth couldn't wait until after the fucking inaugural.”

The newly-elected President of the United States had been shuffled out of a celebratory ball by two severe looking NSA agents half an hour before. They were grim and persistent and they arrived right in the middle of a solo by the President's favorite jazz clarinetist, which added considerably to his irritation.

“General Mitchell needs to see you immediately, sir.”

“What about? Can't it wait?”

“I'm not at liberty to say what about, sir. The General needs to see you now. We've been sent to bring you to his office.”

The President thought he detected the hint of a threat in the agent's tone and he didn't like it one bit. He scowled at both of the agents but neither registered a reaction. They just gazed back at him with dead eyes and repeated their command.

“We need to go now, Mr. President.”

He scowled at them for a few more seconds and thought about getting their names for future retribution, but decided it wasn't worth the trouble.

“Alright. Fuck. Jerry, tell the boys we're moving out.”

The Secret Service agent standing nearest to the President nodded. “Yes, sir.”

The General's office was spacious but spartan. No art hung on the walls. No plants or furniture interrupted the vast expanse of black marble tile that covered the floor, save for the General's desk and two leather chairs that sat facing it. The General was now gesturing to one of those chairs with an outstretched hand, a used car salesman's smile frozen on his face.

“Please, Mr. President, have a seat. I assure you this will only take a moment.”

The General had been expecting a fiery response from the President: it was the response he always got at the start of these meetings. Anger and indignation was what he expected when he had given the order for the President to be brought to his office; indeed, it was what he had hoped to elicit with his exquisitely bad timing. He was not disappointed.

“Please, sir, sit down and let me explain.”

The President glared at the General a few moments longer and then finally took a seat.

“Make it snappy.”

The General took a moment to consider the man sitting across from him, the man who many were already referring to as “the most powerful man on Earth” and “the leader of the free world.” He chuckled silently to himself, savoring the irony of those phrases.

“Some things have come to our attention at the NSA, Mr. President, some rather disturbing things.”

“What kind of things? What are you talking about? I don't have time for this bullshit.”

“Well, Mr. President, it has come to our attention that in 2022, a Ms. Jenny Butler received a pregnancy termination at the Port View Medical Center of Grand Rapids, Michigan. Does that ring any bells for you Mr. President?”

The President said nothing. A man who had been radiating confidence and power just a few minutes before now sat stunned, his mouth slightly agape as the implications of the General's words slowly sunk into his brain.

“You were married at that time, were you not, Mr. President? Quite unfortunate. There is also the matter of your brother, Michael.”

The President just stared at the General, still in shock. Vaguely connected thoughts ran wildly about the inside his skull like squirrels on methamphetamine. Jenny...the abortion...so long ago...if Cindy knew...if the press knew...Michael?...

“He would appear to have a predilection for three-way intercourse. Watching videos of others, I mean, not participating himself. Still, it would be an uncomfortable thing to have to explain to his congregation, don't you agree? I'm not a church-going man myself, but I've heard that they tend to frown on that sort of thing, especially among the leadership.”

The President started to regain his composure. He hadn't risen to the height he had by allowing himself to be intimidated. Ok, he thought, they've got some dirt. It isn't the end of the world

“So what do you want from me?”

“Oh,” the General grinned cheerily, “we'll let you know.”

“And am I to understand that you've been spying on me for my entire political career, that you know all my deep dark secrets? Is that what this is about?”

“No, no, of course not! Don't be ridiculous. No one has been spying on you for all those years. You're beginning to sound paranoid, Mr. President.”

The General's good-natured smile had remained unchanged throughout their conversation, but now it broadened slightly and took on an additional air of sadistic pleasure.

“No, this is just what the boys have dug up in the last few hours. I'm sure you have plenty of deep dark secrets that we haven't found out about yet.”

The leader of the free world and commander-in-chief of the US military seemed to physically shrink in his chair. In the space of a few minutes he had gone from a self-righteous, self-assured world leader, to a beaten, battered dog. He felt like his guts had been ripped out. He felt like there was a noose around his neck.

He stood up slowly and turned to leave without a word. Just as he reached the door of the cavernous office, the General called out.

“Oh, Mr. President...”

The President turned, too traumatized already to fear anything else the General might have to say.

“What?”

“The Air Force drone bases in Afghanistan, the ones you promised to shut down during your campaign...that's not going to work.”

The President stared at the General in silence, then opened the door to leave. The General's cheery, gruff voice followed him out of the office.

