Wages, jobs and The Man Who Shot Liberty Valance

“This is the West sir, and when the legend becomes fact, print the legend” says the reporter to the Governor who is returning to a town for the funeral of a friend,Tom Doniphon, in the final scenes of the 1965 film The Man Who Shot Liberty Valance.

The quote came to the blog’s mind when reading an obituary of the economist, Alan Krueger, just after it had read yet another quote from yet another business leader saying that increasing the minimum wage would increase unemployment. And this wage-unemployment myth is very much part of a modern Western myth just as much as it was part of The Man Who Shot Liberty Valance US western cow town myth.

For readers who don’t remember the film the mild-mannered Governor’s (James Stewart) political career starts after he becomes a hero for confronting and killing the notorious outlaw Liberty Valance (Lee Marvin). Why he is returning to town for the Doniphon (John Wayne character) funeral you can probably guess although if not – watch the film.

Among Krueger’s greatest strengths was to realise that despite the common ostensibly methodologically advanced mathematical approach to theoretical economic models there was little of the detailed and systematic analysis of data which is used to tests theories in the sciences and medicine.

The fundamental myth he attacked, using this approach in conjunction with a colleague, was the supposed relationship between jobs and wages. From the medieval ages landlords were arguing that increasing the wages, sustenance or whatever of serfs would bring ruin. Admittedly the laws of supply and demand did apply as far as wages were concerned after the Black Death when the situation of peasants improved dramatically – if only relatively – after much of the population had died off and labour was short. But generally – except for some other periods in modern history – the pressure came from employers or, in the US slave-owners – and not the wage earners.

Nevertheless, even a casual reader/viewer/listener of or to most Australian media would hear the medieval landlords’ laments being repeated by media, employers, employer associations and conservative governments in Australia. It is after all allegedly axiomatic, simply a matter of the laws of supply and demand and also much easier to just print the legend.

But what Krueger, and a colleague David Card, demonstrated when they interrogated the data was that the standard model was wrong. Needless to say this was as well received as someone suggesting that there were actually not witches who needed to be burnt at the stake and that everybody who disagreed with a particular religious brand would burn in hell forever.

The Economist Krueger obituary said: “In research with David Card in the early 1990s, Mr Krueger showed, through careful data analysis, that increases in the minimum wage did not lead to reductions in employment, as standard models suggested they should. The research, which the authors summarised in a seminal book, Myth and Measurement, published in 1995, drew a scathing initial response. Critics assaulted their motivations, data and analysis until allowing, finally, that the pair had a point.”

Demography in ageing western countries may also lead to shortages of skilled labour – particularly in Australia given neglect of education and the destruction of trade and technical training through de-regulation and privatisation – which AI and automation may not solve.

In an echo of a major policy debate in the forthcoming Australian election – well if the Morrison-Frydenberg belief that eventually it will all be okay is to be deemed one serious side of a debate – The Economist pointed out that: “Markets might not be very competitive at all, some economists reckoned, because it is costly for workers to find and switch jobs, or because large firms dominate markets or collude to suppress pay. In a talk last August, Mr Krueger cited a stream of recent research in arguing that stubbornly weak wage growth is strong evidence that workers have too little bargaining power, and that the economy is suffering as a result. It is wrong to label such dynamics ‘market imperfections’, he mused. As Mr Krueger pointed out, Adam Smith himself thought labour markets worked that way.”

But such an evidence-based approach is the antithesis of the ideologically-based position most opponents of increasing wages in Australia adopt. Readers seeking more information about Krueger’s career should visit the Princeton University website and postings about his tragic early death at Bloomberg or in the Financial Times.

Meanwhile another significant take on his career comes from, of all places, an obituary in the showbiz magazine Variety.

Variety said: “For anyone who shares his fascination with the intersection of music and money, he left behind a gift in the form of a final book — Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us About Economics and Life……The title term was popularized when Krueger ……… gave a speech at the Rock and Roll Hall of Fame almost six years ago, using ‘Rockonomics’ to describe how the music economy intersects with and foreshadows behavior in the economy at large.”

“The book looks at ‘the Superstar Effect, where the top performers in a field receive a disproportionate share of the income, a term first broached by Sherwin Rosen in a 1981 paper. It’s since been found to prevail widely in fields ranging from CEOs to sports and entertainment stars.”

“The concern with a winner-takes-all economy is that the population gets further segmented into winners and losers with little in-between, winnowing the middle class and increasing inequality,” Variety said.

Needless to say in the next eight weeks or so Australians will hear the mindless mantras about wages being repeated again and again. Many of them will nevertheless wonder why CEOs are doing so well (even when they fail legally, morally or financially) and why they are feeling so much pressure. Alan Krueger knew why and proved it from hard data. But the ‘fact’ has become legend and is still being spruiked and printed.