Dynamism’s Effect on the Labor Market, Wages, and Income Inequality

Is the US Economy Too Dynamic, or Not Dynamic Enough?, by Erwin (2017), was published in the Upshot section of the New York Times. Says that despite recent appearances of better GDP growth, lower unemployment, and higher wages, most Americans, as reflected in economic evaluation surveys, simply do not think much of it. There were twice as many Americans who believed that America was on the wrong trajectory as there were who believed that it was on the right one. However, with the election of President Donald Trump, this sentiment changed, fuelled mostly by Republicans due to Mr. Trump’s pledge to reform policies. Considering the political state of the nation however, the rigorous campaigns of Senator Bernie Sanders against Mr. Trump and the developments in Britain and other developed nations, it does not become too hard to notice that there is indeed something wrong with the economic times we are living in that the public has not caught on to yet. What it is however, is what Irwin tries to disclose.

One such answer he begins, might lie in the in the volatility of the American economy. This factor, he continues, is perhaps driven by the increasing globalization that has seen to increased automation and consequent increase in job insecurities. Most employers, he states, cannot guarantee jobs for their employees through thick and thin. Most people are therefore unable to obtain well-paying jobs and hold on to them for long. The rising inequality levels have also ensured that benefits accrued from economic growth are mostly distributed amongst the top percentile leaving the middle and the bottom groups of the pyramid with scarcely any beneficial gains. Additionally, he states, that despite the increasing work wages and job opportunities, however marginal, people without advanced education are finding it difficult to secure jobs. Technology and production shifts have also had quite an impact he says, for example, technical changes in an industry such as adoption of technological methods in production can result in changes in employment patterns. When such changes are implemented in many industries a situation say, massive unemployment, may arise. All these can be attributed to too much dynamism.

The number of business less than a year old in comparison with existing businesses

Source: (Irwin, 2017)

On the other hand, referring to a report conducted by an economic innovation group it was determined that the current economy is being influenced in fact by too little dynamism. It was shown as in the graph above that there has been too little business formation and consequently job creation in 2012 as in 1977. Between 1977 and 2012 There has been however a rise in GDP and corporate profits that coincided with increase in market concertation for two thirds of the company. There was however a decline in workers’ wages.

The job market has become too viscous. Movement of people across state lines has reduced significantly from 3% in the 1970’s to 1.5% in 2006. Irwin states. Less people are also likely to change jobs as of recent (12% in 2000, 7% in 2007). Back in the day, implementation of technological aspects in manufacturing that led to loss of jobs was often covered by the mushrooming of new businesses at the time. Nowadays however, there are fewer business creation (except in the major cities, New York, Dallas, Houston, Los Angeles, and Miami) hence fewer jobs.

Dynamism he concludes, too much or too little has a definite effect on the economy and both protectionism and regulation (antitrust enforcement) can be employed to curb each respectively. Dynamism in our case has also had an impact on labor market, wages and income inequality. For example, as we have seen, the labor market under too little dynamism is prone to monopolism. While monopolism is not always bad, dictation of prices by a single supplier could lead to consumer exploitation and in cases of an incontestable market, production inefficiency. Too little dynamism also causes very little business formation and unemployment ensues. This leads to low wages as there’s too much available labor. With high unemployment, high market concentration and uncontestable markets, the trickle-down effect doesn’t work and most profits raked in are distributed amongst the top members. This leads to high inequality levels.

The technological impact in a highly dynamic economy is massive. Technology not only affects production but is also used to rate worker’s performance. There is differential payment amongst workers according to their input (variable compensation) (Parent, n.d., p.1). This often leads to high income inequality. Labor is usually educationally oriented. Therefore, for people without advanced education in this environment, it becomes difficult to secure jobs not to mention with differential earnings the income inequality will be staggering.

References

Irwin, N. (2017). Is the U.S. Economy Too Dynamic, or Not Dynamic Enough?. The New York Times. Retrieved from https://www.nytimes.com/2017/02/04/upshot/is-the-us-economy-too-dynamic-or-not-dynamic-enough.html?rref=collection%2Ftimestopic%2FIncome%20Inequality

Parent, D. INCOME INEQUALITIES AND THE LABOUR MARKET.