“National Security, sir, I'm sure you understand.”

The Labor Market As Ultimatum Game

Introduction: Labor Market as Ultimatum Game

In the standard neo-classical economics that I was taught in college, labor contracts are assumed to be negotiated between parties who have an equal ability to refuse the terms of any proposed contract and walk away from the agreement. Each party to the contract is also assumed to have the same amount of information available to them; for instance, the working conditions and the amount of surplus created by the production process. It follows from these assumptions that each party to the labor contract (i.e. the worker and the employer) will only agree to contracts which provide each with the value of their contribution to the production process. So long as there is competition among both employers and employees, capitalists will not be able to exploit workers (by paying them less than they are worth) and workers will not be able to exploit capitalists (by demanding more than they contribute).

Of course, this description of the labor market sounds patently absurd to anyone who has spent time toiling in the low-wage sectors of our economy. The statement that both parties to a labor contract have an equal ability to walk away from the agreement recently elicited a well deserved guffaw from one of my friends.

An alternative model of the labor market is offered by scholars such as Prof. Ellen Dannin¹, who describe at-will employment as a “dictator game²” in which the employer tells the worker the terms of the agreement and the worker has no choice but to accept³. While Dannin's description is closer to lived reality for most of us, it too, like the neo-classical description above, fails to capture the nuanced real-life interaction of employers and their employees (at least, to this humble observer).

A better description can be had, I think, by conceptualizing the labor market as a variety of ultimatum game⁴. In a standard ultimatum game, two players are given the task of dividing a sum of money between them. The first player (the 'proposer') makes an offer to the second player (50/50, 60/40, 99/1, etc) and the second player decides whether to accept or reject that offer. If the second player accepts the offer both keep the amounts agreed upon, but if the second player rejects the offer neither receives anything. Usually, the game is only played once by any test subject or pair of subjects and both players know what the stakes are (that is, they know what the total amount being divided is). The ultimatum game bears many resemblances to my experience working in low-wage sectors (janitorial, retail sales, food service); however, there are a number of tweaks that could be made to the standard ultimatum game that would make it much more closely resemble what people like myself face when we go out to look for a job.

First, and most obviously, the ultimatum game is only played one time by any given individual in an experiment, while employment negotiations are (for most of us) a 'repeated game.' Not only do workers seek employment at multiple establishments and employers interview multiple job candidates, but the 'ultimatum game' continues even after employment as workers and employers negotiate for adjustments of wages, benefits and working conditions/requirements. Besides being a repeated game, labor contract negotiations also have distinct 'informational asymmetries.' Workers and employers do not have the same amount of information regarding what the actual value of the product or service that the worker will be making or providing is; nor do they have equal information regarding the relative share of revenue that labor is responsible for creating. Workers and employers bargain for shares of revenue created by the productive process, but only the employer knows what that revenue actually is. Contrariwise, employers have no way of knowing for sure ex ante what the individual characteristics of an employee are, and therefore what their productivity will actually turn out to be.

Another difference between the actual labor market and the standard ultimatum game experiment is that players in the ultimatum game do not suffer any personal economic consequences if the game ends in refusal, both players simply walk away in the same economic position that they were before. No one had gained, but neither has anyone lost. In the real world, on the other hand, people seeking employment are often in no position to refuse any offer, however small. This is why my friend laughed at the notion that workers and employers are on equal footing in negotiating labor agreements and why Prof. Dannin has characterized the at-will labor market as a dictator game. Different individual workers will have differing degrees of ability to refuse low proposals, based on things like their accumulated savings, strength of social and familial 'safety nets,' relative slack or tightness in the labor market, and their individual psychologies. Because these factors (and many others) are unique to each individual 'player' in the labor market ultimatum game, generalizations about workers abilities to refuse proposals must be made with a great deal of caution. My preference is to assume some sort of distribution of player's ability to reject low offers, random or otherwise. I have tried to encapsulate these realities into two concepts which I will explain in more detail later: ability to refuse (ATR) and economic effects of refusal (EER).

So, we might conceptualize the labor market (or at least large portions of it) as a modified ultimatum game; one in which players repeat the game indefinitely with multiple other players in an environment of informational asymmetry, and in which players experience differing consequences as a result of games that end in refusal. It is on this basic conceptual framework that I will build in what is to follow.

