this is a dumb question, so talk to me like I am not really bright

[Faith-manor]

3 minutes ago, Pam in CT said:

re ethics of the Hidden Hand

According to Adam Smith, if labor markets contract, employers will pay more.  Workers have withdrawn from the labor force: that is, COVID disruptions have precipitated a shift in the supply curve for labor.  Ergo: the "price of labor" -- what we call wages -- should go up.  A *lot* more if necessary, as much as it takes for the markets to come back into equilibrium. 

Yet that is not what we're seeing -- we're seeing a whole lot of handwringing about "shortages," and some amount of kvetching about how emergency COVID benefits reduce "motivation" even 5-3 months after those benefits have expired, and some amount of employer bonuses - which are not wages, and in Smith's world would not bring the market to a sustained equilibrium, only another just-temporary shift in labor supply.

In fact: the Hidden Hand solution to the labor shortage problem is really not even part of the discussions we're having about it. What Smith would tell us is THE solution, THE mechanism to resolve the labor shortage problem - THE mechanism to lure folks on the COVID-cautious fence back in, or to enable formerly-working mothers with new COVID-precipitated childcare responsiblities/unpredictabilities to pay someone else to manage those responsiblities, or to enable Sandwich-squeezed women suddenly caring for elderly parents to pay someone else to do so, and etc, rising wages rippling throughout the economy until the market clears like Smith would say is supposed to happen.

That's not on the table. Employers are very very very loathe to increase real wages (or make other more structural changes to part-time/full time hours, or predictable schedules, or benefits or other aspects of labor compensation that is outside Smith's microeconomic model).  At at the macro level, the US economy has evolved to the point that many, many jobs are of a contingent, part time, provisional nature that would (to my reading of Smith) be unrecognizable to him. And US policymakers of both parties have *accepted* that transformation of the labor market, such that the solution that would be *absolutely obvious* to Smith -- if real wages aren't sufficient to lure workers in, it's time for real wages to rise -- is not even a meaningful part of the debate.

I totally agree. 

[TechWife]

35 minutes ago, Pam in CT said:

re ethics of the Hidden Hand

According to Adam Smith, if labor markets contract, employers will pay more.  Workers have withdrawn from the labor force: that is, COVID disruptions have precipitated a shift in the supply curve for labor.  Ergo: the "price of labor" -- what we call wages -- should go up.  A *lot* more if necessary, as much as it takes for the markets to come back into equilibrium. 

Yet that is not what we're seeing -- we're seeing a whole lot of handwringing about "shortages," and some amount of kvetching about how emergency COVID benefits reduce "motivation" even 5-3 months after those benefits have expired, and some amount of employer bonuses - which are not wages, and in Smith's world would not bring the market to a sustained equilibrium, only another just-temporary shift in labor supply.

In fact: the Hidden Hand solution to the labor shortage problem is really not even part of the discussions we're having about it. What Smith would tell us is THE solution, THE mechanism to resolve the labor shortage problem - THE mechanism to lure folks on the COVID-cautious fence back in, or to enable formerly-working mothers with new COVID-precipitated childcare responsiblities/unpredictabilities to pay someone else to manage those responsiblities, or to enable Sandwich-squeezed women suddenly caring for elderly parents to pay someone else to do so, and etc, rising wages rippling throughout the economy until the market clears like Smith would say is supposed to happen.

That's not on the table. Employers are very very very loathe to increase real wages (or make other more structural changes to part-time/full time hours, or predictable schedules, or benefits or other aspects of labor compensation that is outside Smith's microeconomic model).  At at the macro level, the US economy has evolved to the point that many, many jobs are of a contingent, part time, provisional nature that would (to my reading of Smith) be unrecognizable to him. And US policymakers of both parties have *accepted* that transformation of the labor market, such that the solution that would be *absolutely obvious* to Smith -- if real wages aren't sufficient to lure workers in, it's time for real wages to rise -- is not even a meaningful part of the debate.

