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Comment by bjourne | Hacker News Reader

No, U-3 is not misleading. See the discussion at https://news.ycombinator.com/item?id=17475481 The point of metrics is to make them comparable. Comparing apples to apples, the US unemployment rate is 3.9% vs the EU average at 7.1%. If you want to use U-6 instead, you can make an orange to orange comparison and get 7.4% for the US and roughly 14% for the EU.

Given that EU wages have increased much more than US wages we can conclude that unemployment has very little to do with wage increases. And since empirical evidence trumps conjectures, we throw the so called "law" of supply and demand into the garbage bin.

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> Given that EU wages have increased much more than US wages we can conclude that unemployment has very little to do with wage increases.

No, we cannot. Unemployment and wage increases could be perfectly positively correlated and still be completely consistent with EU wages rising faster in the US when the EU unemployment rate is twice the US rate.

All we can conclude is that the EU unemployment rate to wage increase function is not the same as the US function, so that a given level of unemployment does not result in the same rate of wage increases in the EU and the US.

There are huge social safety net differences between the EU and the US that might affect how urgent it is for an unemployed person to find a job, and so could affect what employers have to offer to get workers.

In the US, being out of work is a major disaster for many people. If you are in a state that has not expanded Medicaid, you may not be able to afford even the cheapest health insurance for more than a short time with no money coming in if, like many Americans, you do not have much in savings.

> All we can conclude is that the EU unemployment rate to wage increase function is not the same as the US function

If the difference between the outputs has held steady over time...which I dont think is the case.

Start adding other variables into the equation and I have no doubt you can make it work. I also have little confidence in the predictive power of the resulting functions.

I dont think unemployment is UNRELATED to wages, but it seems obvious that the straightforward econ 101 equation has been broken by some factor. I'd rather see people try to figure out what is really going on than assuming the broken equation must actually be right, we just need to depend on it MORE.

One of the primary tasks of a govt is stability, but the recent US trend has been focused on short term stability over long term. I've seen a few (different) theories for what is going on (and am far too ignorant to have a clue myself), but I've not seen ACTION indicationing any concerns are being seropusly considered. I'm sure a chunk of the Fed is concerned, but what are we doing to bleed off the inequality pressure?

You're dismissing supply and demand a little too quickly with a broad stroke.

When it comes to workforce, the supply is directly related to the supply of people able to do a job. Across the entire country, a job that requires little to no training to do will enjoy a much larger supply of workers than a job that requires more skill and experience.

Then there are other factors that essentially cap wages by limiting the cost of a service, such as insurance. Auto insurance, for example, largely dictates the compensation level for repairs and consistently gets tighter and tighter. This means that no matter how effective you are as a mechanic, the business paying you has a limit on how it defines your value because it can't opt to simply charge more for your work.

This applies to other industries as well.

If wages are the "price" in the supply/demand formula, price fixing has to be taken into account.

>No, U-3 is not misleading.

The U-3 is exactly what it's defined as. In that sense, it isn't misleading.

It is misleading in the sense that it does not capture what unemployment actually is as it's a very narrow definition of unemployment.

>Given that EU wages have increased much more than US wages we can conclude that unemployment has very little to do with wage increases.

We can conclude from this that it may not be the only factor affecting wages, though I never made that claim to begin with.

> Given that EU wages have increased much more than US wages we can conclude that unemployment has very little to do with wage increases. And since empirical evidence trumps conjectures, we throw the so called "law" of supply and demand into the garbage bin.

One could argue that the reason wages increased in the EU is because it restricts the supply of workers. For example, strong unions could explain that.

Its like you are saying a helium balloon float and conclude gravity has been disproven.

>we throw the so called "law" of supply and demand into the garbage bin

This is like throwing away the law of conservation of energy because you found a perpetual motion machine instead of checking inside the machine for batteries.

For example, are we considering how the impact of workers too scared or financially unstable to leave their current job impacts supply? Or how outsourcing jobs, hiring people who can't legally work, and other such changes impact supply?

We could just fire 3.2% of the nation's lowest wage earners so unemployment equals Europe's and the average wage would instantly be higher.

...Also just pay them more.

If pay gets raised, the unemployment number goes up. If you believe in supply and demand.

For those that don't believe in supply and demand, why are they so stingy that they only want a $15 minimum wage?

> Given that EU wages have increased much more than US wages

Where exactly? Surely not in western Europe, it's stagnating since the 80s. In the former soviet bloc for sure I agree.

Please see the chart on this page: https://www.businessinsider.com/france-vs-us-real-wages-2015... Yes, wages have begun to stagnate in the Eurozone in the last 10 years, but it is a completely different situation from the total robbery American workers have been put through!

This shows that although wages in Europe rose faster, they're still higher in the US: http://www.pewglobal.org/2017/04/24/middle-class-fortunes-in....

To me, that implies the possibility of there being a "wage ceiling" for people of a given skill level as the other western nations appear to be on a trajectory that will top out around the same level at which US wages have stagnated. The existence of such a ceiling does make sense given that the distribution of innate ability in a given population is on a bell curve. Even if we assuming a perfect allocation of resources (capital, education, etc), there will eventually be a point at which an individual can be made to be more efficient in performing a task and without groundbreaking advances in technology that drastically change the amount of value an individual can generate at their peak level of efficiency, there will be no economic force acting to increase their wage.

There are plenty of inefficiencies in the current American model of resource distribution, hence the continued slow growth of wages as they get worked out over time, but it looks like we may have exhausted all the "easy" problems given the length of time this trend of slow growth has been in effect.

