Is it really true that most markets clear, and the labor market is unusual? It seems to me that a lot of non-labor stuff also goes unsold. If I try to sell something, like my old phone, then I will probably observe that it goes unsold for at least some time. Is that also a mystery for economics?
Macroeconomics (by which I mean mainly the Keynesian/Monetarist schools) is built on the seeming trivial observation that the salaries of workers are the means by which they buy products, and that the sale of these products are the income of the firms that employ people. Therefore, if the job market doesn’t “clear” it’s not as simple as just waiting for salaries (the price of that market) to adjust. If salaries fall, this feeds into less cash for consumers, which generally implies less consumption, which feeds into less revenue for firms, lowering their demand for workers, etc...
How is this different between the labor market and any other market? If I try and fail to sell my old phone, that also affects my ability to buy stuff.
Is it really true that most markets clear, and the labor market is unusual? It seems to me that a lot of non-labor stuff also goes unsold.
Good point! Even in the used car market, there are cars which are old enough and/or broken enough that they are finally disposed of. One could say these are still “sold,” but the analogy in labor markets would be people selling their organs, or selling their bodies to be used as food.
So plenty of markets do not clear. Maybe even all of them. Supermarkets and restaurants throw out food they didn’t sell. The company I work at pays people to take away old electronic equipment from our labs rather than selling it to third world countries or some such.
So plenty of markets do not clear. Maybe even all of them.
You misunderstand the term.
“The market clears” means that there exists a price (a “market-clearing price”) at which the supply and the demand are exactly balanced. It does NOT mean that every seller sells everything and every buyer gets what he wants.
“>The market clears” means that there exists a price (a “market-clearing price”) at which the supply and the demand are exactly balanced.
Well, it means that the market clearing price is actually allowed to be the prevailing price in the market. A market with either an enforced minimum price which is higher than the market clearing price will have excess supply. Unemployment in the presence of a minimum wage, for example. A market with an enforced maximum price which is lower than the market clearing price will have unsatisfied demand. Rationing of price-fixed commodities like meat, sugar, and fuel during WWII are examples of this. The fact that there existed in these cases a theoretical, but illegal price that would have matched supply to demand does not mean the market clears.
It does NOT mean that every seller sells everything and every buyer gets what he wants.
But it does mean that everything offered at a price that is less than the market clearing price is purchased. In the case of unemployment you have people who would be willing to work for less than some employed people, but those people are not hired while the employed people continue being paid more than the unemployed people would accept.
A minimum wage law forces a market to not clear, unless the minimum wage is set below the market clearing wage, in which case the law has no effect and might as well not exist.
Most people who support the minimum wage seem to think that you can force a market to pay “everybody” an above market clearing price. In fact, all you can do is force people to pay the employed a minimum wage, you can’t force them to pay the unemployed who would like to work at the minimum wage or less, anything at all. Those people make zero.
There’s not good evidence for the minimum wages reducing the amount of jobs. Reality is complex.
There is not good evidence that a minimum wage does NOT reduce the amount of jobs.
Meanwhile, unpaid internships and graduate assistantships are being attacked because they do not meet minimum wage laws. Is there good evidence that a graduate student is better off if she is not offered a stipend to help teach, or that a would-be television worker is better off if they cannot work for a year on a television show as an aid to making themselves employable? Is there evidence that the rather general mathematics of optimum economic deployment of resources when market mechanisms are used does NOT apply to the bottom end of the labor market?
If one were to look for it, might there be evidence that if you think society owes a person a higher income than can be gathered by working full time at the minimum wage, that it makes sense to put the burden or cost of that conviction entirely on the employer of that person? That is, wouldn’t be better off sharing the cost of our social justice convictions across the entire tax base with something like a negative income tax?
I personally am a fan of passing laws only when their is good evidence that they do more good than harm. A lack of good evidence that they do harm is NOT a good reason to pass a law.
What do you think the effect of passing a $25 or $50/hr minimum wage? I think it would destroy the economy. And in the absence of good evidence that there is some kind of magic non-linearity down at the $10/hr and lower level, I suspect the only reason that there is not “good” evidence that a low minimum wage does harm is because the “signal” has been turned down so it is in the “noise” by choosing low numbers that allow you to miss the effects you are looking for.
Is there good evidence that a graduate student is better off if she is not offered a stipend to help teach, or that a would-be television worker is better off if they cannot work for a year on a television show as an aid to making themselves employable?
The problem is that there are too many people who want to be television workers. Having a market that pushes some of those people out of that industry and into something more productive is useful.