Agree entirely. There are quite a few people/organizations/companies/politicians/policymakers who simply have their heads in the sand. If only we, the people, would comply and make their jobs easier & maintain their profits by keeping things the same. snark. I'm sensing more and more of the "let them eat cake" mentality coming from those promoting corporate interests.

It does seem to circle back to ethics determining priorities. What do we really value? Are organizations/companies/policy making arms/political bodies willing to accept that things are different and act accordingly? The events of the past couple of years have had a profound effect on the culture & psyche of our country. A great deal of emphasis has been placed on "getting back to normal" and "reopening the economy" without any realization that by necessity, what is "normal" has changed and therefore what it takes to "reopen the economy" must change as well.

[TechWife]

dp

Edited December 7, 2021 by TechWife

[Bootsie]

44 minutes ago, prairiewindmomma said:

Under the section pricing power, there is a bit of discussion about the premium good pricing strategy: https://www.fool.com/investing/general/2015/10/29/4-reasons-nike-inc-has-such-a-high-profit-margin.aspx

With direct to consumer sales, the amount Nike gets per shoe is also higher: https://solecollector.com/news/2014/12/how-much-it-costs-nike-to-make-a-100-shoe

https://www.lvmh.com/news-documents/press-releases/lvmh-delivers-record-first-half-performance/

LVMH is also focusing on direct to consumer. This is a general report on all of their operations. Look at their bag and hand good numbers.

What I am trying to say, apparently badly, is that there is a portion of the luxury market that is not very price sensitive. I think this is a new trend, over the last ten years, and it’s turning some conventional wisdom on its ear. People aren’t buying a good in the traditional sense. They are buying brand equity.

 

Yes, with direct to consumer sales the amount that Nike gets per shoe is higher.  But, that does not say anythning about the price sensitivity of customers.  If you cut out a cost of an intermediary, the amount per shoe is going to rise.  The important thing is the portion--is it really large enough to make an impact and "very price sensitve" is also relative.  I do not see that there is any indication that the Law of Deman is being turned on its ear or that people aren't buying in the traditional sense.  Brand equtiy has been around for a long time.

[Pam in CT]

The clearest evidence that the regular labor market is not responding like Adam Smith would say it's supposed to, is the number of regular nurses who are quitting their hospital jobs and then turning around to become "traveling nurses" at 3x the pay, often returning to those same hospitals that were unwilling or unable to simply pay them more in the first place.

(from WaPo)

Quote

..The continued pandemic; an aging, burned-out and retiring nurse workforce; the return of hospital services that were shut down last year; and a shortage of foreign recruits and nursing students have combined to make travel nursing one of the most critical and sensitive issues in health care.

.Hospitals accuse the travel companies of price gouging. The companies say they are responding to the laws of supply and demand in an increasingly mobile work environment. Nurses’ unions say there would be no shortage if nurses were adequately paid and afforded better working conditions.

 

The one area of agreement is that health-care staffing is suffering from fundamental problems that must be addressed for some measure of balance and efficiency to return...

...[Former hospital staff, now traveling nurse Alex] Stow’s hourly pay is near the median of $99 an hour for critical-care travel nurses at the moment, according to Barry Asin, president of Staffing Industry Analysts, a research firm that focuses on the contingent workforce.

But a quick search turns up ads for even higher pay: $9,486 per week for ICU nurses, posted by Aya Healthcare, one of the industry leaders; nurses with cardiovascular experience can make even more. ...

...In contrast, a full-time registered staff nurse earns an average of just less than $74,000 per year, according to a 2018 report from the Department of Health and Human Services.

 

With respect to the Hidden Hand and its ethics...

Quote

The nation’s largest nurse union maintains that hospitals are suffering the consequences of the just-in-time staffing model they created to cut costs by keeping the number of full-time staff nurses as small as possible.

 

“This current staffing crisis is one of the hospital industry’s making,” Deborah Burger, president of National Nurses United, said in a written statement. “They need to take a long hard look at how their treatment of permanent staff and exploitation of the nursing ethos has inevitably led to this unsustainable model of staffing hospitals.”

