21 May 2018

Contra Krugman AND Sumner on Nominal Wage Growth

Scott Sumner, Shameless Self-Promotion 6 Comments

My latest at Mises.org. It’s too long to summarize, except don’t miss my analogy:

[S]uppose a father sees his 25-year-old son lounging on the couch watching reruns. The father exclaims, “Jimmy, this has got to stop! All through your teenage years you kept getting raises and better jobs. But after your messy breakup last year, you’ve fallen apart. Your mother and I shouldn’t have let you move back in. You get a job within two weeks or we’re kicking you out!”

Then Jimmy, who has spent some of his copious free time reading the work of Scott Sumner, responds to his father in this fashion:

“Dad, dad, stop thinking like a micro economist. You seem to believe that my effort determines the pay I earn. But actually, monetary policy drives NGDP growth, and NGDP growth (per worker) is by far the most important determinant of my wage growth. (The other determinant is my income as a share of GDP.)”

6 Responses to “Contra Krugman AND Sumner on Nominal Wage Growth”

  1. Keshav Srinivasan says:

    Bob, in that example the Dad should respond “Your income as a share of GDP is what’s the problem. It’s zero!” Are you making the analogous claim, namely that Scott is neglecting how the labor share of GDP is affecting nominal wage growth?

  2. Milty says:

    You like these extended analogies, but they generally don’t help. It would be much better to just make your point instead of saying “spot the problem.” Your example sounds like it is supporting what Sumner is saying, which is, don’t mix micro and macro.

  3. Andrew_FL says:

    The weak link in Sumner’s argument is not that monetary policy drives the growth rate of nominal GDP, but the argument that nominal GDP somehow “causes” changes in labor income-he lacks a causal *mechanism* and instead relies on good old fashioned “hydraulic macro”-he somehow has the “labor share” acting as a “determinant” of wages, as if the “labor share” were a thing-in-itself and not an abstract statistic which cannot *cause* anything.

    This is the same problem as in your analogy. All the *actual* causal mechanisms of movement of Jimmy’s wages are hiding in the phrase “my income as a share of GDP”-the various “micro” factors determine Jimmy’s wages and then his “share of GDP” is determined by what his income is and what GDP is-regardless of what determines what GDP is.

  4. Harold says:

    Say the family moved to Somalia. The dad says “When I was your age I was earning 10 time what you earn! Get off your ass and get a proper paying job””
    The son responds as before.

    Would this make more sense?

    • Andrew_FL says:

      The reasons why wages tend to be lower in Somalia are all “micro” reasons

      • Harold says:

        Thanks for pointing that out. Yes, it is not so much Somalia’s central bank that is causing most of their problems!

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