Wednesday, July 13, 2005

Labor supply curves are funny things 

Russell Roberts notes that, unlike many people's beliefs, Americans are actually working less hours than before. I have heard this argument for years and it annoys me no end. Why do people work more? HedgeFundGuy explains:
creating jobs is trivial, nature does it for us. I have many jobs wanting my attention at home and at work, it's just a matter of my priorities and limited time. The real difficulty is discovering jobs where the benefits outweigh the costs, broadly conceived to include opportunity costs, and where benefits are often best determined by what other people are willing to pay.
In many sectors real wages have risen dramatically, which leads to two effects: higher wages induce more work (because an hour of leisure is more costly, you do "less leisuring"); but more income induces less work and more leisure. When we say that the Bush Administration has created a (little less than a) million jobs so far in 2005, it might mean we've changed the tax system to induce more work -- though I doubt it. It more likely means that investment has been induced enough to create capital that needs labor to grow, so labor is being bid out of leisure. It's the result of individual decisions, as Roberts says in a later post,
The lesson here is to avoid metaphors taken from physics and engineering that are inevitably cause and effect metaphors and think instead of metaphors from biology where results emerge from the actions of multiple interactions in a complex system. Think rain forest not engine.

At least I said in that earlier post that the economy "grows" jobs. Sounds something like a rain forest. But the problem isn't the verb. It's the noun "economy" doing the growing like a farmer growing wheat. The economy can't do things. It is the result of individuals "doing."