There is an American reflex to dismiss such statements by advocates by any organized labor segment *   as entitled kvetching.  That is a value judgment.

 

But here we are: there is a demonstrable shortage.  Bad news for the Hidden Hand: the hospitals haven't raised regular wages.   There is what economists call a "market failure."  (Perhaps due to "barriers to entry," like COVID-driven reduction in visas to foreign-trained nurses, or how long it takes for new nurses to be trained.)

But OTOH good news for the Hidden Hand: the market has yielded up a solution: a mechanism whereby nurses can be quickly and temporarily deployed as needed where needed.  (This reduces what economists call "stickiness" in either demand or in this case supply (of labor) -- it is costly for workers to pick up and move around, so the fact that average nursing salaries in CT may be a bit higher than in Idaho, is not sufficient to induce Idaho nurses to move here.)

If we lived in an Adam Smith world, this would be celebrated!!  Nurses are getting what they "need" for their self interests to be met; and hospitals are getting what they "need" for their self interests to be met.

But rather than celebrating this awesome example of markets working as they're supposed to... we go to "price gouging."

 

"Price gouging" isn't a thing in Adam Smith's ethical world.  The "fair" price is the "price the market will bear."  If that's $10,000/week for an ICU nurse in the time of COVID, or $50/gallon in the time of an evacuation, or $10K/generator in a sustained power outage... that's the correct and ethical price for that moment.

Adam Smith's micro analysis also doesn't  get to any sort of macro surround; it assumes as a premise "perfect markets" with no barriers to entry (like nursing or teaching credentials, or the cost of ICU wards); the entire field of macroeconomics developed later. 

And it is in that bigger macro surround that the ideas that raising wages => inflation and inflation is BAD -- the precise frame that takes the Adam Smith micro solution off the American macro discussion -- came to inform the national consciousness.

 

 

 

 

 

 

 

 

( *  with the possible exception of police & fire unions )

 

[Bootsie]

46 minutes ago, Pam in CT said:

re ethics of the Hidden Hand

According to Adam Smith, if labor markets contract, employers will pay more.  Workers have withdrawn from the labor force: that is, COVID disruptions have precipitated a shift in the supply curve for labor.  Ergo: the "price of labor" -- what we call wages -- should go up.  A *lot* more if necessary, as much as it takes for the markets to come back into equilibrium. 

Yet that is not what we're seeing -- we're seeing a whole lot of handwringing about "shortages," and some amount of kvetching about how emergency COVID benefits reduce "motivation" even 5-3 months after those benefits have expired, and some amount of employer bonuses - which are not wages, and in Smith's world would not bring the market to a sustained equilibrium, only another just-temporary shift in labor supply.

In fact: the Hidden Hand solution to the labor shortage problem is really not even part of the discussions we're having about it. What Smith would tell us is THE solution, THE mechanism to resolve the labor shortage problem - THE mechanism to lure folks on the COVID-cautious fence back in, or to enable formerly-working mothers with new COVID-precipitated childcare responsiblities/unpredictabilities to pay someone else to manage those responsiblities, or to enable Sandwich-squeezed women suddenly caring for elderly parents to pay someone else to do so, and etc, rising wages rippling throughout the economy until the market clears like Smith would say is supposed to happen.

That's not on the table. Employers are very very very loathe to increase real wages (or make other more structural changes to part-time/full time hours, or predictable schedules, or benefits or other aspects of labor compensation that is outside Smith's microeconomic model).  At at the macro level, the US economy has evolved to the point that many, many jobs are of a contingent, part time, provisional nature that would (to my reading of Smith) be unrecognizable to him. And US policymakers of both parties have *accepted* that transformation of the labor market, such that the solution that would be *absolutely obvious* to Smith -- if real wages aren't sufficient to lure workers in, it's time for real wages to rise -- is not even a meaningful part of the debate.

But with a switch in the supply curve, the equilibrium is not back where it was before.  These changes do not happen immediately, there is adjustment period.  The economic evidence points to rising wages in the market, maybe not as much are as quickly as some would like, but the evidence is that it is happening.  The economic evidence points to a lower quantity, also, which is exaclty what theory would suggest woud occur when their is a decrease in supply.