Great. Now give me an inflation ceiling.

And since empirical evidence trumps conjectures, we throw the so called "law" of supply and demand into the garbage bin.

Would you mind expanding on this point? It wasn't supported by your other assertions, and I'm curious how such a counterintuitive conclusion might be true.

I interpreted it as follows:

If unemployment is indeed down (and he asserts that it is) then the supply of extra workers is down also.

The salaries, following the supply/demand ratio, should be up. And they are not.

Since they're not, the law of supply/demand dictating 'prices' does not work for worker's compensation.

What people call "salaries" does not include employer cost of benefits. For instance, US health care spending grew 4.3% in 2016 [0]. Since many employers cover health care in the US, a growth in health care expenditures on the employer side can be seen as a increase in salary. And since health care benefits is a disproportionate amount for low or middle income workers, this will hamper their wage growth the most in relative terms.

In other words, if 25% of your "pay" is health care, and health care is growing at 4%, your effective "salary" can be said to be growing at 1% as long as your premiums and coverage stay the same.

[0] https://www.cms.gov/Research-Statistics-Data-and-Systems/Sta...

I think the meager growth in health care spending is not nearly big enough to cover the discrepancy between the increase in salaries predicted by extrapolating market forces and what the salaries actually are.

Not to mention, most low paying jobs don't provide health care.

This is something that can easily be referenced. Benefits make up around 30% of workers wages with health insurance around 8%. If health care expenditures grow at 4%, that's 0.32% wage growth from health care costs. You may consider that insiginificant but I don't.

https://www.bls.gov/news.release/ecec.nr0.htm

> If health care expenditures grow at 4%, that's 0.32% wage growth from health care costs.

So if you earn $100,000 each year you get a raise of $320 due to health care? To be honest with you, that seems pretty insignificant. And it's also sort of a feedback loop - the quality of care isn't increasing - the system is only costing more because the system can charge more. All that's doing is accounting for "healthcare inflation", and if a cost of living raise is a significant raise, something is wrong.

Excellent point!

Healthcare truly should be the #1 policy discussion in the US, due to the magnitude of its economic impact and how the current status quo is not supported by economists on either side of the aisle.

I wish that someone drafted some economic-concensus presidential mandates for trump to irresponsibly sign before his term is over and someone argues for socialization of healthcare.

Supply and demand can be affected by externalities. In the labor market, those externalities include legal discrepancies between individuals and companies as well as international trade. With inappropriately cheap shipping costs local labor is competing against foreign labor. So the model would have to take into account wage levels abroad. Ie until US wages sink to Brazilian, Chinese, and Indian levels no broad wage increases are likely locally (as a strong interpretation).

Other things to keep in mind: - Labor market is bigger than a single country - Other costs may affect wages (if profits are squeezed, increased competition, rising costs of goods or benefits, etc) - Government policies impact wages (law of unintended consequences)

> The salaries, following the supply/demand ratio, should be up. And they are not.

Supply and demand says that offers will go up. And they have. After all, if you are unemployed, employers see your value as being less than the amount you are willing to work for (which can be no lower than minimum wage). If they could hire you for $0, or a negative amount, they most certainly would. There is always some price point where it is worthwhile.

Those rising offers is what has allowed those previously unemployed to find jobs with agreeable compensation and join the employed where previously offers were not high enough to reach an agreement (by choice or due to the law).

> Since they're not, the law of supply/demand dictating 'prices' does not work for worker's compensation.

The law of supply and demand is being observed exactly as expected here.

Or there are a lot of hidden unemployed that are not captured by the statistics.

A law is a universal truth. If you find that empirical evidence disproves it, clearly it is not universal, and you cannot call it a law without suffixing it with exceptions.

Following from this, supply and demand is a tendency, not a law.

Also, the poster has not applied the law. He is saying that because the labor supply in the US is low, wages should be up. However, the US can outsource functions, which means that the labor supply is bigger than the US.

Anyone who'd read even an introductory economics text would know that such laws are defined "ceteris paribus", meaning all other things being equal. Like in physics: the fact that a law that assumes something is a perfect sphere doesn't work perfectly when something is not a perfect sphere doesn't disprove the law, it just shows that it alone isn't sufficient to model complex phenomena.

The law of supply and demand is a law, but many people don't understand that it is a law in a very basic economic model with major assumptions. If you remove the assumptions in real life, then of course the law will no longer always hold.

I've been reading on the philosophy of science for a while. According to Karl Popper, what distinguishes science from pseudo-science such as Astrology is that the former is able to produce falsifiable theories. Is economy science or pseudo-science? If it is, then its theories needs to be falsifiable.

But apparently you can't falsify the Law of Supply and Demand (LSD). When the world again and again doesn't work in accordance with what the LSD predicts, its adherents always comes with excuses as to why it didn't work in this particular case. But there are huge labor shortages across the whole US, but wages still doesn't increase! So you throw the theory into the garbage bin.

> But apparently you can't falsify the Law of Supply and Demand (LSD). When the world again and again doesn't work in accordance with what the LSD predicts, its adherents always comes with excuses as to why it didn't work in this particular case

It's weird that you dismiss "more advanced models that explain the behavior we observe and provide better predictions" as "excuses".

Yes, it's more convenient to argue against a straw man (the most basic formulation of "supply and demand" that doesn't even cover what's taught in introductory economics classes), but it doesn't mean you'll produce valid criticism from it.

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