The fact that universities who get huge tuition fees use graduate students who haven’t learned anything about teaching to teach is appalling. If you force a university to pay the people who teach more money than they will have higher standards and pick people who can teach better.
The university doesn’t suddenly stop teaching.
Is there evidence that the rather general mathematics of optimum economic deployment of resources when market mechanisms are used does NOT apply to the bottom end of the labor market?
If the mathematics would really work you could calculate the size of the effect and see whether or not the effect exist in reality. In reality things are complex enough that you can’t predict them with the models. That proves the math doesn’t work out. Cognitive Science also frequently shows that humans aren’t simple utility optimizers.
That is, wouldn’t be better off sharing the cost of our social justice convictions across the entire tax base with something like a negative income tax?
Today that’s commonly called basic income. I’m in favor of it but the underlying politics are complex.
I suspect the only reason that there is not “good” evidence that a low minimum wage does harm is because the “signal” has been turned down so it is in the “noise” by choosing low numbers that allow you to miss the effects you are looking for.
If the signal has turned down and the effect is really small, then the effect maybe isn’t that important.
The problem is that there are too many people who want to be television workers. Having a market that pushes some of those people out of that industry and into something more productive is useful.
Do you really think you know what is more productive and what is less better than the market? If only the centrally planned economies had had access to your expertise before they collapsed, we might now be living in a worker’s paradise!
The fact that universities who get huge tuition fees use graduate students who haven’t learned anything about teaching to teach is appalling. If you force a university to pay the people who teach more money than they will have higher standards and pick people who can teach better. The university doesn’t suddenly stop teaching.
You’re not from around here, are you. I was a professor, a higher priced teacher at a university. I had NO training to teach and was not hired based on my ability to teach, but rather was hired entirely on the basis of the research I had done. And this is typical. The highest paid teachers are the most famous, and they are notoriously NOT available for a lot of teaching. The higher paid the professor the less time they spend teaching, and none of them got that high pay based on their ability to teach in the first place.
If the signal has turned down and the effect is really small, then the effect maybe isn’t that important.
In which case it makes absolutely no sense to pass a law about it.
Do you really think you know what is more productive and what is less better than the market?
The market is not what decides which skillsets are over-supplied and which are under-supplied. The market merely reacts to this over- or under-supply by adjusting salaries.
What decides which skillsets are over- or under-supplied is a whole lot of students, fresh out of high school, deciding which career(s) to pursue. If more of them decide to pursue a career in television than there is demand for careers in television, then the market-clearing price for careers in television will drop; possibly even to below a living wage. (The market does not care about whether people live or not). On the other hand, if virtually nobody wants to pursue a career in (say) medicine, then those few who do will be able to earn vast amounts of money… but they will not be able to provide medical care to everyone, which would be a bad thing.
Personally, I find it easy to believe that ChristianKi is better at predicting which careers are productive than an average student just out of high school.
Do you really think you know what is more productive and what is less better than the market? If only the centrally planned economies had had access to your expertise before they collapsed, we might now be living in a worker’s paradise!
This discussion isn’t about central regulation of television workers but on setting parameters within with market forces can act. I don’t advocate solving the issue through quota but through using the market.
In which case it makes absolutely no sense to pass a law about it.
Unless you don’t pass the law to effect the number of job but you want that the people at the bottom that have jobs have higher payed jobs.
In the case of unemployment you have people who would be willing to work for less than some employed people, but those people are not hired while the employed people continue being paid more than the unemployed people would accept.
Yes, this. Any number of unsold product does not indicate a failure for the market to clear per se. It just means that someone guessed wrong as to what that price is.
You have to ask him. Note that a single labor market is an abstraction—in reality there are lots and lots of little labor markets. If you treat each job (and each job-seeker) as its own labor market, then all these nanomarkets clearing would represent everyone getting a job—but that’s a rather silly way to look at things.
Or the market would fail to exist when someone is unwilling to buy or sell at the price necessary for the exchange to go through. It’s not a market without a buyer and a seller, so all markets would clear here because the markets that wouldn’t would never be realized.
I think “markets clear” implies the market finds the market-clearing price, in which case everything gets sold (i.e. no surplus inventories over the long run).
The market does indeed find the market-clearing price, that’s what markets do, but I don’t see how that leads to “everything gets sold”, especially given that that the market-clearing price changes over time.
Because some owners of the goods are not interested in selling at the current market-clearing price and because some potential buyers are not interested in buying at the current market-clearing price.
Supply and demand are not fixed scalars, they are functions of the price.