Differential Ability to Refuse

We start with the last difference between the standard ultimatum game and real life that I mentioned above, i.e. that in the ultimatum game neither party suffers economic consequences for a refusal to accept the offer. The worst-case scenario for either player is that they leave the experiment in exactly the same economic condition as when they entered it. In real life, on the other hand, the refusal to accept an offer of employment can have very real economic consequences for the players involved. Failing to reach an acceptable arrangement with another party in the labor market can lead players to lose not only money, but homes, families and self-respect as well.

I say “can” because the degree to which failing to accept an offer (or failing to make an acceptable offer) will effect a particular player is dependent on all sorts of things, many of which are not susceptible to economic analysis, even of the rather “soft” variety I am attempting here. We can, however, sketch the broad outlines of what conditions, at least here in the United States, we might expect to diminish or enhance a person's ability to refuse any given offer (hereinafter, ATR). Strictly speaking, only workers should have an ATR, since they are the ones who accept or refuse the labor contract offered by the employer. However, we might also speak of the employer's ATR as their ability to refuse to increase their offers as a result of not finding any takers at their current offer level. ATR then, for both employers and workers represents their ability to wait for a better deal to come along.

Many different variables, so to speak, go into an individual's ATR. The one that we will be most concerned with here is the economic effects on an individual of refusal to accept an offer or to make an acceptable offer (hereinafter EER, economic effects of refusal). By economic effects, I mean real effects on an individual's standard of living and their ability to maintain that standard into the foreseeable future. While we would expect an individual's EER to have a relatively strong negative correlation to an individual's ATR, even extremely high EERs can be overridden by other constituents of a person's ATR. As a dramatic example, I offer the experience of my homeless friend Dave (known to the transient community in Missoula, MT as “Crazy Dave”). Dave used to work as a cook at a local restaurant. The sheer quantity of food wasted by the establishment became increasingly troubling to him until one day he decided that he would rather live off the incredible waste of our society than continue to contribute to it. He walked off the job and never looked back (although he has done a fair bit of work since then, just not paid work). For Dave, the economic effects of his refusal to accept any wage offered, dramatic as they were, were far outweighed by the negative psychological effects that he experienced as a result of acceptance. Most of us, however, do not posses David's ethical rectitude, and so our ATR will likely largely reflect our EER.

As a general proposition, we might expect workers to have higher EERs than employers, and low-wage workers have higher EERs than high-wage workers. Labor market conditions will also differentially effect players' EERs. A tight labor market (low unemployment) will tend decrease EERs for workers, since the odds of finding another at-least-as-good offer in a relatively short period of time will be high. Coversely, tight labor markets will tend to increase EERs for employers, since it will be relatively harder for them to find additional players to make their offer to. However, this will only be true for some employers, i.e. those that require a continual stream of revenue to maintain their standard of living. Employers with large personal fortunes may have an EER of zero, regardless of labor market conditions; the same is true for wealthy workers. Accumulated savings and assets are what largely determine a players' EER, since they are what must substitute for an income or profit stream in the absence of achieving a 'successful' ultimatum game outcome (which is why we would expect EERs to be highest for poor workers and lowest for rich employers).

One last thing that seems pertinent to this analysis is that workers and employers face different 'transaction costs' in finding opponents (or, perhaps, partners) with whom to repeat the labor market ultimatum game. While workers generally must seek out potential employers, employers can generally wait for potential employees to come to them. For many low-wage employers, even the simple expedient of a classified ad is unnecessary as unemployed workers will regularly present themselves for consideration whether the business is advertising a vacancy or not. The result is that these kinds of transaction costs will tend to lower the ATRs of workers more than of employers.

Having a high EER means having a low ATR, and having a low ATR means that you will accept pretty much any offer that is made to you. If your bank account is flirting with zero and rent is due in a week, you are much more likely to accept wages and conditions that, in other circumstances, you would not even consider. In the labor market ultimatum game then, having a low ATR means being ripe for exploitation. For all of the reasons stated above, it seems reasonable to assume that, on the whole, a worker will have a lower ATR than an employer in any given iteration of the labor market ultimatum game.

Informational Asymmetries

In the standard version of the ultimatum game, both players are aware of the full amount being divided. This informational symmetry has obvious implications for the outcome of the game. If I am in the position of player two, i.e. I have to decide whether to accept or reject the offer, and I know that the ten dollars being offered to me is only 10% of the total amount at stake, I may reject the offer to punish my opponent/partner for their unfairness. However, if I am offered the ten dollars without knowing the full amount in play, i.e. without knowing whether my opponent/partner was given $20 or $1000 to divide, I will be more likely to accept it, since I cannot judge the “fairness” of the deal.

