Doesn't this depend on the nature of the production function over the relevant range?
What would be the consequences of a rise in the minimum wage for fast food employees? Some of the 2nd order effects should not be ignored: e.g. moving towards full cost pricing (crowding-in via a reduction in budget deficits through reduced welfare payments; a reduction in our "collective gut" - in effect, a rise in price = a fat tax - ...)
My point is not that minimum wages must be increased - but that Hayek was offering un-nuanced advocacy.
RL
----- Original Message -----
From: "David Hammes" <[log in to unmask]>
To: [log in to unmask]
Sent: Tuesday, 12 November, 2013 11:34:06 PM
Subject: Re: [SHOE] Hayek, hysteresis and trade unions
Robert,
The movement up the labor demand curve (1st order) cannot cause a shift
outward (2nd order) that is large enough to outweigh the substitution
effect (away from using labor) otherwise we could guarantee (over)full
employment of all resources by just legislating ever-increasing higher real
wages (higher real rental rates, etc.) to all resources.
David Hammes
On Tue, Nov 12, 2013 at 2:10 AM, Robert Leeson <[log in to unmask]> wrote:
> The end of the analysis? Citing Ricardo ("Machinery and labour are in
> constant competition, and the former can frequently not be employed until
> labour rises") Hayek (1942, 127) explained that he was using "the familiar
> Ricardian proposition that a rise in wages will encourage capitalists to
> substitute machinery for labour". If a movement up a labour demand curve
> (forgive the previous jet-lagged in-exactitude) causes an outward shift of
> the curve, this represents an equilibrating force: not included in Hayek's
> analysis. Hysteresis - which failed to dislodge the equilibrium paradigm -
> may be present.
>
> Is there a compelling (as opposed to our collective gut) reason to
> conclude that there would be "still a net unemployment of labor created."
>
> RL
>
> F.A. v Hayek. 1942. The Ricardo Effect. Economica New Series, Vol. 9, No.
> 34
>
>
> ----- Original Message -----
> From: "James C.W. Ahiakpor" <[log in to unmask]>
> To: [log in to unmask]
> Sent: Tuesday, 12 November, 2013 7:05:16 AM
> Subject: Re: [SHOE] Hayek and trade unions
>
> I find nothing wrong with Hayek's argument. He appears here to be using
> "capital" as in classical economics and in the language of the
> marketplace, namely, funds employed in production. See, for example,
> David Ricardo's explanation in his chapter on machinery: "The
> consequence of a rise of food will be a rise of wages, and every rise of
> wages will have a tendency to determine the saved capital [funds] in a
> greater proportion than before to the employment of machinery. Machinery
> and labour are in constant competition, and the former can frequently
> not be employed until labour rises" (_Works_, 1: 395).
>
> Furthermore, the substitution of capital goods or machinery for labor
> should be interpreted as a "decrease in the quantity of labor demanded"
> (a movement along the labor demand curve) rather than the "demand for
> labour will fall." That will be the end of the analysis -- determining
> the consequence of a rise of wage rates. There would then be no need to
> resort to a subsequent deflation in order to make meaning of Hayek's
> point. Indeed, the increased marginal product of labor with the reduced
> quantity employed would also match the increased (real) wage rate.
> Perhaps it's the modern fixation with interpreting "capital" always to
> mean capital goods that creates the apparent confusion.
>
> James Ahiakpor
>
> Robert Leeson wrote:
> > Can someone explain Hayek's (1978) logic:
> >
> > “I have just published an article in the London Times on the effect of
> trade unions generally. It contains a short paragraph just pointing out
> that one of the effects of high wages leading to unemployment is that it
> forces capitalists to use their capital in a form where they will employ
> little labor. I now see from the reaction that it's still a completely new
> argument to most of the people. [laughter]”
> >
> > Statically, Hayek may be right: capital and labour are, in large part,
> substitutable inputs – if labour becomes relatively more expensive, at the
> margin, demand for labour will fall. The time structure of production,
> however, appears to render Hayek’s assertion false. In a standard
> neoclassical model, an increase in capital per worker will, ceteris
> paribus, increase the marginal product of labour and thus the demand for
> labour - which will tend to raise the equilibrium real wage. Since in
> neoclassical equilibrium, the real wage is equal to the marginal revenue
> product of labour (the price of output, P times marginal physical product,
> MPP), the only mechanism by which Hayek’s assertion holds is by adding a
> missing link: deflation.
> >
> > Hayek (1939 [1933], 176, 178) claimed that he was seeking a return to
> “some sort of equilibrium” via labour liquidation: yet a fall in the price
> level (deflation) would increase labour market disequilibrium (liquidation)
> by increasing real wages (W/P) and reducing the marginal revenue product of
> labour (P times MPP) and thus the demand for labour.
> >
> > Is there some aspect of the reswitching debate which may validate
> Hayek's claim; or is there some aspect of Austrian capital/cycle theory
> that provides support?
> >
> > RL
>
>
> --
> James C.W. Ahiakpor, Ph.D.
> Professor
> Department of Economics
> California State University, East Bay
> Hayward, CA 94542
>
> (510) 885-3137 Work
> (510) 885-7175 Fax (Not Private)
>
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