How the reserve army works
David Ruccio
The new jobs report is out and, pretty much as expected, a bunch of new jobs (242,000, to be exact) were created in February and the official unemployment rate remained the same (at 4.9 percent). But workers’ wages actually declined.
What’s going on?
What’s going on is a key feature of capitalism: the reserve army of labor.
As Ben Casselman explains,
There is one downside to a growing labor force: If more people start looking for work there will be more competition for available jobs, holding down wages. Average hourly earnings fell by three cents in February, and the year-over-year rate of growth dropped to 2.2 percent, the slowest pace since last summer.
The fact is, the Second Great Depression created a large pool of potential workers who haven’t formally been part of the labor force but who would be willing to work—to take a job or search for a job—under the right circumstances. In the meantime, while they’re not part of the official labor force, these people do lots of things: they work at home, they work with and for their friends and neighbors, and they engage in a variety of other activities (both legal and illegal). They form part of capitalism’s relative surplus population.
Their existence—as potential members of the official labor force, first-time members of the labor force, or as reentrants to the labor force—puts downward pressure on all workers’ wages.
That’s how the reserve army of labor works: even as the labor force participation rate rises, workers’ wages continue to stagnate and their employers’ profits continue to grow.
There are several components to the RA in addition to the official count of those unemployed. One is as you suggested those who would like to work but are not seeking jobs currently and are thereby excluded from the official count of the labor force. A less obvious component would be those in minimum-wage and low-paying jobs who could and would work in a higher-paying segment of the labor force if such an opportunity became available. The great increase in the number of such low-paying jobs hides the true extent of misery in the labor market even on top of the decline in the employment-to-population ratio. One might also look at the great number of people employed in unproductive labor, including much if not most workers in FIRE for another aspect of the officially hidden RA. In other words, there are effectively hidden components of the RA within the officially employed labor force. For these reasons, a strong push by the Federal government to increase employment in productive fields such as infrastructure could bring about extraordinary gains for the common good.
Wage, profit, and the counter-intuitive labor market
Comment on David Ruccio on ‘How the reserve army works’
The reserve army theory is false because it rests on a false profit theory. The commonsensers’ profit theory says that profit goes up when wages go down. This is true for a single firm. And here is where the error/mistake/blunder comes in: what is true for a single firm is NOT true for the economy as as whole. In methodological terms, the reserve army theory is a fallacy of composition (2014a). In colloquial terms, the reserve army theory falls into the category of flat earth theories which are approximately true for a small part of the picture but false for the full picture.
Until this day, the representative economist has not realized that the overall SYSTEMIC interdependencies establish a POSITIVE feedback loop between the (aggregate) product and the (aggregate) labor market, thus that employment INCREASES when the (average) wage rate INCREASES. This explains why wage rate and employment decline in tandem in the exhibits above (See intro).
The formally and empirically correct employment and profit theory is incorporated in two equations.*
The most elementary version of the correct employment equation reads:
Legend: L total employment, I investment expenditure, W wage rate, P price, R, productivity, rhoE expenditure ratio, rhoF factor cost ratio, sub c consumption good sector, sub i investment good sector.
The correct profit equation reads: Qm = Yd+I-Sm (2014b, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure.
These two formulas are testable, so there is no need for further pointless filibustering about pseudo-explanations.
Among the numerous low-IQ economic theories, the labor market theory (wage down-profit up-employment up and vice versa) is the most idiotic and causes the most social devastations when applied as economic policy.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792
* For details see the post ‘Have data, lack theory’
http://axecorg.blogspot.de/2016/02/have-data-lack-theory.html
and the working papers on SSRN
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665
in particular ‘Essentials of Constructive Heterodoxy: Employment’
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2576867