What does it mean for supply and demand to be balanced, then? How do we tell the difference between a market where they are balanced and a market where they aren’t balanced?
What does it mean for supply and demand to be balanced, then?
Just solve the equation: supply(price) = demand(price)
How do we tell the difference between a market where they are balanced and a market where they aren’t balanced?
In the market where they are not balanced there is either excess supply or unsatisfied demand at the prevailing price. The usual reason is some constraints on prices.
So empirically, what is the difference between a market that hasn’t cleared vs. one that has, in your view? What would that look like in terms of inventories?
The usual definition of market clearing implies that we don’t end up with surplus inventories building up over time (because everything is sold), etc.
So empirically, what is the difference between a market that hasn’t cleared vs. one that has, in your view?
Well, as I said, there is either excess supply or unsatisfied demand—that’s pretty empirical.
Take the old Soviet-style planned economies—they had lots of markets that didn’t clear. In the US, for example, there are certain things in very limited supply with more or less fixed prices—e.g. licenses to go photograph bears fishing for salmon on Katmai peninsula—they are allocated on the basis of lotteries. These markets don’t clear. In another example, financial markets sometimes have limits on price movement during one day—once that limit is reached, the price can go no further. In such cases these markets don’t clear either.
implies that we don’t end up with surplus inventories
We don’t end up with surplus inventories (mostly) because the situation is dynamic: both the prices and the people adjust over time.
Well, as I said, there is either excess supply or unsatisfied demand—that’s pretty empirical.
But you shifted it to “excess supply or unsatsified demand at the prevailing price” which is a much harder thing empirically. Demand is itself somewhat hard to measure, but supply is easy, just measure inventories.
You claim that “market clearing” doesn’t imply there are no excess inventories, I claim that it does.
We don’t end up with surplus inventories (mostly) because the situation is dynamic: both the prices and the people adjust over time
This is the definition of market clearing. The market clearing price is found, and everything sells.
So now it sounds like you agree that in a market that has “cleared,” everything sold.
Nah, I was just too lazy to type out the whole thing. I still mean “at the prevailing price”—note that all the examples I give work this way.
You claim that “market clearing” doesn’t imply there are no excess inventories, I claim that it does.
I am not sure what “excess inventories” are. But let’s take a simple example—a stock market. Let’s take IBM which closed tonight at $162.15. This was the market clearing price at the close and the market cleared. Even though the market cleared, the order book wasn’t empty—there were people willing to buy at, say, $162 and people willing to sell at, say, $163. Was there inventory? Sure. Was there excess inventory? I don’t know since I have not idea what it means.
The market clearing price is found, and everything sells.
See above. No, not everything sells.
So now it sounds like you agree that in a market that has “cleared,” everything sold.
No, that is wrong. A market that cleared is the market which found the market-clearing price and traded at that price all amounts that were there to be traded at that price. That does mean that “everything sold”—there is nothing which says that all goods on offer are on offer at the current market-clearing price. See the stock market example above.
Your phone example seems analogous to “frictional” unemployment, which will resolve itself, given time.
As for why the job market is special: most (western) people derive the majority of their income from a salary. If many people were professional used phone sellers, the analogy would work.
The analogy works for firms, no? If a firm can’t sell as much stuff, then it can’t buy as much other stuff, which feeds into less revenue for other firms, etc.
Is it really true that most markets clear, and the labor market is unusual? It seems to me that a lot of non-labor stuff also goes unsold. If I try to sell something, like my old phone, then I will probably observe that it goes unsold for at least some time. Is that also a mystery for economics?
How is this different between the labor market and any other market? If I try and fail to sell my old phone, that also affects my ability to buy stuff.
Good point! Even in the used car market, there are cars which are old enough and/or broken enough that they are finally disposed of. One could say these are still “sold,” but the analogy in labor markets would be people selling their organs, or selling their bodies to be used as food.
So plenty of markets do not clear. Maybe even all of them. Supermarkets and restaurants throw out food they didn’t sell. The company I work at pays people to take away old electronic equipment from our labs rather than selling it to third world countries or some such.
You misunderstand the term.
“The market clears” means that there exists a price (a “market-clearing price”) at which the supply and the demand are exactly balanced. It does NOT mean that every seller sells everything and every buyer gets what he wants.
“>The market clears” means that there exists a price (a “market-clearing price”) at which the supply and the demand are exactly balanced.