In the labor market ultimatum game, the total amount to be divided between the employer and the employee is any revenue left over after all of the non-labor operating expenses (inventory, rent, power, licensing, etc.) have been covered. In general, employees and potential employees can have only a weak grasp of what the total amount in play actually is. Because the firm's accounting is not usually made available to employees either before or after being hired, employees are placed at a necessary disadvantage in wage negotiation ultimatum games. Employers will always be able to claim that “we can't afford” increases in wages or benefits and employees will not be in a position to verify, much less gainsay, these claims. The workplace taboo against employees discussing their relative wage levels creates further informational asymmetries, as only employers know what the total wage bill for the firm is, while employees are left to speculate. In the absence of this taboo, workers might be able to piece together some idea of the company's overall accounting, but in it's presence this is almost impossible⁵.

The asymmetries also flow in the other direction, so to speak, although to an apparently lesser degree. Employers, as noted above, have no way of knowing ex ante whether a worker will be more or less efficient than average. Having been on a couple of hiring committees in my day, I know from experience: the description of goods given in a job interview does not necessarily have anything to do with the actual goods that will eventually be delivered.

However, employers can mitigate this problem, especially in low-wage jobs, through routinization and automation; something the fast-food industry seems to have refined to an exact science. Employers can also monitor the productivity of the worker after hiring, which will be discussed below.

Looking for a Job/Employee as Repeated Ultimatum Game

As I said before, unlike the usual ultimatum game experiment, players in the labor market ultimatum game play repeatedly, both with different partners, while in the search mode, and with the same partner, after hiring has occurred. The manner in which this repetition is performed differs for employers and employees. While employees tend to entertain employment offers sequentially (one at a time), employers generally make their offers in batches, interviewing many candidates for a position and selecting from a group of interested individuals. This makes “comparison shopping” easier for employers than for employees and thus serves as another advantage for employers (although this might not be the case in a tight labor market).

Another disadvantage faced by employees is that difficulty in comparing different wage and benefit packages (if one is lucky enough to have multiple options). Suppose a worker is offered three jobs: one with a relatively high wage but no health benefits and inconvenient hours, a second with some health benefits but a lower wage, and a third with an even lower wage but full health coverage and convenient hours. How is the worker to estimate the relative values of the different health plans, or determine how to weigh wages and benefits against being available for family members, friends and children? It becomes a matter of trying to compare apples with oranges, bananas and pomegranates.

Employers, however, do not face this conundrum, since they are the ones structuring the offers. If an employer cannot find any takers for a given wage and benefit package, they can simply increase the wage by a given amount and try another iteration. Once again, we find that informational asymmetries inherent in the structure of the game tend to favor employers over employees.

Repeating the Game After Acceptance

In a sense, the labor market ultimatum game is continually repeated even after employer and employee have reached a mutually acceptable division of revenue. This is true because the effective offer from the employer goes down if pay-raises do not keep pace with inflation, work requirements are increased ex post, or rises in productivity are not reflected in wage and benefit gains. Here again we have informational asymmetries that favor the employer, since workers do not have direct knowledge of the revenue created or their overall contribution to it.

Conversely, an employer's effective offer goes up if pay increases outstrip inflation, if workers successfully “slack off,” or if workers can bargain for a greater percentage of revenue (through unions, exploiting the value of their personal experience to the firm, etc.). In general though, it would seem that employers will be able to get a better idea of a worker's productivity than the worker him/herself, and thus ensure that the employee's remuneration never exceeds their contribution to the value of the finished product or service. Workers, however, have no direct way of observing their own contribution to said value and thus no easy way of knowing what percentage of the value they create that they are receiving.

Conclusion

The labor market can be conceived of as a modified, repeated ultimatum game between employers and employees. Most the of the divergences between the real-life labor market and the idealized experiment, serve to advantage employers and disadvantage employees. As a result, in the labor market ultimatum game it's easier to get away with under-paying than it is to get away with under-working.

1Professor of Law, Wayne State University Law School

2https://en.wikipedia.org/wiki/Dictator_game

3https://papers.ssrn.com/sol3/papers.cfm?abstract_id=524382

4https://en.wikipedia.org/wiki/Ultimatum_game

5Some of these asymmetries, of course, can be addressed through union tactics in workplaces where workers are organized. Trade union representation, however, seems to be decidedly on the decline and, at any rate, cannot ameliorate all of the asymmetries and disadvantages that workers face under the current, capitalist arrangement.