Labor demand and consumption demand.

There are two sides to every market: the supply side and the demand side. The supply side produces the good. The demand side consumes it. This is a simple claim, but let’s unpack it a bit.

Consumption is the process of extracting value from something for personal, emotional benefit. Let’s leave aside the issue of what exactly “value” is. A sufficient characterization is that its manifestation as personal benefit is intangible and non-transferable. If I am happy I cannot directly transfer that happiness to you. Production is the process of packaging value in a transferable form. In the case of production goods (as opposed to services) this consists of adding value to a physical object.

But value cannot simply be injected into physical goods. Some physical interaction must occur. And invariably (even in the robot age) this interaction includes other human beings. But then no market can be considered in isolation. While end-consumer consumption could, with mildly restrictive assumptions, be modeled as an economically dead-end process, such is not the case for production as it is typically practiced in developed nations. Under similarly mild assumptions, production is necessarily an economic process, in that both its inputs (through labor) and outputs (as goods) depend on and affect prices and quantities in some markets somewhere.

There are two sides to every market. The blogosphere has been reporting that price competition pressure is increasing in the US. This is because consumers’ price elasticities of demand and substitution remain high, and so corporate profit, at least in consumer-oriented firms, is becoming zero sum. At least one blogger is predicting a contraction based on this trend.

Ok. But why are consumers so price conscious? Because their incomes are so low relative to prices. Corporate profits are historically high because wage growth is historically flat and wages are historically low relative to productivity. I am posting this quickly, without links, so I don’t forget about it, but this story has been spun by smarter and more measured analysts than me.

Here’s what I haven’t seen anyone say yet: Increasing price competition is a natural, nominal (deflationary?) corrective pressure that results from equilibrium wages that are apparently too low. The blogosphere has failed to recognize that corporate suppliers are also demanders and consumer demanders are also suppliers.

So why is this a problem in real terms? Does it have something to do with price rigidity? Something in the transition dynamics as an oligopoly turns to Bertrand competition?

Firms won’t pay each other to raise wages to offset the fall in demand. But is there a policy recommendation in here? Could a minimum wage actually increase output this way? Particularly if a contraction is, in fact, on the horizon.

Perhaps importantly, how does this interact with the recent finding that wage floor interventions reduce hiring by an order of magnitude larger than they raise incomes?

I really suck at macro and didn’t learn anything about it in college. I’d love to hear what else I’m missing. A friend once accused me of being a Keynesian. Is that true?


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