COVID has not only changed the risk assessment on the part of workers; it has changed the risk assessment on the part of business owners.  The risk of having to close doors for a while or operate at reduced capacity has increased; the risk of not being able to get items in the supply chain has increased.  Just as workers want to be rewarded with higher wages for their added risk, those putting their capital in a business want to be rewarded.  

[Arcadia]

35 minutes ago, prairiewindmomma said:

LVMH is also focusing on direct to consumer. This is a general report on all of their operations. Look at their bag and hand good numbers.

What I am trying to say, apparently badly, is that there is a portion of the luxury market that is not very price sensitive. I think this is a new trend, over the last ten years, and it’s turning some conventional wisdom on its ear. People aren’t buying a good in the traditional sense. They are buying brand equity.

 

It has always been brand equity for Asians. The goods have to hold their social status and auction value. LV counterfeit goods has been around since before I was born in the 70s. We would go to their boutique to buy. I’m familiar with LVMH since many of my favorite brands are owned by them. What I read was LV hires Romanians to make their handbags in the rural areas 
https://amp.theguardian.com/business/2017/jun/17/revealed-the-romanian-site-where-louis-vuitton-makes-its-italian-shoes
“Exclusivity did not, however, make Louis Vuitton the 20th most valuable brand in the world. In the 1980s the company expanded to cater to a growing middle class, and now the brand makes most of its revenue from selling large amounts of product to the middle market.

As a business model, mass-produced luxury has made Louis Vuitton so successful that it has now acquired 70 luxury houses.Just a few weeks ago it took control of Christian Dior.

To keep profits high, the company had to lower production costs. This is what led it to Cisnadie, a pastel-hued town where EU flags fly from the lampposts along the main street. At one end is the kind of fortified church for which Transylvania is famed. At the other end is the Somarest factory.

LVMH established its first plant here in 2002 to make the most of Romania’s low-wage labour. By 2004, it was producing 1,500 pairs of shoe uppers a week, according to the online CV of the company’s director at the time.”

There has always been luxury goods that were not very price sensitive, eg The Patek Philippe Nautilus Ref. 5711/1A-018 $52,635 or any Ferrari

[Arcadia]

As for OP’s question, someone I knew for years had her subject teacher credentials a few years ago because she was interested in the more stable pay. Recently she is thinking of changing to another occupation because her similar age friend (dual income tech) just bought a single family home for $2mil. So she is looking for a much higher paying job. 

[Bootsie]

3 minutes ago, Arcadia said:

It has always been brand equity for Asians. The goods have to hold their social status and auction value. LV counterfeit goods has been around since before I was born in the 70s. We would go to their boutique to buy. I’m familiar with LVMH since many of my favorite brands are owned by them. What I read was LV hires Romanians to make their handbags in the rural areas 
https://amp.theguardian.com/business/2017/jun/17/revealed-the-romanian-site-where-louis-vuitton-makes-its-italian-shoes

There has always been luxury goods that were not very price sensitive, eg The Patek Philippe Nautilus Ref. 5711/1A-018 $52,635 or any Ferrari

Just because there are some people who are willing to pay a high price for a good does not mean that there is not price sensitivity.  You must look at the way quantity sold changes when price changes to determine sensitivty.  If the price of a Ferrari fell in half, I think the quantity of Ferraris sold would increase--that is price senstivity.  If the price of milk, or water, or gasoline fell in half, more would be purchased but the percentage increase would be less than the percentage increase in Ferraris for the 50% reducation in price.  

[prairiewindmomma]

Thanks!

[Bootsie]

18 minutes ago, Pam in CT said:

And it is in that bigger macro surround that the ideas that raising wages => inflation and inflation is BAD -- the precise frame that takes the Adam Smith micro solution off the American macro discussion -- came to inform the national consciousness.

 

Macroeconomic theory does not suggest that rising wages will lead to inflation.  

