Sunday, May 17, 2015

Don Boudreaux seems to pick and choose his view on average product and wages depending on what the liberal du jour is arguing

Recently, Don Boudreaux called Robert Reich sophomoric for suggesting that productivity (as the BLS measures it) and real wages should move in tandem. Even an intro student could tell you that wages are determined by workers' marginal product, not their average product! The conclusion:

"It, and it alone, should label him forever as someone not to be trusted to analyze any economic matter, including the economics of minimum-wage legislation."

Strong words coming from a guy that just a year ago (in an op-ed written with grad student Liya Palagashvili) was adamant that we should expect from theory that the market "links pay to productivity," which throughout the op-ed is the same BLS measured average product that Reich is referring to!

My view is this:

2015 Don is right about theory.
2014 Don and Liya are right about empirics.

This combination is a point in favor NOT of the idea that wages are determined by average products, but of the idea that the production function is something like Cobb-Douglas. When accounting for all compensation (not just wages) the labor share stays fairly constant and when accounting for compensation and deflating the nominal figures correctly average product grows with wages (which are equal to marginal product). These are both properties of a Cobb Douglas production function (although Bob Murphy has a really nice post on how other functional forms could produce a divergence between average product and wages that many people allege is happening).

Friday, May 8, 2015

I love this graph from Paul Krugman

I love this graph. When you just graph the monetary base you give the impression that the Fed is (1.) in complete control and (2.) very expansionary. It takes careful argument to walk people back from each of those impressions. Depending on who you're talking to you usually only get halfway through convincing them that the last one is not true and don't make much progress at all on the first one. Market monetarists are weirdos that get that the second one isn't true but maintain adamantly that the first one is true - practically tautologically in some cases. When you put M2 over the base it makes clear why the second one isn't true and strongly suggests that the first one isn't true either (unless you think there was some radical change in preferences on the part of the Fed at the beginning of the recession).