Monday, November 16, 2015

Sticky Wages in Price Taker vs. Price Maker Context

Often I get excited about concepts before I really have a chance to take a closer look, at what existing literature has to say. That's partly a result of feeling pressured for time (to learn and apply), since I was almost fifty years old before I finally allowed myself the luxury of studying economics on a regular basis. A recent challenge in this regard is the interaction of price taking and price making mechanisms in the economy. About price taking, InvestorWords has this to say, "An individual or company which is not influential enough to affect the price of an item." And, from Wikipedia, regarding price taking in "Market Power":
In perfectly competitive markets, market participants have no power.
How do we square this with the fact more competition is needed in a broader range of the marketplace...not less? Price making mechanisms are overtaking (good deflationary) price taking mechanisms to such a degree, they now impact monetary policy around the world. Does potential exist for a more inclusive, hence fully competitive price taking marketplace? It's somewhat of a tricky question, and one which also affects the sticky wages which can limit labor force participation.

In a recent post about macroeconomic frameworks, Nick Rowe noted the role of sticky wages, and the fact they contribute to coordination problems. For understandable reasons - given the nature of today's asymmetric wage compensation - he classifies labor as a single existing endowment. Indeed, this is often the case for expectations in high skills investment, given service formation in non tradable sectors.

The twentieth century saw a vast increase, in the ability of knowledge based careers to command price maker functions. This temporary increase was possible until only recently, given the degree to which higher education became associated with economic access. Just the same, existing revenue available for these positions is gradually becoming less certain. More of the faculty in the universities which remain viable, will need to make greater use of price taking wage structures.

However, there's still a problem for aggregate output and labor force participation, even though wages are gradually being adjusted downward. Even though universities and other knowledge based institutions have accounted for the revenue losses of recent recessions, addressing the sticky wage factor doesn't quite have the same effect, as what occurs in tradable sectors. Indeed, some element of implied knowledge use loss - and consequently time value - is involved. To some degree, the loss accrues across public and private sectors. This is why knowledge use systems need to position knowledge use in a sustainable price taker context - for both labor force participation and output potential.

Of course, government isn't really all that different from private interests, which encourage knowledge use limits to generate price maker income. Sticky wages from a price maker perspective, is as much about preserving marketplace power, as anything. But ultimately, price maker tactics backfire, in terms of marketplace competition and labor force participation. This is a reality which local corporations would (eventually) need to acknowledge, as they develop local patterns for economic viability.

My biggest concern regarding a base wage for mutual assistance, is the fact it has to exist on price taking terms. In other words, compensated wages would be less than currently defined minimum wages. Otherwise there would be too many pressures on knowledge use systems - both internally and externally. Internally: should groups attempt to adopt a price making wage (minimum wage or above), exclusionary rationale for some locals would be the quick result. And everyone would be right back to problematic unemployment.

Hence it is imperative to generate time/money investment and social security mechanisms which negate the need for price making wages. Likewise, should local corporations set wages too high, this would be externally counterproductive as a direct competition to general equilibrium. Why would specialists (from general equilibrium) provide their expertise to knowledge based systems...if those systems eventually plan to compete with them? The most important competition for alternative equilibrium rests in time value, so that one's personal preferences and skill sets have a chance to remain in balance over the course of a lifetime. In order to effectively break sticky wages in a long term sense, some trade-offs and backup plans are necessary.

One way to back the limited "power" of (fully competitive) local corporations, is to define economic environments with clear starting or base points for access and entry. By doing so, one's compensated wage would not present a constant struggle for access and participation, as has been the case for so long. Over and over, people gave up their desires to assist one another, to a marketplace of economic access which overcame entire realms of practical knowledge use. As a result, too many individuals eventually found themselves all but unable to reach out to others.

A marketplace for time value, would ensure that knowledge maintains "value in use" characteristics in a high skill, "value in exchange" economy. While price maker dynamics will always exist for high skill levels, a price taker marketplace for knowledge use would still go a long way, to restore normalcy.

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