Well, it means that the market clearing price is actually allowed to be the prevailing price in the market. A market with either an enforced minimum price which is higher than the market clearing price will have excess supply. Unemployment in the presence of a minimum wage, for example. A market with an enforced maximum price which is lower than the market clearing price will have unsatisfied demand. Rationing of price-fixed commodities like meat, sugar, and fuel during WWII are examples of this. The fact that there existed in these cases a theoretical, but illegal price that would have matched supply to demand does not mean the market clears.
But it does mean that everything offered at a price that is less than the market clearing price is purchased. In the case of unemployment you have people who would be willing to work for less than some employed people, but those people are not hired while the employed people continue being paid more than the unemployed people would accept.
A minimum wage law forces a market to not clear, unless the minimum wage is set below the market clearing wage, in which case the law has no effect and might as well not exist.
Most people who support the minimum wage seem to think that you can force a market to pay “everybody” an above market clearing price. In fact, all you can do is force people to pay the employed a minimum wage, you can’t force them to pay the unemployed who would like to work at the minimum wage or less, anything at all. Those people make zero.
Yes, I agree. For the market to clear it must actually be able to trade at that price.
Yes—as a more general statement, any binding price constraint causes the market to not clear.
I think that’s a strawman. With or without a minimum wage the market doesn’t employ everybody.
There’s not good evidence for the minimum wages reducing the amount of jobs. Reality is complex.
There is not good evidence that a minimum wage does NOT reduce the amount of jobs.
Meanwhile, unpaid internships and graduate assistantships are being attacked because they do not meet minimum wage laws. Is there good evidence that a graduate student is better off if she is not offered a stipend to help teach, or that a would-be television worker is better off if they cannot work for a year on a television show as an aid to making themselves employable? Is there evidence that the rather general mathematics of optimum economic deployment of resources when market mechanisms are used does NOT apply to the bottom end of the labor market?
If one were to look for it, might there be evidence that if you think society owes a person a higher income than can be gathered by working full time at the minimum wage, that it makes sense to put the burden or cost of that conviction entirely on the employer of that person? That is, wouldn’t be better off sharing the cost of our social justice convictions across the entire tax base with something like a negative income tax?
I personally am a fan of passing laws only when their is good evidence that they do more good than harm. A lack of good evidence that they do harm is NOT a good reason to pass a law.
What do you think the effect of passing a $25 or $50/hr minimum wage? I think it would destroy the economy. And in the absence of good evidence that there is some kind of magic non-linearity down at the $10/hr and lower level, I suspect the only reason that there is not “good” evidence that a low minimum wage does harm is because the “signal” has been turned down so it is in the “noise” by choosing low numbers that allow you to miss the effects you are looking for.
The problem is that there are too many people who want to be television workers. Having a market that pushes some of those people out of that industry and into something more productive is useful.
The fact that universities who get huge tuition fees use graduate students who haven’t learned anything about teaching to teach is appalling. If you force a university to pay the people who teach more money than they will have higher standards and pick people who can teach better. The university doesn’t suddenly stop teaching.
If the mathematics would really work you could calculate the size of the effect and see whether or not the effect exist in reality. In reality things are complex enough that you can’t predict them with the models. That proves the math doesn’t work out. Cognitive Science also frequently shows that humans aren’t simple utility optimizers.
Today that’s commonly called basic income. I’m in favor of it but the underlying politics are complex.
If the signal has turned down and the effect is really small, then the effect maybe isn’t that important.
Do you really think you know what is more productive and what is less better than the market? If only the centrally planned economies had had access to your expertise before they collapsed, we might now be living in a worker’s paradise!
You’re not from around here, are you. I was a professor, a higher priced teacher at a university. I had NO training to teach and was not hired based on my ability to teach, but rather was hired entirely on the basis of the research I had done. And this is typical. The highest paid teachers are the most famous, and they are notoriously NOT available for a lot of teaching. The higher paid the professor the less time they spend teaching, and none of them got that high pay based on their ability to teach in the first place.
In which case it makes absolutely no sense to pass a law about it.
The market is not what decides which skillsets are over-supplied and which are under-supplied. The market merely reacts to this over- or under-supply by adjusting salaries.
What decides which skillsets are over- or under-supplied is a whole lot of students, fresh out of high school, deciding which career(s) to pursue. If more of them decide to pursue a career in television than there is demand for careers in television, then the market-clearing price for careers in television will drop; possibly even to below a living wage. (The market does not care about whether people live or not). On the other hand, if virtually nobody wants to pursue a career in (say) medicine, then those few who do will be able to earn vast amounts of money… but they will not be able to provide medical care to everyone, which would be a bad thing.