Inflation is primarily caused by an increase in the money supply.  

[Pam in CT]

re markets take a long time to adjust to fundamental shifts such as a sharp curtailment in the supply of labor

19 minutes ago, Bootsie said:

But with a switch in the supply curve, the equilibrium is not back where it was before.  These changes do not happen immediately, there is adjustment period.  The economic evidence points to rising wages in the market, maybe not as much are as quickly as some would like, but the evidence is that it is happening.  The economic evidence points to a lower quantity, also, which is exaclty what theory would suggest woud occur when their is a decrease in supply.

COVID has not only changed the risk assessment on the part of workers; it has changed the risk assessment on the part of business owners.  The risk of having to close doors for a while or operate at reduced capacity has increased; the risk of not being able to get items in the supply chain has increased.  Just as workers want to be rewarded with higher wages for their added risk, those putting their capital in a business want to be rewarded.  

I fully agree with your view that it will take a long time for labor markets to adjust, and it seems (?) like you're concurring that the new equilibrium, when we get there, will likely be at a point of higher real wages. 

I would argue that the lived power asymmetry between employees and employers (something outside of Smith's analytical world of perfect exchanges between equals) creates a "stickiness" in expectations, whereby employers REALLY REALLY RESIST the imperatives of the market leading to higher wages (or better quality-of-work conditions, an element that is also outside Smith's analytical world). And that those unrealistic non-market expectations will prolong the time it will take to come to the new, higher-real-wage, equilibrium.

But those differences in perspective may not be very important, compared to the larger shared view about real wages.

And FWIW I concur about business owners facing COVID risk too, and some businesses will remain closed; which in turn will not require employees; that too is part of getting to the new equilibrium.  Adjustment sucks.

 

 

4 minutes ago, Bootsie said:

Macroeconomic theory does not suggest that rising wages will lead to inflation.  

Inflation is primarily caused by an increase in the money supply.  

1.  It does indeed:  higher net income (overall across the economy) => higher spending (across the economy), that is, the aggregate demand curve shifts out.  Even if aggregate supply stays constant for a while, the aggregate price level increases (this is sometimes referred to, reductively, as "more money chasing the same amount of goods").  Over time, aggregate supply is supposed to shift out too, and you get several rounds of price spirals before it's supposed to land at a stable higher level.

2.  Microeconomic theory absolutely substantiates the exact inflationary spiral argument currently being made by the likes of Walmart:

• If we raise wages, our profits will decrease
• If our profits decrease, we will "have to" increase prices of our goods
• If the prices of our goods (and other goods) increase, consumers' incomes will not go as far
• If consumers' incomes don't go as far, they will have to demand higher wages
• which spirals up and up and up and wreaks untold havoc throughout the economy.

That is precisely what is commonly understood to have been the spiral that the OPEC price shocks precipitated (except the intial shock happened to be an operating cost shock, rather than a labor cost shock).  But the way one ripple caused another ripple caused another ripple, all precipitated by an initial increase in company cost structures: that is how micro theory came to inform macro policy in the first place.  That is WHY the Federal Reserve believes it "has to"  manage inflation through the money supply.

 

[To be clear: I'm not arguing, at all, that there is both logic and empirical data that supports the idea that increased costs =>decreased profits =>  increased prices => increased pressure on households => increased pressure to raise wages +> around and around, for a distressing amount of pain and disruption, until everyone -- not just the US --lands again.  The inflationary spiral is REAL.

What is also real is that the pain and disruption of disequilibrium is distributed, somehow, across companies and workers and people in society too old or young or disabled to work. And that that distribution, since the 1960s, has overwhelmingly gone, in greater and greater proportion, to companies and their owners (generally) and an increasingly concentrated and small handful of companies and their extremely concentrated owners (specifically).  And that the labor foundation on which that profitability has been grounded may not hold post COVID.

 

[As happened with the feudal system post-Black Plague; as happened with slavery post Civil War. It happens, from time to time, that fundamental shifts in labor organization occur.]

