Tuesday, May 20, 2014

Analysis of Morgan Warstler's proposal

I promised to look into the implications of Morgan Warstler's "GI/CYB" proposal with the information transfer model. You're probably familiar with him and his style if you're a regular econo-blogger or econo-blogo-commenter. And I must apologize to Warstler for a couple of comments of his that fell in the spam folder (that I fished out).

Fitting the information transfer model to the empirical data (see here) comes up with a system where economic shocks are realized as job losses instead of nominal wage cuts -- the classic sticky wages model. Total employment (E) is roughly constrained by the function P ~ NGDP/E where P is the price level.  Another way to say that is that RGDP/E = constant. This is basically Okun's law.

Morgan's proposal should essentially lead to a system where those shocks should be realized as nominal wage cuts instead of increased unemployment, at least in the simplest version of the model. To that end, I used the information transfer model to come up with the size of those nominal wage cuts. I still assumed total employment was constrained by P ~ NGDP/E. Anyway, here are the nominal wage cuts we would have experienced over the course of the post-war period:


It basically follows through in the math that the level of unemployment converts rather directly into the average size of the nominal pay cut. Instead of the Great Recession unemployment, we all would have all taken a 6% pay cut.

13 comments:

  1. Would you expand your methodology pre-1947/-1960? http://www.measuringworth.com/ has good data for the US and UK.

    You may be pleased with the 1920s-1930s MB/NGDP relationship to rates. The handoff from reserves to currency in the 1940s is also a topic ripe for exploration.

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    1. I replied to this comment on the previous post ... (here's a cut and paste)

      There appears to be a change for the US and UK around the time of WWII. I looked at it as a "phase transition" in the US:

      http://informationtransfereconomics.blogspot.com/2013/08/the-liquidity-trap-and-information.html

      And as a bout of wartime hyperinflation:

      http://informationtransfereconomics.blogspot.com/2013/09/exit-through-hyperinflation.html

      Here are some looks at the UK over 150 or so years:

      http://informationtransfereconomics.blogspot.com/2013/11/the-long-run-in-uk.html
      http://informationtransfereconomics.blogspot.com/2013/11/the-labour-supply-part-2.html

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    2. Phenomenal! Try this lagged relationship (even better with 1930s added) for phase transition. Debt could be anti-AD.

      http://research.stlouisfed.org/fred2/graph/?g=Bip

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  2. I got from his proposal that he wants to use it to eliminate most other forms of social assistance ("all non-Medical welfare") and force the labour force participation rate higher (as per his example, get that 74 year old woman in a wheelchair back to work doing telemarketing for $1 per hour).

    In your analysis, are you modeling those higher labour force participation rates, or are you just modeling unemployment rates? If you aren't modeling higher labour force participation rates, what happens if you do?

    Thanks!

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    1. I spent more time looking at his proposal, and it fell apart as soon as I thought about the people I know who don't want to work. One thing many of them ~do~ like is conversation... and conversation is a legitimate job, as evidenced by psychologists, telephone psychics, chaplins, etc. A "befriending service" is a legitimate business, currently used mostly by the aged and isolated... but who's to say we don't all need it? I guarantee you it'd quickly become the most posted and replied-to job among people who don't like work and are already on some form of social assistance.

      In other words, nothing much would change.

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    2. Yeah -- I understood his general motivation. I imagine the same kind of people who would oppose taxes to pay for social insurance would equally oppose the idea of taking a wage cut to allow other people to stay employed.

      I thought the question was interesting from a separate perspective -- why do we have involuntary unemployment instead of nominal wage cuts?

      The results from the post above suggest it's a coordination problem (getting everyone to take wage cuts) coupled with loss aversion (no one wants to take wage cuts).

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    3. That ~is~ an interesting question. It seems like a weird thing to be more loss averse about taking a wage cut than getting laid off. I wonder what the psychology behind that is. Does it vary from culture to culture?

      From the other side, the company side, I've got anecdotal experience that might be interesting:

      I work in a project-driven industry full of small businesses, where large layoffs are common when work dries up and hiring sprees happen when new projects come in. Over the past couple of years, the company I'm at now has gone from 40 employees to 180 and then back down to 80. That's typical of the industry.

      So why don't they simply lower everyone's wages instead of letting them go? The motivation I've seen most often is holding on to key employees. There are some people who know the production process inside-out. If you keep them, you can ramp production up very quickly when a new project comes in. If you don't, everything is a mess until the new hires can sort themselves out. That's extremely costly. Those key employees are in high demand, so if you lower their wages, they will be able to find a new job very quickly.

      The opposite is the case with the least valuable employees. So if the company lowered wages across the board, it would be left with all its button-pushers and lose all its wizards.

      When times are good, the button-pushers can usually find work at other companies who recently got a new project and are ramping up. In between, they're involuntarily unemployed.

      That's the view from one corner of one industry. I'm not sure how universal it is, or exactly which economic terminology would be used to describe it, though.

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    4. FWIW, about the labour force participation rates going up: If we're at 65% participation now, would an increase of employment to near 100% mean a 35% drop in wages, or a 54% drop in wages?

      Thanks again.

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    5. Your description would go along with what I wrote in the link about "piece work":

      http://informationtransfereconomics.blogspot.com/2014/02/sticky-wages-information-transfer-and.html

      Regarding the other question, these wage cuts are for the currently employed population -- there is no adjustment that would need to be made to account for the labor force size.

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    6. I'll check that other link out; thanks.

      So if 80 million or so people were suddenly added to the labour force in the USA (labour force participation rate goes from 65% to 99%), wages for current workers wouldn't go down more than the 5-10% in your graph? That seems odd. I would've thought that would put more downward pressure on wages than that.

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    7. 80 million people can't be added without a massive change in NGDP, the monetary base or the price level.

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    8. Ah. So would I be correct to guess that the framework you're using depends on all else being more-or-less equal?

      Thinking through my anecdotal experience a bit more, I realized that the smaller companies I've worked at with less complex workflows (under 20 people, projects that can be completed with minimal coordination), the "tall weeds" approach has been more common: If you're an expensive employee, you're the first to go when work gets slow. They've also been the companies that've been most likely to ask workers to scale back hours (though generally not wage rates, so far as I know).

      Which is to say, I suppose, that "it's complicated".

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    9. This particular calculation is dependent on NGDP, the base and CPI having their historical relationship. I could easily see the impact of adding 80 million people to the labor force (massive deflation would result) ... The counterfactual just needs to be fully specified.

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