A Quick Comment on the Jobs Report

It is unfortunate when ideology blinds observers to the obvious

Friday's jobs report showed a drop in the unemployment rate, a growth in payroll employment, and a decline in the average wage.  Many observers cannot understand why the wage would go down when the unemployment rate and pay-rolled employment indicate a tightening labor market.  The reason is obvious.  However, before one can see it, one has to discard the notion that there is an aggregate labor market.

Unfortunately, many observers, especially economists, are blinded by the Marxist notion that there is a great lump of something called labor.  If you assume all labor is homogeneous and all jobs are homogeneous, then a tightening labor market should increase wages, but no such homogeneity exists.  The theory was wrong when Marx advanced it and it is still wrong.  People are individuals.  Each job requires a different set of skills and contributes a different amount to the output of the organization hiring the individual.

It never occurs to observers that as markets tighten, they increasingly draws in individuals who are less productive, less willing to work, and less skilled.  Not surprisingly, those individuals cannot command the same wages as the individuals who are already employed.

What is surprising about this inability to see the obvious is that there has been considerable handwringing about the loss of skills attended with long-term unemployment.  Also, anyone paying attention has noticed that the unemployment rate among the prime working age population has been consistently lower than the unemployment rate of demographic groups more marginally attached to the labor market.  The young and those with less education, as well as those most inclined to just drop out of the labor market, represent a disproportionate share of the available labor.

Also, as the economy expands it becomes profitable to employ people to work on things that would not be worth it if the economy were not expanding. There is also what is referred to as the composition issue.  Put simply, the composition issue is the question of what firms are hiring and whether those firms are in high wage industries hiring for high wage occupations.

For those who love to see a political issue in any economic data, there is also the impact of the incentives our government provides to employers to avoid hiring people for full-time jobs.  Part-timers tend to earn less than full-time employees.  Finally, lest we forget, wages are quite different from employee compensation, and we have enacted legislation that mandates the substitution of health insurance for higher wages in many instances.

So, let the handwringing continue; it is easier than giving up an obsolete theory.