Economists Do It With Models

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Some Thanksgiving Wishful Thinking, Labor Markets Edition…

December 2nd, 2013 · 9 Comments

I feel like I’m going crazy- this is backwards, right?

I’m pretty sure I was taught that one of the side effects of strong unions is that they discourage hiring, both because unions tend to lobby for above-market wages and because companies are hesitant to hire employees when they know that said employees will be difficult to get rid of. If you don’t believe me, ask France.

Update: In related news, this exists. Also, if you want to noodle on the pros and cons of “right to work” laws, I suggest you look into how to become a member of the Screen Actors’ Guild.

Tags: Markets

9 responses so far ↓

  • 1 Cory // Dec 2, 2013 at 9:10 pm

    In a Wage Setting/Vacancy and Beveridge Curve model, the strength of a union would very much indeed create unemployment. A rightward shift of WS (by unions increasing their bargaining power) would push down vacancies which pushes UE out on the BC.

  • 2 Jeff // Dec 2, 2013 at 9:23 pm

    The key question is whether unemployment is a supply-side effect or a demand-side effect. (Obviously it is both, but it will be more sensitive to one of the two.)

    If the number of economic transactions is limited by the ability of supply to meet demand, then you would expect unions to decrease the supply that is being created and therefore to limit growth while also making companies afraid to hire.

    If the number of economic transactions is limited by the ability of demand to meet supply then unions will increase wages at large companies while also possibly slowing large companies down enough for small companies to catch up and increase the total need for labor (both of which contribute to higher wages expressed as a percentage of revenues). Higher wages as a percentage of revenue allows for the possibility of revenues going up with less requirement for money printing, taxing and spending, return on asset-based spending, and savings reduction spending to balance the fundamental equation of economics – money spent = money received from expenditures.

    France has a big potential problem on its hands in that it has forgotten the fundamental rule for economic growth established by England in the 15th century. Creation of new local industries requires at least some border control. It can keep wages high, but unrestricted imports, it doesn’t have the ability to keep local production going to meet that demand, which causes other problems. We will have to see if those problems turn out to be larger than the problems keeping Indonesia Indonesia or not…

  • 3 Norman Maynard // Dec 3, 2013 at 10:15 am

    Jeff, you’re right that we have models that can go either way in terms of the causality. Jodi is correct that, in such an environment, it’s best to look at the data. And the strong message of the data is that the raw correlation runs the other way. We can argue about causation and other factors, but if we’re plotting a line through data the answer isn’t complicated. Jodi’s right.

  • 4 Vinny // Dec 21, 2013 at 10:39 pm


    Can you give an example of such data? I would think it’s highly situational.

  • 5 The Skeptic // Jan 4, 2014 at 11:36 pm

    Perhaps you’d like to pair this particular graph with one tracing the relationship between the strength of unions and a societies standard of living or average wages.

  • 6 Vinny // Jan 11, 2014 at 6:12 pm

    Good point Skeptic. I can’t stop thinking of how much the experience of the Nordic countries really calls this graph into question, or at least the implications people are supposed to draw from it.

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