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What is More Important: Markets or People?

Productivity-compensation(Editorial) A defining question for our age is whether people or markets matter more. Some believe that the so-called “free” market can do no wrong, and that it is people who must adjust themselves to it, however painfully. Others believe that markets merely serve as a tool, and that if markets deliver a result that is inconsistent with common values, then market outcomes should be overridden. The age we live in, one in which market forces have been unleashed to transform much of our society during the last decades, is an age that will have to answer this question clearly in the not-too-distant future.

There is ample evidence mounting that markets are delivering less prosperity and greater inequality in many of the advanced economies of the world. This evidence of failure will serve to increase political divisions among people, as those who believe markets to be infallible will come to blame more of the population for failure, while those who believe that markets can malfunction will demand reform and re-regulation of markets to address failure.

And there is growing failure. Into a sixth year since the beginning of the 2008-9 recession, unemployment and underutilization of the labor force are both still high – and projected to be high for years to come. Youth employment prospects are dismal at best, through no fault of their own. Many of today’s youth did what was asked of them and graduated from college, only to find employment in low-paying, menial jobs for which they are overqualified. According to the BLS, nonfarm employment grew in April of this year by 165,000 jobs; of these, a full 100+ thousand, or 62%, were jobs in temporary agencies, leisure & hospitality, and retail – low-paying industries all. With a recovery like this one, labor doesn’t feel much improvement from the recession.

Relative growth of employment in low-paying industries is one reason for rising inequality, as income shifts from labor to capital. A way to illustrate this shift of income from labor to capital is to show the growing gap between productivity and hourly compensation (see chart). As output per hour worked out-paces compensation per hour (indicated by the black lines and left scale in chart), the difference is rising income as a share of value added accruing to capital (NOTE: these indices are both created from nominal values, unadjusted for inflation). This contrasts with a more equitable pattern of development between capital and labor, where compensation per hour and output per hour closely align.

Given all these growing troubles in the economy, believers in the infallibility of markets will seek to blame a larger portion of the US population for failure. Last year, a US presidential candidate cited 47% as “takers” = moochers. This figure of 47% will have to rise if economic failure grows, because believers in perfectly rational markets always choose markets over people.



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