The Next Financial Bubble: Your Salary

Here’s an interesting thought: Neoclassical economics (e.g. the “free market” capitalists) would lead to essentially the same result in regard to wages as socialism.

Stick with me; this thought experiment relates directly to your income. Here’s the thought experiment: Free market dynamics presumes that everyone is paid according to demand for their labor, particularly when dealing with skilled labor. In fact, neoclassical economics insists that the higher wages (“rent” in economic parlance) is due in particular to advanced skill sets and the so-called sacrifice of additional training time. [1] Yet this, in turn, should drive more people to seek those skills in order to get those wages. In turn, that would drive the wage for that profession down (since supply would exceed demand), until the market “cleared”. That is, reached equilibrium.

Likewise, that should hold for “nasty” jobs – such as janatorial work. In FreeMarketLand [2], most people would not want to do such a job. Therefore, they would seek other professions. The labor supply for janitors would be small, and therefore, they would gain higher wages. If the wages grew too high, then more people would put up with the work in order to gain higher wages. Again, this continues until the market “clears”, or reaches equilibrium.

In FreeMarketLand (closely bordered by LibertarianLand), there is a presumption of a level playing field. There would be no barriers to taking a job besides innate skill – and I think it is possible to argue that nearly all jobs save a very very few could be done competently by most people. Therefore, in this theoretical land, labor supply would fluctuate to match wages and demand… until nearly everyone was paid exactly the same.

Obviously, this is nowhere near the case. There’s a couple of reasons – information inequality being a big one, and lack of labor mobility being another. But it also implies that there is not a level playing field. In fact, when we compare this theory to the real world, it becomes obvious that there is nothing anywhere near a level playing field. There are numerous barriers: substandard schools, racial or gender bias, or even deliberate exclusion from professions to keep wages artificially high.

Check that last clause again.

All of these barriers have the effect of creating a wage bubble. Your wages (and since you’re reading this on the Internet, I’m probably correct in saying “you”) are artificially higher than they would be in a truly perfect free market system. We saw a brief dip in wages after women began entering the workforce en masse in the late 1970’s. That was the effect of that part of the wage bubble deflating – at least a little bit. That is not a bad thing. Bubbles happen in capitalist economies; a slow deflation of the bubble is far better than the sudden crash of internet stocks in 1999-2000, or the housing market collapse of 2007-2009.

It’s kind of nice to be the beneficiary of a bubble – to be “ahead of the game”. But no bubble – whether tulips or collateralized debt obligations, houses or Beanie Babies – lasts forever. They end – either by a slow deflation, or by a sudden, dramatic pop.

Now you know. You’re on the top of a bubble – a wage bubble. One that is due to be the third big bubble of the last twenty years. We have already felt its tremors with robotics and outsourcing. Let me be clear – I am not talking about the gloomy economic forecast mentioned recently in The Economist, though the current global recession may serve as a dangerously close needle to our wage bubble. But this problem did not need the recession to manifest itself. The skin of the bubble has been thinning for years, and is far beyond recovery now.

The question is not how to preserve our artificially high wages.

The question is – how are we – all of us, across the globe – going to survive when they fall?

[1] I’m presuming here that individual skills beyond competence are not particularly relevant. My co-workers and I all (presumably) share a base set of skills. If I have more talent at it, I might get a minimal wage increase in a higher raise or small bonus, but such differentials makes no pretense at being proportional to skill level. The vast majority of hired labor positions work like this. There is a more valid argument that freelancers (for example) can command differential wages due to skill, but that doesn’t apply to the vast amount of the wage-earning public.

[2] Yes, I know the real world doesn’t work like this. I’m pointing out a frequently missed point in the theory; real-world application is a few paragraphs later down.