[Terabith]

This seems applicable here.  

[Bootsie]

5 minutes ago, Pam in CT said:

1.  It does indeed:  higher net income (overall across the economy) => higher spending (across the economy), that is, the aggregate demand curve shifts out.  Even if aggregate supply stays constant for a while, the aggregate price level increases (this is sometimes referred to, reductively, as "more money chasing the same amount of goods").  Over time, aggregate supply is supposed to shift out too, and you get several rounds of price spirals before it's supposed to land at a stable higher level.

2.  Microeconomic theory absolutely substantiates the exact inflationary spiral argument currently being made by the likes of Walmart:

• If we raise wages, our profits will decrease
• If our profits decrease, we will "have to" increase prices of our goods
• If the prices of our goods (and other goods) increase, consumers' incomes will not go as far
• If consumers' incomes don't go as far, they will have to demand higher wages
• which spirals up and up and up and wreaks untold havoc throughout the economy.

That is precisely what is commonly understood to have been the spiral that the OPEC price shocks precipitated (except the intial shock happened to be an operating cost shock, rather than a labor cost shock).  But the way one ripple caused another ripple caused another ripple, all precipitated by an initial increase in company cost structures: that is how micro theory came to inform macro policy in the first place.  That is WHY the Federal Reserve believes it "has to"  manage inflation through the money supply.

 

[To be clear: I'm not arguing, at all, that there is both logic and empirical data that supports the idea that increased costs =>decreased profits =>  increased prices => increased pressure on households => increased pressure to raise wages +> around and around, for a distressing amount of pain and disruption, until everyone -- not just the US --lands again.  The inflationary spiral is REAL.

What is also real is that the pain and disruption of disequilibrium is distributed, somehow, across companies and workers and people in society too old or young or disabled to work. And that that distribution, since the 1960s, has overwhelmingly gone, in greater and greater proportion, to companies and their owners (generally) and an increasingly concentrated and small handful of companies and their extremely concentrated owners (specifically).  And that the labor foundation on which that profitability has been grounded may not hold post COVID.

 

[As happened with the feudal system post-Black Plague; as happened with slavery post Civil War. It happens, from time to time, that fundamental shifts in labor organization occur.]

But, higher wages does not imply higher net income and a shift in aggregate demand.  More money chasing more goods comes from an increase in the money supply, not an increase in wages.  

The reason that wages are rising is important.  Is it tied to increased productivity of workers?  Are wages increasing proportionately at all levels of society (which would suggest higher ouput and a shift in the aggregate supply curve)?  If aggregate supply is not shifting and there are increasing real wages for some group, is it at the expense of another group?  If so, you must know how the marginal propensity to consumer differs across these two groups to know the impact on Aggregate Demand.  Do wages rise for some and go to zero for others because there is a reuction in the amount of workers hired; then aggregate demand does not need to increase.

[DawnM]

I love reading all of your perspectives and views on this topic.   It is enlightening.

[DawnM]

https://www.cnn.com/2021/11/18/investing/ceo-turnover/index.html

 

Interesting article on "The Great Resignation" 

[Arcadia]

11 hours ago, Bootsie said:

.  If the price of a Ferrari fell in half, I think the quantity of Ferraris sold would increase--that is price senstivity.  

I think brand dilution would happen and Ferrari would rank lower in status symbol. Kind of like how people view Coach after Coach outlets flood the market. I do understand what you are explaining though. 

[Bootsie]

23 minutes ago, Arcadia said:

I think brand dilution would happen and Ferrari would rank lower in status symbol. Kind of like how people view Coach after Coach outlets flood the market. I do understand what you are explaining though. 

Yes, brand dilution would happen and it would probably rank lower as a status symbol because more people have the item because quantity demanded increases.  Companies do not make revenue based upon some rank as a status symbol; revenue is based on two items: price charge multiplied by quantity sold.  A company would prefer to sell 30 million units at a $1000 profit margin than 3 million units at a $5000 profit margin, even if there is brand dilution from selling the 30 million units at a lower price.