Personally, I find it easy to believe that ChristianKi is better at predicting which careers are productive than an average student just out of high school.
This discussion isn’t about central regulation of television workers but on setting parameters within with market forces can act. I don’t advocate solving the issue through quota but through using the market.
Unless you don’t pass the law to effect the number of job but you want that the people at the bottom that have jobs have higher payed jobs.
To do the same work?
Yes, this. Any number of unsold product does not indicate a failure for the market to clear per se. It just means that someone guessed wrong as to what that price is.
Okay, I’m confused. Why does Stuart say in the original post that a clearing labor market would give everyone a job?
You have to ask him. Note that a single labor market is an abstraction—in reality there are lots and lots of little labor markets. If you treat each job (and each job-seeker) as its own labor market, then all these nanomarkets clearing would represent everyone getting a job—but that’s a rather silly way to look at things.
Or the market would fail to exist when someone is unwilling to buy or sell at the price necessary for the exchange to go through. It’s not a market without a buyer and a seller, so all markets would clear here because the markets that wouldn’t would never be realized.
Yeah, that seems silly. That’s like treating every object on sale as its own little market.
I think “markets clear” implies the market finds the market-clearing price, in which case everything gets sold (i.e. no surplus inventories over the long run).
The market does indeed find the market-clearing price, that’s what markets do, but I don’t see how that leads to “everything gets sold”, especially given that that the market-clearing price changes over time.
If the supply and demands are perfectly balanced, how is it possible that there are some goods not being sold?
Because some owners of the goods are not interested in selling at the current market-clearing price and because some potential buyers are not interested in buying at the current market-clearing price.
Supply and demand are not fixed scalars, they are functions of the price.
What does it mean for supply and demand to be balanced, then? How do we tell the difference between a market where they are balanced and a market where they aren’t balanced?
What does it mean for supply and demand to be balanced, then?
Just solve the equation: supply(price) = demand(price)
In the market where they are not balanced there is either excess supply or unsatisfied demand at the prevailing price. The usual reason is some constraints on prices.
So empirically, what is the difference between a market that hasn’t cleared vs. one that has, in your view? What would that look like in terms of inventories?
The usual definition of market clearing implies that we don’t end up with surplus inventories building up over time (because everything is sold), etc.
Well, as I said, there is either excess supply or unsatisfied demand—that’s pretty empirical.
Take the old Soviet-style planned economies—they had lots of markets that didn’t clear. In the US, for example, there are certain things in very limited supply with more or less fixed prices—e.g. licenses to go photograph bears fishing for salmon on Katmai peninsula—they are allocated on the basis of lotteries. These markets don’t clear. In another example, financial markets sometimes have limits on price movement during one day—once that limit is reached, the price can go no further. In such cases these markets don’t clear either.
We don’t end up with surplus inventories (mostly) because the situation is dynamic: both the prices and the people adjust over time.
But you shifted it to “excess supply or unsatsified demand at the prevailing price” which is a much harder thing empirically. Demand is itself somewhat hard to measure, but supply is easy, just measure inventories.
You claim that “market clearing” doesn’t imply there are no excess inventories, I claim that it does.
This is the definition of market clearing. The market clearing price is found, and everything sells.
So now it sounds like you agree that in a market that has “cleared,” everything sold.
Nah, I was just too lazy to type out the whole thing. I still mean “at the prevailing price”—note that all the examples I give work this way.
I am not sure what “excess inventories” are. But let’s take a simple example—a stock market. Let’s take IBM which closed tonight at $162.15. This was the market clearing price at the close and the market cleared. Even though the market cleared, the order book wasn’t empty—there were people willing to buy at, say, $162 and people willing to sell at, say, $163. Was there inventory? Sure. Was there excess inventory? I don’t know since I have not idea what it means.
See above. No, not everything sells.
No, that is wrong. A market that cleared is the market which found the market-clearing price and traded at that price all amounts that were there to be traded at that price. That does mean that “everything sold”—there is nothing which says that all goods on offer are on offer at the current market-clearing price. See the stock market example above.
Your phone example seems analogous to “frictional” unemployment, which will resolve itself, given time.
As for why the job market is special: most (western) people derive the majority of their income from a salary. If many people were professional used phone sellers, the analogy would work.
But even professional manufactures often fail to sell some of their stuff.
The analogy works for firms, no? If a firm can’t sell as much stuff, then it can’t buy as much other stuff, which feeds into less revenue for other firms, etc.
Assuming, unrealistically , that everything stays constant.